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8/9/2019 A Practical Guide to New IFRSs for 2010
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A practical guide to new
IFRSs for 2010February 2010
8/9/2019 A Practical Guide to New IFRSs for 2010
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PricewaterhouseCoopers IFRS and corporate governance publications and tools 2010
IFRS technical publications
IFRS pocket guide 2009Provides a summary of the IFRS recognition and measurementrequirements. Including currencies, assets, liabilities, equity,income, expenses, business combinations and interimfinancialstatements.
IFRS student manual 2010Designed as a practical guide to IFRS for researchers,teachers, students and those studying for professional exams.Includes worked examples and illustrations from real IFRScompanyaccounts.
Illustrative interim nancial information for existingpreparers (due May 2010)Illustrative information, prepared in accordance with IAS 34, fora fictional existing IFRS preparer. Includes a disclosure checklistand IAS 34 application guidance. Reflects standards issued upto 2010.
Illustrative IFRS corporate consolidated nancialstatements for 2009 year endsIllustrative set of consolidated financial statements for an existingpreparer of IFRS. Includes an appendix showing exampledisclosures under IFRS 3 (revised).Included with Manual of accounting IFRS 2010; alsoavailableseparately.
Illustrative consolidated nancial statements Investment property, 2009 Private equity, 2009
Banking, 2009 Insurance, 2009 Investment funds, 2009
Realistic sets of financial statements for existing IFRS preparersin the above sectors illustrating the required disclosure andpresentation.
Impairment guidanceGuidance includes: Questions and answers on impairment of nonfinancial assets in the
current crisis Top 10 tips for impairment testing
Manual of accounting Financial instruments2010Comprehensive guidance on all aspects of the requirements forfinancial instruments accounting. Detailed explanations illustratedthrough worked examples and extracts from company accounts.Included with Manual of accounting IFRS 2010; alsoavailableseparately.
Preparing your rst IFRS nancial statements:Adopting IFRSOutlines how companies should address the process of selectingtheir new IFRS accounting policies and applying the guidance in
IFRS 1. Provides specific considerations for US market.
Segment reporting an opportunity to explainthe businessSix-page flyer explaining high-level issues for management toconsider when applying IFRS 8, including how the standard willchange reporting and what investors want to see.
Keeping up to date
Want to know about the latest IFRS developments? Stay ahead.
IFRS newsMonthly newsletter focusing on the business implications of the IASBs
proposals and new standards.IFRS mail-shotTwice-monthly email summarising new items added to pwc.com/ifrs,including breaking news from the IASB on new standards, exposure draftsand interpretations; PwC IFRS publications; IFRS blog posts; PwC webcasts;and more.
To subscribe, email corporatereporting@uk.pwc.com
Manual of accounting IFRS 2010Global guide to IFRS providing comprehensive practicalguidance on how to prepare financial statements in accordancewith IFRS. Includes hundreds of worked examples and extractsfrom company accounts. The Manual is a three-volume setcomprising:
Manual of accounting IFRS 2010 Manual of accounting Financial instruments 2010
Illustrative IFRS corporate consolidated financialstatements for 2009 year ends
A practical guide to capitalisation of borrowingcostsGuidance in question and answer format addressing thechallenges of applying IAS 23R, including how to treat specificversus general borrowings, when to start capitalisation andwhether the scope exemptions are mandatory or optional.
A practical guide to new IFRSs for 201048-page guide providing high-level outline of the keyrequirements of new IFRSs effective in 2010, in question andanswer format.
A practical guide to segment reportingProvides an overview of the key requirements of IFRS8,Operating segments and some points to consider as entitiesprepare for the application of this standard for the first time.See also Segment reporting an opportunity to explain thebusiness below.
A practical guide to share-based paymentsAnswers the questions we have been asked by entitiesand includes practical examples to help management drawsimilarities between the requirements in the standard and theirown share-based payment arrangements. November2008.
Executive guide to IFRS Topic summaries 2010
Key information on the major accounting topic areas. Eachsummary includes explanations of current requirements anda resources table showing external source material and PwCguidance, tools, practice aids and publications that relate tothetopic.
Financial instruments under IFRS A guide throughthe mazeHigh-level summary of IAS 32, IAS 39 and IFRS 7, updatedin June 2009. For existing IFRS preparers and first-timeadopters.
IAS 39 Achieving hedge accounting inpracticeCovers in detail the practical issues in achievinghedge accounting under IAS 39. It provides answers tofrequently asked questions and step-by-step illustrations of howto apply common hedging strategies.
IAS 39 Derecognition of nancial assets inpracticeExplains the requirements of IAS 39, providing answers tofrequently asked questions and detailed illustrations of how toapply the requirements to traditional and innovative structures.
IFRS 3R: Impact on earnings the crucial Q&A fordecision-makersGuide aimed at finance directors, financial controllers anddeal-makers, providing background to the standard, impacton the financial statements and controls, and summary
differences with US GAAP.
IFRS disclosure checklist 2009Outlines the disclosures required by all IFRSs published up toOctober 2009.
Only available in electronic format. To download visit www.pwc.com/ifrs
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Contents
Page
Introduction 21. New and amended standards
Consolidations IFRS 3 (revised), IAS 27 (revised) 5
Cost o investment IAS 27 and IFRS 1 amendment 17
Financial instruments
ClassicationandmeasurementofnancialassetsIFRS9 19
HedgingofportionsofnancialinstrumentsIAS39amendment 23
ClassicationofrightsissuesIAS32amendment 24
Group cash-settled share-based payment transactions IFRS 2 amendments 26
Related-partydisclosuresIAS24amendment 28 First-timeadoptionIFRS1amendment:nancialinstrumentdisclosures 30
First-time adoption IFRS 1 amendment: oil and gas assets and
leaseclassication 31
2. New and amended interpretations
Pre-paymentsofaminimumfundingrequirementIFRIC14 32
Agreements or construction o real estate IFRIC 15 33
HedgesofanetinvestmentinaforeignoperationIFRIC16 35
Distributions o non-cash assets to owners IFRIC 17 36
TransferofassetsfromcustomersIFRIC18 37
ExtinguishingnancialliabilitieswithequityinstrumentsIFRIC19 39
3. Annualimprovementsproject2009 41
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Introduction
This publication is a practical guide to the new IFRS standards and interpretations thatcome into eect in 2010. For three years there was little change to the body o IFRSs since
European listed groups were required to apply the standards in 2005. This period o bedding
downisnowover.TheBoardissuednewstandardsthattookeffectin2009;for2010there
areanumberofsignicantchangesthatwillimpactcompanies.Thesechangesincludenew
standards and interpretations, and amendments to existing requirements.
TherevisedIAS27,Consolidatedandseparatenancialstatements,andIFRS3,Business
combinations, adopt a single consolidation model (the entity model). The revised standards
introducesignicantchangestothewayinwhichconsolidatednancialstatementsare
prepared. This has important implications or reported earnings pre- and post-acquisition
and or the calculation o goodwill and non-controlling interests (the new name or minority
interests);thesecannowbecalculatedusingafullgoodwillorapartialgoodwillmodel.
Management will need to consider the accounting or uture business combinations careullybeforestructuringdeals,asthewaythetransactionisundertakencouldhaveasignicant
accounting impact. The separate amendment to IFRS 1 and IAS 27 concerning the recognition
o the cost o investment will help companies transitioning to IFRS.
IFRS9,Financialinstruments,dealswiththeclassicationandmeasurementofnancial
assetsandistherstpartoftheIASBsprojecttoreplaceIAS39,Financialinstruments:
Recognition and measurement. It applies to 2013 year ends but can be adopted with
immediate eect.
IFRIC15,Agreementsfortheconstructionofrealestate,clariesthecontractsthatwill
needtobeaccountedforinaccordancewithIAS18,Revenue,andthosethatwillneed
toapplyIAS11,Constructioncontracts.Thisinterpretationmayhavesignicantearnings
implications, as the revenue recognition between the two standards can be quite dierentandwillhavewiderimplicationsthanjustfortherealestateindustry.IFRIC16,Hedgesofa
netinvestmentinaforeignoperation,clariestwoissuesonthissubjectandisunlikelyto
haveasignicantimpactinpractice.IFRIC17,Distributionsofnon-cashassetstoowners,
requires distributions o assets other than cash made as a dividend to owners to be measured
atfairvalueintheentitymakingthedistribution.IFRIC18,Transferofassetsfromcustomers,
will impact certain sectors, particularly utilities, as it changes how such assets should be
recognisedwhentheyaretransferredtotheentity;italsoimpactsincomerecognition.
IFRIC19,Extinguishingnancialliabilitieswithequityinstruments,clariestheaccounting
when an entity renegotiates the terms o its debt when the liability is extinguished by the debtor
issuing its own equity.
AnumberofotherspecicamendmentstostandardsandtheIASBs2009annual
improvements project have aected many o the standards. Some o the changes addressinconsistencyinterminologybetweenthestandards;otherswillimpactcertainentitiesand
hence will need careul consideration.
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The table below summarises the implementation dates or the new and amended IFRSs that
are considered in more detail in the pages that ollow.
Standard Adoptedby EU1
Pg
Changes that apply rom 1 July 2009
IAS 27 (revised), Consolidated andseparatenancialstatements
4 Early adoption is permitted, but cannotbe adopted without IFRS 3 (revised).
5
IFRS 3 (revised), Business combinations 4 Early adoption is permitted, but cannotbe adopted without IAS 27 (revised).
5
IFRS 1 (revised), First-time adoption 4 Early adoption is permitted. N/A
AmendmenttoIAS39,Eligiblehedgeditems
4 Early adoption is permitted. 23
Amendment to IFRS 1, First-time adoptiono IFRS, and IAS 27, Consolidated andseparatenancialstatements,ontheCosto an investment in a subsidiary, jointlycontrolled entity or associate
4 17
IFRIC16,Hedgesofanetinvestmentinaforeignoperation,effective1October2008
4 Early adoption is permitted. EUendorsedfor1July2009.
35
IFRIC 17, Distributions o non cash assetsto owners
4 Early adoption is permitted. 36
IFRIC18,Transferofassetsfromcustomers,effective1July2009
4 Early adoption is permitted. EUendorsedfor31October2009.
37
Annual improvements 2008
IFRS 5, Non-current assets held or salesand discontinued operations
4 Prospective adoption rom the dateIFRS5wasrstapplied.Earlyadoptionpermitted i IAS 27 (as amended in May2008)isalsoadopted.
N/A
Annual improvements 2009
IFRS 2, Share-based payments Early adoption is permitted. 43IFRIC9,Reassessmentofembeddedderivatives
Early adoption is permitted. 44
IFRIC16,Hedgesofanetinvestmentinaoreign operation
Early adoption is permitted. 44
Changes that apply rom 1 January 2010
Amendment to IFRS 2, Share basedpayments Group cash-settled share-based payment transactions
Early adoption is permitted. 26
Amendments to IFRS 1, First-timeadoption, or additional exemptions
Early adoption is permitted. 31
IFRIC 15, Agreements or construction
ofrealestate,effective1January2009although EU endorsed or 1 January 2010
4 Early adoption is permitted. 33
Annual improvements 2009
IFRS 5, Non-current assets held or saleand discontinued operations
Early adoption is permitted. 44
IFRS8,Operatingsegments Early adoption is permitted. 44
IAS1,Presentationofnancialstatements Early adoption is permitted. 41
1 As at February 2010.
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Standard Adopted
by EU1Pg
Annual improvements 2009 (continued)
IAS 7, Statement o cash fows Early adoption is permitted. 41
IAS 17, Leases Early adoption is permitted. 41
IAS18,Revenue Amendment only aects appendix
hence adoption on publication.
42
IAS 36, Impairment o assets Early adoption is permitted. 42
IAS38,Intangibleassets Early adoption is permitted. 42
IAS39,Financialinstruments:Recognitionand measurement
Early adoption is permitted. 43
Changes that apply rom 1 February 2010
Amendments to IAS 32, Financialinstruments:Presentation,onclassicationo rights issues
4 Early adoption is permitted. 24
Changes that apply rom 1 July 2010
Amendment to IFRS 1, First-time
adoption, on exemption o new air valuedisclosures
Early adoption is permitted. 30
IFRIC19,Extinguishingnancialliabilitieswith equity instruments
Early adoption is permitted. 39
Changes that apply rom 1 January 2011
AmendmenttoIAS24,Related partydisclosures
Early adoption is permitted. 28
AmendmenttoIFRIC14,IAS19Thelimitonadenedbenetasset,minimumunding requirements and their interaction
Early adoption is permitted. 32
Changes that apply rom 1 January 2013
IFRS9,Financial instruments Early adoption is permitted. 19
1 As at February 2010.
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TherevisedstandardonbusinesscombinationswasreleasedinJanuary2008,accompaniedbyarevisedstandardonconsolidatednancialstatements.TheysubstantiallyconvergeIFRS
withUSAccountingStandardsSFAS141(revised),Businesscombinations,andSFAS160,
Noncontrollinginterestsinconsolidatednancialstatements,respectively.Thenewstandards
are expected to add to earnings volatility, making earnings harder to predict. They are also
likely to:
Infuence acquisition negotiations and deal structures in an eort to mitigate
unwanted earnings impacts.
Potentially impact the scope and extent o due diligence and data-gathering
exercises prior to acquisition.
Require new policies and procedures to monitor and determine changes in the air
value o some assets and liabilities.Call or valuation expertise.
Infuence the how, when and what o stakeholder communications.
The table below sets out the potential impact or gains and losses on day 1, measurement o
assets and liabilities in the acquisition balance sheet and income statement volatility on day 2
and beyond.
Impact on
earnings at
combination date
Impact on net
assets/goodwill at
combination date
Ongoing
earnings impact
Share options given to seller 4 4
Existing interest held in target 4 4Earn-outpaidinaxednumber
o equity shares
4
Earn-out paid in cash or sharestoaxedamount
4
4
Transaction costs 4 4
Full goodwill 4 4
Contingent liabilities 4 4
Settlement o pre-existing
relationships
4
4
4
Restructuring costs 4
Indemnity rom seller 4 4
Buying or selling minority interest 81
1Transactions with minority interests resulted in income statement eects under IAS 27, depending on an entitys policy. There will be no
eect on income under IAS 27 (revised).
Consolidations IFRS 3 (revised)
and IAS 27 (revised)
Eective date
Annualreportingperiodsbeginningonorafter1July2009.Earlyadoptionispermitted.
EU adoption status
AdoptedbytheEuropeanCommissionon12June2009.
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Questions and answers
1. Scope and applicability
2. Consideration
3. Goodwill and non-controlling interests
4. Assetandliabilityrecognition5. Other issues
6. IAS 27 (revised) new proposals on minority interests and disposals
1. Scope and applicability
ThebusinesscombinationsstandardrepresentssomesignicantchangesforIFRS.
IFRS 3 (revised) is a urther development o the acquisition model. The standard now applies
to more transactions, as combinations by contract alone and combinations o mutual entities
are brought into the standards scope. Common control transactions and the ormation o
jointventuresremainoutsidethescopeofthestandard.Thedenitionofabusinesshasbeenamended slightly. It now states that the elements are capable o being conducted rather than
areconductedandmanaged.Thischangeissupplementedbyasignicantexpansionofthe
application guidance. This may bring more transactions into acquisition accounting.
1.1 When will the new standard aect the nancial statements?
IFRS3(revised)isappliedprospectivelytobusinesscombinationsoccurringintherst
annualperiodbeginningonorafter1July2009.Itcanbeappliedearlybutonlytoan
annual period beginning on or ater 30 June 2007. IFRS 3 (revised) and
IAS 27 (revised) are applied at the same time. Retrospective application to earlier
business combinations is not permitted.
1.2 Has the scope o the standard changed?
Yes, it now includes combinations o mutuals and combinations by contract. This
changeinscopeisnotsignicantformanyentities.
1.3 What about common control transactions?
Common control transactions remain outside the scope o the new standard. The IASB
has a project on accounting or them, but this is currently on hold until sta resources
become available. Entities choose a policy or such transactions. The most common are
either applying IFRS 3 by analogy to other business combinations or using predecessor
values by analogy to US and other GAAPs with similar rameworks. Entities should
continue to use their existing policy or business combinations under common control.
2. Consideration
Considerationistheamountpaidfortheacquiredbusiness.Someofthemostsignicant
changes are ound in this section o the revised standard. Individual changes may increase
or decrease the amount accounted or as consideration. These aect the amount o goodwill
recognised and impact the post-acquisition income statement. Transaction costs no longer
formapartoftheacquisitionprice;theyareexpensedasincurred.Considerationnow
includes the air value o all interests that the acquirer may have held previously in the acquired
business. This includes any interest in an associate or joint venture or other equity interests
o the acquired business. I the interests in the target were not held at air value, they are re-
measured to air value through the income statement.
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The requirements or recognising contingent consideration have also been amended.
Contingent consideration is now required to be recognised at air value even i it is not deemed
to be probable o payment at the date o the acquisition. All subsequent changes in liability-
classiedconsiderationarerecognisedintheincomestatement,ratherthanagainstgoodwill.
2.1 The selling-shareholders will receive some share options. What eect will
this have?
An acquirer may wish selling-shareholders to remain in the business as employees. Their
knowledge and contacts can help to ensure that the acquired business perorms well.
The terms o the options and employment conditions could impact the amount o
purchase consideration and also the income statement ater the business combination.
Share options have a value. The relevant accounting question is whether this value is
recorded as part o the purchase consideration, or as compensation or post-acquisition
services provided by employees, or some combination o the two. Is the acquirer paying
shareholders in their capacity as shareholders or in their capacity as employees or
services subsequent to the business combination?
Howshareoptionsareaccountedfordependsontheconditionsattachedtotheaward
and also whether or not the options are replacing existing options held by the employeein the acquired business. Options are likely to be consideration or post-acquisition
service where some o the payment is conditional on the shareholders remaining in
employment ater the transaction. In such circumstances, a charge is recorded in post-
acquisition earnings or employee services. These awards are made to secure and
reward uture services o employees rather than to acquire the existing business.
2.2 Is it true that some business combinations will result in gains in the income
statement?
Yes, it is. Any previous stake is seen as being given up to acquire the business. A gain
or loss is recorded on its disposal. I the acquirer already held an interest in the acquired
entity beore acquisition, the standard requires the existing stake to be re-measured
to air value at the date o acquisition, taking any movement to the income statement
(together with any gains previously recorded in equity that relate to the existing stake).
I the value o the stake has increased, there will be a gain to recognise in the income
statement o the acquirer at the date o the business combination. A loss would only
occur i the existing interest has a book value in excess o the proportion o the air value
o the business obtained and no impairment had been recorded previously. This loss
situation is not expected to occur requently.
The standard also requires any gain on a bargain purchase (negative goodwill) to be
recorded in the income statement. This is not a change rom the previous requirements.
2.3 Some o the payments or the business are earn-outs. How are theseaccounted or?
It is common or some o the consideration in a business combination to be contingent
on uture events. Uncertainty might exist about the value o the acquired business
orsomeofitssignicantassets.Thebuyermaywanttomakepaymentsonlyifthe
business is successul. Conversely, the seller wants to receive ull value or the business.
Earn-outs are oten payable based on post-acquisition earnings or on the success o a
signicantuncertainproject.
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The acquirer should air value all o the consideration at the date o the acquisition
including the earn-out. I the earn-out is a liability (cash or shares to the value o a
specicamount),anysubsequentre-measurementoftheliabilityisrecognisedinthe
income statement. There is no requirement or payments to be probable, which was the
case under previous IFRS 3. An increase in the liability or strong perormance results
in an expense in the income statement. Conversely, i the liability is decreased, perhaps
due to under-perormance against targets, the reduction in the expected payment will be
recorded as a gain in the income statement.
These changes were previously recorded against goodwill. Acquirers will have to explain
this component o perormance: the acquired business has perormed well but earnings
are lower because o additional payments due to the seller.
2.4 Does it make a dierence whether contingent consideration (an earn-out) is
payable in shares or in cash?
Yes,itdoesmakeadifference.Anearn-outpayableincashmeetsthedenitionofa
nancialliability.Itisre-measuredatfairvalueateverybalancesheetdate,withany
changes recognised in the income statement.
Earn-outs payable in ordinary shares may not require re-measurement through theincome statement. This is dependent on the eatures o the earn-out and how the
number o shares to be issued is determined. An earn-out payable in shares where the
numberofsharesvariestogivetherecipientofthesharesaxedvaluewouldmeetthe
denitionofanancialliability.Asaresult,theliabilitywillneedtobefairvalued
throughincome.Conversely,whereaxednumberofshareseitherwillorwillnotbe
issued depending on perormance, regardless o the air value o those shares, the
earn-outprobablymeetsthedenitionofequityandsoisnotre-measuredthroughthe
income statement.
2.5 A business combination involves ees payable to banks, lawyers and
accountants. Can these still be capitalised?
No, they cannot. The standard says that transaction costs are not part o what is paid
to the seller o a business. They are also not assets o the purchased business that are
recognised on acquisition. Transaction costs should be expensed as they are incurred
and the related services are received.
The standard requires entities to disclose the amount o transaction costs that have
been incurred.
2.6 What about costs incurred to borrow money or issue the shares used to
buy the business. Do these also have to be expensed?
No, these costs are not expensed. They are accounted or in the same way as they were
under the previous standard.
Transaction costs directly related to the issue o debt instruments are deducted rom the
air value o the debt on initial recognition and are amortised over the lie o the debt as
part o the eective interest rate. Directly attributable transaction costs incurred issuing
equity instruments are deducted rom equity.
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3. Goodwill and non-controlling interests
The revised standard gives entities the option, on a transaction-by-transaction basis, to measure
non-controllinginterests(previouslyminorityinterest)atthevalueoftheirproportionofidentiable
assetsandliabilitiesoratfullfairvalue.Therstwillresultinmeasurementofgoodwilllittle
differentfrompreviousIFRS3;thesecondapproachwillrecordgoodwillonthenon-controlling
interest as well as on the acquired controlling interest. The bargain purchase guidance remainsthe same with the requirement to recognise negative goodwill immediately in the income
statement.
3.1 Does the type o consideration aect how much goodwill is recognised?
No, it does not. Regardless o how payments are structured, the consideration is
recognised in total at its air value at the date o the acquisition. Paying the same
amount in todays values in dierent ways will not make a dierence to the amount o
goodwill recognised.
The orm o the consideration will not aect the amount o goodwill, but the structure o
thepaymentswillhaveasignicanteffectonthepost-acquisitionincomestatement.
Payments that are contingent and deemed to be part o the acquisition price will be
measured at air value and included in the business combination accounting on day one.
Equity instruments that are contingent consideration are not subsequently re-measured.
Debt instruments are subsequently re-measured through the income statement.
Changes in the carrying amount o contingent consideration will oten not be oset by
protsandlossesoftheacquiredsubsidiary.Asubstantialpaymenttothepreviousowners
may be required i an in-process research and development (IPR&D) project meets key
approvalmilestones.ThesuccessfulIPR&Dprojectmaygeneratesubstantialprotsover
20 years. The increased amounts due under the contingent consideration arrangement are
likely to be recognised as an expense in the income statement beore the project generates
any revenue at all.
3.2 How is goodwill measured?
Goodwill continues to be a residual. It may well be a dierent residual under IFRS 3
(revised) compared to the previous standard. This is partly because all o the
consideration, including any previously held interest in the acquired business, is
measured at air value. It is also because goodwill can be measured in two dierent ways.
TherstapproachissimilartothemethodundercurrentIFRS:goodwillisthe
differencebetweentheconsiderationpaidandthepurchasersshareofidentiable
net assets acquired. This is a partial goodwill method because the non-controlling
interestisrecognisedatitsshareofidentiablenetassetsanddoesnotincludeany
goodwill. Goodwill can also be measured on a ull goodwill basis, described in the
ollowing question.
3.3 What is ull goodwill?
Full goodwill means that the non-controlling (minority) interest is measured at air value,
and goodwill is recognised in a business combination. Under previous IFRS 3, minority
interest was recognised at the minoritys share o net assets and did not include any
goodwill. Full goodwill means that non-controlling interest and goodwill are both increased
by the goodwill that relates to the non-controlling interest.
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3.4 When can ull or partial goodwill be recognised?
The standard gives a choice or each separate business combination. An acquirer may
either recognise the non-controlling interest in the subsidiary at air value, which leads
to 100% o goodwill being recognised (ull goodwill), or the acquirer can recognise the
non-controlling interest measured at the non-controlling interest in net assets excluding
goodwill. This leads to goodwill being recognised only or the parents interest in the
entity acquired, the same as under previous IFRS 3 (partial goodwill).
This is one o the major dierences with the US GAAP standard: under US GAAP, the
non-controlling interest must be measured at air value, and ull goodwill is always
recognised.
This choice only makes a dierence in an acquisition where less than 100% o the
acquired business is purchased. Few acquisitions o listed entities are or less than
100% o the equity shares. Business combinations where the entire business is
acquired will result in goodwill being calculated in much the same way as it was under
previous IFRS 3.
3.5 What is the eect o recognising ull goodwill?
Recognising ull goodwill will increase reported net assets on the balance sheet. The
potential downside is that any uture impairment o goodwill will be greater. Impairments
o goodwill should not occur with greater requency.
Measuringnon-controllinginterestatfairvaluemayprovedifcultinpractice.However,
goodwill impairment testing may be easier under ull goodwill, as there is no need to
gross-up goodwill or partially owned subsidiaries.
A company planning a cash buy-out o the non-controlling interest in a subsidiary at a
uture date may want to record the non-controlling interest at air value and recognise
ull goodwill in a business combination. I the non-controlling interest is later purchased,
there will be a lower dierence between the consideration paid or the non-controlling
interest and its recorded value, and thus a smaller percentage reduction o equity.
4. Assetandliabilityrecognition
The revised IFRS 3 has limited changes to the assets and liabilities recognised in the
acquisitionbalancesheet.Theexistingrequirementtorecognisealloftheidentiableassets
and liabilities o the acquiree is retained. Most assets are recognised at air value, with
exceptions or certain items such as deerred tax and pension obligations.
4.1 Have the recognition criteria changed or intangible assets?
No, there is no change in substance. Acquirers are required to recognise brands,
licences and customer relationships, amongst other intangible assets. The IASB
has provided additional clarity that may well result in more intangible assets being
recognised, including leases that are not at market rates and rights (such as ranchise
rights) that were granted rom the acquirer to the acquiree.
4.2 What happens to the contingent liabilities o the acquired business?
Many acquired businesses will contain contingent liabilities or example, pending
lawsuits, warranty liabilities or uture environmental liabilities. These are liabilities where
thereisanelementofuncertainty;theneedforpaymentwillonlybeconrmedbytheoccurrenceornon-occurrenceofaspeciceventoroutcome.Theamountofany
outfow and the timing o an outfow may also be uncertain.
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There is very little change to previous guidance under IFRS. Contingent assets are not
recognised, and contingent liabilities are measured at air value. Ater the date o the
business combination contingent liabilities are re-measured at the higher o the original
amount and the amount under the relevant standard, IAS 37.
Measurement o contingent liabilities ater the date o the business combination is an
area that may be subject to change in the uture (see Q&A 5.5).
4.3 I consideration paid and most assets and liabilities are at air value, what
does this mean or the post-combination income statement?
Fair valuation o most things that are bought in a business combination already existed
under previous IFRS 3. The post-combination income statement is aected because
partoftheexpectedprotsisincludedinthevaluationofidentiableassetsatthe
acquisition date and subsequently recognised as an expense in the income statement,
through amortisation, depreciation or increased costs o goods sold.
A mobile phone company may have a churn rate o three years or its customers. The
value o its contractual relationships with those customers, which is likely to be high, will
be amortised over that three-year period.
There may be more charges in the post-combination income statement due to increased
guidance in IFRS 3 (revised) on separating payments made or the combination rom
those made or something else. For example, guidance has been included on identiying
payments made or post-combination employee services and on identiying payments
made to settle pre-existing relationships between the buyer and the acquiree.
Withcontingentconsiderationthatisanancialliability,fairvaluechangeswillbe
recognised in the income statement. This means that the better the acquired business
performs,thegreaterthelikelyexpenseinprotorloss.
4.4 Can a provision be made or restructuring the target company in the
acquisition accounting?
The acquirer will oten have plans to streamline the acquired business. Many synergies
areachievedthroughrestructuringssuchasreductionsinhead-ofcestaffor
consolidation o production acilities. An estimate o the cost savings will have been
included in the buyers assessment o how much it is willing to pay or the acquiree.
The acquirer can seldom recognise a reorganisation provision at the date o the business
combination. There is no change rom the previous guidance in the new standard: the
ability o an acquirer to recognise a liability or terminating or reducing the activities o
the acquiree in the accounting or a business combination is severely restricted.
A restructuring provision can be recognised in a business combination only when the
acquiree has, at the acquisition date, an existing liability, or which there are detailedconditions in IAS 37, the provisions standard.
Those conditions are unlikely to exist at the acquisition date in most business
combinations. A restructuring plan that is conditional on the completion o the business
combination is not recognised in the accounting or the acquisition. It is recognised
post-acquisition, and the expense fows through post-acquisition earnings.
4.5 What might adjust goodwill and over what period?
Anacquirerhasamaximumperiodof12monthstonalisetheacquisitionaccounting.
The adjustment period ends when the acquirer has gathered all the necessary
inormation, subject to the one year maximum.
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4.6 The seller will be giving an indemnity on a tax exposure. How will this be
accounted or?
An indemnity is a promise by the seller to reimburse the buyer or liabilities o uncertain
amount or likelihood. The indemnity is recognised as an asset and measured in the same
wayastheindemniedliability.Itislimitedtotheamountoftheindemniedliability.This
appliestoallindemnitiesforspeciccontingenciesorliabilities.
5. Other issues
There is additional guidance on accounting or employee share-based payments in the
revised standard. It provides additional guidance on valuation as well as determining whether
replacement share awards are part o the consideration or the business combination or may
be compensation or post-combination services.
The revised standard includes additional guidance with regard to contracts and arrangements
o the acquired business at the balance sheet date. Leases and insurance contracts are
assessed based on the acts at the time they were entered into (or subject to substantial
modication).Allothercontractsareassessedforclassicationatthedateoftheacquisition.
Previous IFRS 3 required deerred tax assets o the acquired business that were not recognised
at the date o the combination but subsequently meet the recognition criteria to be adjusted
against goodwill. The revised standard will only allow adjustments against goodwill within the
one-yearwindowfornalisationofthepurchaseaccounting.
5.1 Are there any changes to deerred tax accounting?
Yes. The main change relates to the recognition o acquired deerred tax assets ater the
initialaccountingforthebusinesscombinationiscomplete;thiswillhaveanimpacton
the income statement.
Adjustments to deerred tax assets will only aect goodwill i they are made within the
12-monthperiodfornalisingthebusinesscombinationsaccountingandiftheyresult
rom new inormation about acts and circumstances that existed at the acquisition date.
Ater the 12-month period, adjustments are recorded as normal under IAS 12, through
the income statement or the statement o changes in equity, as appropriate.
5.2 Is there more clarity around classication and reassessment o contracts
and other arrangements?
Yes, there is. The previous IFRS 3 was silent on what to do with leases, purchase and
salecontracts,insurancecontractsandhedges.Therevisedstandardclariesthatall
assessments such as the determination o embedded derivatives are made based onthe acts at the date o the business combination. The only exceptions are leases and
insurancecontracts.Thesearegenerallyassessedandclassiedbasedonconditionsat
the inception date o the contract.
5.3 Will the nancial statements grow through additional disclosures?
Thenancialstatementswillbelongerthanbeforeandevenmoredetailed.Some o the
new disclosure requirements are:
the amount o acquisition-related costs expensed and the income statement line
iteminwhichthatexpenseisreported;
the measurement basis selected and the recognised amount o non-controllinginterestsintheacquiree;
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where non-controlling interest is measured at air value, the valuation techniques and
keymodelinputsusedfordeterminingthatvalue;
details o transactions that are separate rom the acquisition o assets and
assumptionofliabilitiesinexchangefortheacquiree;
in a step acquisition, disclosure o the air value o the previously held equity interest
in the acquiree and the amount o gain or loss recognised in the income statement
resultingfromremeasurement;and inormation about receivables (air value, gross contractual amounts receivable and
best estimate o cash fows not expected to be collected at the acquisition date).
5.4 Do previous transactions need to be restated?
No. Business combinations and transactions with minorities that occurred prior to the
adoption o IFRS 3 (revised) and IAS 27 (revised) are not restated. The standards are to
be applied prospectively to all transactions or which the transaction date is on or ater
therstannualperiodbeginningonorafter1July2009orthedateofearlyadoption,if
elected.
Some uture accounting related to previous business combinations will change oncethe standard is adopted. Deerred tax assets that are recognised relating to a previously
acquired business will be accounted or under the revised standard. Instead o aecting
goodwill,theywillberecognisedinprotorloss(seeQ&A5.1).Thepurchaseorsaleof
a non-controlling interest that existed at the date o adoption o IFRS 3 (revised) and
IAS27(revised)mayalsobedifferent(seeQ&A6.4).
5.5 Are there more changes to come?
Possibly, although the timing o any change is uncertain. The IASB has a project on
its agenda to address the treatment o business combinations involving entities under
commoncontrol.WorkwillbeginonthisprojectwhenstafngresourcesattheIASB
become available.
TheFairValueMeasurementProject(anexposuredraftwasreleasedinMay2009)is
stillinprogressandmightaffectthedenitionoffairvalueascurrentlycontainedin
IFRS 3 (revised). There are other ongoing projects on some standards that are linked
to business combinations (notably IAS 37 on provisions and IAS 12 on deerred tax)
that may aect either the recognition or measurement at the acquisition date or the
subsequent accounting.
6. IAS 27 (revised) minority interests and disposals
The revised consolidation standard moves IFRS to a mandatory adoption o the economicentity model. Current practice under IFRS is overwhelmingly the parent company approach.
The economic entity approach treats all providers o equity capital as the entitys shareholders,
even when they are not shareholders in the parent company. The parent company approach
seesthenancialstatementsfromtheperspectiveoftheparentcompanyshareholders.
A partial disposal o an interest in a subsidiary in which the parent company retains control
does not result in a gain or loss but in an increase or decrease in equity under the economic
entity approach. Purchase o some or all o the non-controlling interest is treated as a treasury
transaction and accounted or in equity. A partial disposal o an interest in a subsidiary in which
the parent company loses control but retains an interest (say an associate) triggers recognition
o gain or loss on the entire interest. A gain or loss is recognised on the portion that has been
disposedof;afurtherholdinggainisrecognisedontheinterestretained,beingthedifferencebetween the air value o the interest and the book value o the interest. Both are recognised in
the income statement.
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6.1 What happened to minority interest?
All shareholders o a group whether they are shareholders o the parent or o a
part o the group (minority interest) are providers o equity capital to that group. All
transactions with shareholders are treated in the same way. What was previously the
minority interest in a subsidiary is now the non-controlling interest in a reporting entity.
There is no change in presentation o non-controlling interest under the revised standard.
Additional disclosures are required to show the eect o transactions with non-
controlling interest on the parent-company shareholders.
6.2 What happens i a non-controlling interest is bought or sold?
Any transaction with a non-controlling interest that does not result in a change o control
isrecordeddirectlyinequity;thedifferencebetweentheamountpaidorreceivedand
the non-controlling interest is a debit or credit to equity. This means that an entity will not
record any additional goodwill upon purchase o a non-controlling interest nor recognise
a gain or loss upon disposal o a non-controlling interest.
6.3 How is the partial sale o a subsidiary with a change in controlaccounted or?
Agroupmaydecidetosellitscontrollinginterestinasubsidiarybutretainsignicant
inuenceintheformofanassociate,orretainonlyanancialasset.Ifitdoesso,the
retained interest is remeasured to air value, and any gain or loss compared to book
value is recognised as part o the gain or loss on disposal o the subsidiary. Consistent
with a gain on a business combination (see Q&A 2.2), the standards take the approach
that loss o control involves exchanging a subsidiary or something else rather than
continuing to hold an interest.
6.4 How does the new standard aect transactions with previously recognised
non-controlling interests?
An entity might have purchased a non-controlling interest recognised as part o a
business combination under the previous version o IFRS 3 that is, where only partial
goodwill was recognised. Alternatively, an entity might recognise partial goodwill under
the new IFRS 3 (revised) and might purchase a non-controlling interest at a later date.
In both cases, no urther goodwill can be recognised when the non-controlling interest
is purchased. I the purchase price is greater than the book value o the non-controlling
interest, this will result in a reduction in net assets and equity. This reduction may be
signicant.
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Principles o business combinations
Understand the economics
What does the acquirer think it is buying? Howmuchdoesitthinkitispaying? What does the contract actually say?
Are there any other linked transactions?
Previously held interest
[IFRS3para42].
Remeasure a previously held
equity interest at its acquisition-
date air value.
Recogniseagainorlossinprot
or loss.
Recycle items o other
comprehensive income.
Non-controlling interest (NCI)
Measure NCI either at air value
or at the NCIs proportionateshare o the acquirees
identiablenetassets.[IFRS3R
para19;AppBparasB44,45].
Measurement choice or each
combination.
NCI measurement determines
goodwill.
Identiableassetsandliabilitiesassumedare
recognised i:
a)denitionofassetsandliabilitiesismetatthe
acquisitiondate;andb) they are part o what was exchanged in the
businesscombination.[IFRS3paras11,12].
Identiableassetsandliabilitiesassumedare
measuredatfairvalue.[IFRS3para18].
Exceptions to the recognition and/or measurement:
Contingentliabilities.[IFRS3paras22,23].
Incometaxes.[IFRS3paras24,25].
Employeebenets.[IFRS3para26].
Indemnicationassets.[IFRS3paras27,28].
Reacquiredrights.[IFRS3para29].
Share-basedpaymentawards.[IFRS3para30].Assetsheldforsale.[IFRS3para31].
Areas to watch out or:
Contracts should be re-assessed except or insuranceandleases.[IFRS3paras15-17].
Allidentiableintangiblesarerecognised. [IFRS3AppBparasB31-40].
Restructuring provisions are rarely recognised. [IFRS3para11].
Measurementperiod.[IFRS3paras45-50].
Goodwill
Goodwill is a residual. Full or partial goodwill depends on
measurement o NCI.
Bargain purchase
Re-assessfairvalues.[IFRS3Rpara36]. Recognisegaininprotorloss.[IFRS3Rpara34].
What constitutes control?
Denitionofcontrol.[IAS27para4].
Factors infuencing control[IAS27paras13-15] Equity shareholding. Control o the board. Potential voting rights. Control agreement. Jointcontrol.[IAS31para3]. Specialpurposeentities(SPEs).[SIC-12].
De acto control.
Economic interest is not the same as control.Control exists
IFRS 3 (revised) applies
Acquisition method
Identiy acquirer. Determine acquisition date.Account or elements.
Individual asset
Looktotherelevantspecic
standard, eg, IAS 16, Property,plant and equipment, or a
property (non-investment).
Business: no control
Looktotherelevantspecic
standard,eg,IAS28,Investment
in associates or IAS 31, Interestsin joint ventures.
Group o assets
Allocate cost based on relative air values at
purchase date to assets acquired (includingintangibles) and liabilities assumed.
[IFRS3para2].
Excluded elements are payments made at the
time o the acquisition which do not orm part
o consideration transerred. Consider(a)reasonsforthetransaction;(b)whoinitiated
thetransaction;(c)timingofthetransaction.
[IFRS3AppBparaB50].
Examples
Transactioncosts.[IFRS3para53].
Settlement o pre-existing relationships.
[IFRS3para52].
Remuneration or uture employee services.
[IFRS3para52].
Reimbursement or paying the acquirers
acquisitioncosts.[IFRS3para52].
Costs to issue debt or equity.
[IFRS3para53].
Paymentforindemnicationassets.
[IFRS3para57].
Please note that
this fowchart does
not cover group
reconstructions or
common control
transactions.
Is the transaction an acquisition o an
asset or a business?
Denitionofabusiness.[IFRS3para3;
AppA;AppBparasB7-B12].
Subsequent measurement
[IFRS3paras54-58]. Reacquired rights. Contingent liabilities. Indemnicationassets. Contingent consideration.
Previously
held interest
Non-
controlling
interest
Consideration
transerred
Excluded
elements
Identiable
assets and
liabilities
Goodwill
Asset acquisition
Business acquisition
Control
Components o consideration transerred
[IFRS 3 para 37].
Assetstransferred.
Liabilitiesincurredbyacquirertoformerowners.
Equityinterestsissuedbyacquirer.
Allconsiderationisrecognisedandmeasuredat air value.
Forms o consideration transerred (examples)
Cash,otherassets,businessesorsubsidiaries
o the acquirer.
Contingentconsideration.[IFRS3paras39,40].
Equityinstruments,options,warrants.[IFRS3
para37].PleaseconsultwithACSincaseofput
and call options.
Deferredconsideration.
Replacementshareawards.[IFRS3AppB
paraB56].
Contingent consideration
[IFRS3paras39,40,58]. Classifyasliabilityorequity.
Equityisnotremeasured.
Liabilityisremeasuredthroughprotorloss.
No control
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Investment (10%)
Atfairvalueasanavailable-for-salenancialasset(oratfairvaluethroughprotorloss).
Associate(40%)toassociate(30%)[IAS28para19A]
Derecogniseproportion(25%)ofcarryingamountof
investment.
Recycleproportion(25%)ofassociateAFSreserve
and CTA as part o gain/loss on sale.
Transfershare(25%)ofIAS16revaluationreserve
within equity to retained earnings.
Subsidiary (60%) to investment (10%)
[IAS27Rparas34/37]
Derecognisegoodwill,assetsandliabilities.
DerecogniseNCIincludingothercomprehensive
income items attributable to them.
Initiallyrecogniseinvestmentatitsfairvalueatthe
date control is lost.
RecycleentireAFSreserveandCTAaspartof
gain/loss on sale.
TransferentireIAS16revaluationreservewithin
equity to retained earnings.
Recognisegain/lossonsaleinprotorloss
attributable to the parent.
Associate(40%)toinvestment(10%)[IAS28paras18/19A]
Derecogniseinvestmentinassociate.
Initiallyrecogniseinvestmentatitsfairvalueatthedate
signicantinuenceislost. RecycleentireCTAandAFSreserveofassociateaspartof
gain/loss on sale.
TransferentireIAS16revaluationreservewithinequityto
retained earnings.
Recognisegain/lossonsaleinprotorloss.
Subsidiary(60%)toassociate(40%)[IAS27(revised)paras34-37]
Derecognisegoodwill,assets,andliabilities.
DerecogniseNCIincludingother
comprehensive income items
attributable to them.
Initiallyrecogniseinvestmentinassociate
at its air value at the date control is lost.
RecycleentireAFSreserveandCTAas
part o gain/loss on sale.
TransferentireIAS16revaluationreserve
within equity to retained earnings.
Recognisegain/lossonsaleinprotor
loss attributable to the parent.
Subsidiary(90%)tosubsidiary60%)
[IAS27(revised)paras30-31]
AdjustcontrollinginterestandNCI.
DifferencebetweenFVofconsiderationandamount
o NCI adjustment goes to equity (attributed to
owners o parent).
Subsidiary(80%)tosubsidiary(90%)[IAS27(revised)paras30-31]
NoFVexercise.
AdjustcontrollinginterestandNCI.
DifferencebetweenFVofconsideration
and amount o NCI adjustment goes to
equity (attributed to owners o parent).
Investment(10%)tosubsidiary(80%)[IFRS3(revised)paras41-42]
Remeasureinvestmenttofairvalue.
Recognisegain/lossinprotorloss
and recycle AFS reserve.
Determinegoodwillasfollows:
FV consideration
+ amount o NCI (air value or share in
net assets)
+ FV previously held investment
- FV net assets.
Note:
IMoA = PwCs IFRS Manual o Accounting
Associate(35%)tosubsidiary(80%)
[IFRS3(revised)paras41-42]
Remeasureassociatestofairvalue.
Recognisegain/lossinprotorlossandrecycleitems
o other comprehensive income (i any).
Determinegoodwillasfollows:
FV consideration
+ amount o NCI (air value or share in net assets)
+ FV previously held investment
- FV net assets.
Associate (25%) to associate (35%)
Determinegoodwillateachstage(FVconsiderationFV o share o net assets).
Nostepupofinvestmenttofairvalueforpreviously
owned 25%.
Investment (10%) to associate (25%)
[IAS28para20]
Remeasureinvestmenttofairvalue.
Recognisegain/lossinprotorlossandrecycle
AFS reserve.
Determinegoodwillasfollows:
FV consideration
+ FV previously held investment
- FV o total share o net assets.
+ 15%
= 25%+ 70%
=80%
+ 10%
= 35%
+45%
=80%
+ 10%=90%
- 30%= 60%
- 20%
=40%
- 30%= 10%
- 50%
= 10%
- 10%
= 30%
Step acquisitions
Step disposals
Step acquisitions and disposals
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Cost o investment amendments
to IFRS 1 and IAS 27
The amendments to IFRS 1, First-time adoption o IFRS, and IAS 27, Consolidated andseparatenancialstatements,bringthreemajorchanges:
Thecostofasubsidiary,jointlycontrolledentityorassociateinaparentsseparatenancial
statements, on transition to IFRS, is determined under IAS 27 or as a deemed cost. Deemed
cost is either air value or the carrying amount under the previous accounting practice.
Dividends rom a subsidiary, jointly controlled entity or associate are recognised as income.
There is no longer a distinction between pre-acquisition and post-acquisition dividends.
The cost o the investment o a new parent in a group (in a reorganisation meeting certain
criteria) is measured at the carrying amount o its share o equity as shown in the separate
nancialstatementsofthepreviousparent.
Eective date
Reportingperiodsbeginningonorafter1July2009.Earlyadoptionispermitted.
EU adoption status
AdoptedbytheEuropeanCommissionon23January2009.
What was the reason or the amendment?
ThemainreasonfortheamendmentistofacilitatethetransitiontoIFRSwithoutsignicantly
reducingtherelevanceofthenancialstatements.IAS27requiresanentitytoaccountforitsinvestmentsatcostorinaccordancewithIAS39initsseparatenancialstatements.Forthose
accounted or at cost, a parent entity could previously recognise income rom the investment
only to the extent that distributions were received rom post-acquisition earnings. Distributions in
excess o post-acquisition earnings were recognised as a reduction to the cost o the investment.
Prior to the amendment, IFRS 1 required retrospective application o this method o calculating
cost, which was oten cumbersome to reconstruct or investments that had been held or several
years.Withtheamendments,arst-timeadoptercanuseadeemedcost,whichmaybethe
previous GAAP carrying amount.
I dividends are recognised as income and not as a reduction to the cost o the
investment, is there risk o impairment?
Yes. IAS 36 has been amended to identiy circumstances when a dividend payment requires
impairment testing. These circumstances include:
Dividends exceeding the total comprehensive income (under IAS 1(revised)) o the subsidiary,
jointlycontrolledentityorassociateintheperiodthedividendisdeclared;or
Thecarryingamountoftheinvestmentintheseparatenancialstatementsexceedingthe
carryingamountintheconsolidatednancialstatementsoftheinvesteesnetassets,
including goodwill.
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How will this alleviate dividend trap issues?
Prior to the amendment, dividends rom pre-acquisition earnings were recognised as a
reductionofthecostofaninvestment.Becausetheywerenotrecognisedasprotsbythe
parent, they were not available or urther distribution. Under the new standard, dividends
are credited to income and available or distribution, subject to there being no impairment
and subject to local legal requirements.
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Financial instruments
Classicationandmeasurementofnancial
assetsIFRS9
IFRS9,Financialinstruments,representstherstmilestoneinthecomprehensiveIASB
projecttoreplaceIAS39,Financialinstruments:Recognitionandmeasurement,bytheend
of2010.IFRS9waspublishedon12November2009andmadeavailableforimmediate
early adoption.
Eective date
Annual periods starting 1 January 2013. Early adoption is permitted rom 12 November
2009(seedetailbelow).
EU adoption statusNot adopted by the European Commission at the time o going to print.
How does IFRS 9 improve nancial reporting?
IFRS9simpliesaccountingfornancialassetsasrequestedbymanyconstituentsand
stakeholders.Inparticular,itreplacesmultiplemeasurementcategoriesinIAS39withasingle
principle-basedapproachtoclassication.IFRS9removescomplexrule-drivenembedded
derivativeguidanceinIAS39andrequiresnancialassetstobeclassiedintheirentirety.IFRS
9eliminatestheneedformultipleimpairmentmodels,suchthatonlyoneimpairmentmodelfor
nancialassetscarriedatamortisedcostwillberequired.
What is in the scope?
IFRS9appliestoallnancialassetswithinthescopeofIAS39,includinghybridnancial
instrumentswithnancialassetshosts.IFRS9doesnotapplytonancialliabilitiesandhybrid
contractswithotherthannancialassethosts.
How are nancial assets to be measured?
IFRS9requiresallnancialassetstobemeasuredateitheramortisedcostorfullfairvalue.
Amortisedcostprovidesdecision-usefulinformationfornancialassetsthatareheldprimarily
to collect cash fows that represent the payment o principal and interest. For all other
nancialassets,includingthoseheldfortrading,fairvaluerepresentsthemostrelevant
measurement basis.
What determines classication?
IFRS9introducesatwo-stepclassicationapproach.First,anentityconsidersitsbusiness
modelthatis,whetheritholdsthenancialassettocollectcontractualcashowsratherthan
to sell it prior to maturity to realise air value changes. I the latter, the instrument is measured
atfairvaluethroughprotorloss.Iftheformer,anentityfurtherconsidersthecontractualcash
fow characteristics o the instrument.
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What is contractual cash fow characteristics test?
Anancialassetwithinaqualifyingbusinessmodelwillbeeligibleforamortisedcostaccounting
ifthecontractualtermsofthenancialassetgiveriseonspecieddatestocashowsthatare
solelypaymentsofprincipalandinterestontheprincipalamountoutstanding.Interestisdened
as consideration or the time value o money and or the credit risk associated with the principal
amount outstanding during a particular period o time.
Any leverage eature increases the variability o the contractual cash fows with the resultthat they do not have the economic characteristics o interest. I a contractual cash fow
characteristicisnotgenuine,itdoesnotaffecttheclassicationofanancialasset.Acash
fow characteristic is not genuine i it aects the instruments contractual cash fows only on the
occurrence o an event that is extremely rare, highly abnormal and very unlikely to occur.
What are common eatures that generally would pass the cash fow
characteristics test?
Unleveragedlinkagetoaninationindexinthecurrencyinwhichthenancialassetis
denominated.
Multiple extension options (or example, a perpetual bond).
Call and put options i they are not contingent on uture events, and the pre-payment
amount substantially represents unpaid amounts o principal and interest on the principal
amount outstanding, which may include reasonable additional compensation or the early
termination o the contract.
Interestratecaps,oorsandcollarsthateffectivelyswitchtheinterestratefromxedto
variable and vice versa.
Inavariableratenancialasset,aborroweroptiontochoosearateateachinterestrate
reset day as long as the rate compensates the lender or the time value o money (or
example, an option to pay three-month LIBOR or a three-month term or one-month LIBOR
or a one-month term).
What are common eatures that generally would ail cash fows characteristics
test?
Linkage to equity index, borrowers net income or other variables.
Inverse foating rate.
Call option at an amount not refective o outstanding principal and interest.
Issuer is required or can choose to deer interest payments and additional interest does not
accrue on those deerred amounts.
Inavariableratenancialasset,aborroweroptiontochoosearateateachinterestrate
reset day such that the rate does not compensate the lender or the time value o money(or example, an option to pay one-month LIBOR or a three-month term and one-month
LIBOR is not reset each month).
Avariableratethatisresetperiodicallybutalwaysreectsave-yearmaturityinave-year
constant maturity bond (that is, the rate is disconnected with the term o the instrument
except at origination).
An equity conversion option in a debt host (rom a holder perspective).
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Are reclassications permitted?
Classicationofnancialassetsisdeterminedoninitialrecognition.Subsequent
reclassicationispermittedonlyinthoserarecircumstanceswhenthebusinessmodelwithin
whichthenancialassetisheldchanges.Insuchcases,reclassicationofallaffectednancial
assets is required.
IFRS9speciesthatchangesinbusinessmodelareexpectedtobeveryinfrequent,should
be determined by the entitys senior management as a result o external or internal changes,shouldbesignicanttotheentitysoperationsanddemonstrabletoexternalparties.
For example, an entity has a portolio o commercial loans that it holds to sell in the short term.
The entity acquires a company that manages commercial loans and has a business model that
holds the loans in order to collect the contractual cash fows. The portolio o commercial loans
is no longer or sale, and the portolio is now managed together with the acquired commercial
loans;allareheldtocollectthecontractualcashows.
Another example o a change in the business model is where an entity decides to shut down
a line o service (or example, a retail mortgage business). The line o service does not accept
new business, and the aected portolio is being actively marketed or sale.
IFRS9indicatesthatchangesinintentionswithrespecttoindividualinstruments,temporarydisappearance o a particular market or transers o instrument between business models do
not represent a change in business model.
What does this mean or equity investments?
Equity investments do not demonstrate contractual cash fow characteristics o principal and
interest;theyarethereforeaccountedforatfairvalue.However,IFRS9providesanoption
todesignateanon-tradingequityinvestmentatfairvaluethoughprotorlossoratfairvalue
through other comprehensive income. The designation is available on an instrument-by-
instrument basis and only on initial recognition. Once made, the designation is irrevocable.
All realised and unrealised air value gains and losses ollow the initial designation, and there is
norecyclingoffairvaluegainsandlossesrecognisedinothercomprehensiveincometoprotor loss. Dividends that represent a return on investment rom equity investments will continue
toberecognisedinprotorlossregardlessofthedesignation.
Can an equity investment be measured at cost where no reliable air value
measure is available?
IFRS9removesthecostexemptionforunquotedequitiesandderivativesonunquotedequities
but stipulates that, in certain circumstances, cost may be an appropriate estimate o air value.
Thismaybethecasewhereinsufcientrecentinformationisavailableorwherethereisawide
range o possible air value measurements. Cost will not be an appropriate estimate o air
value i there are changes in investee circumstances, markets or wider economy, or i there is
evidence rom external transactions or or investments in quoted equity instruments. To the
extent actors exist that indicate cost might not be representative o air value, the entity shouldestimate air value.
What does this mean or hybrid contracts?
IFRS9requiresnancialassetstobeclassiedintheirentirety.Hybridcontractsarethose
instrumentsthatcontainanancialornon-nancialhostandanembeddedderivative.Hybrid
contractswithinthescopeofIFRS9thatis,hybridcontractswithnancialassethostsare
assessedintheirentiretyagainstthetwoclassicationcriteria.Hybridcontractsoutsideof
scopeofIFRS9areassessedforbifurcationunderIAS39.Inmanycases,hybridcontracts
may ail the contractual cash fow characteristic test and should thereore be measured at air
valuethroughprotorloss.
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Is air value option available?
TwooftheexistingthreefairvalueoptioncriteriacurrentlyinIAS39becomeobsoleteunder
IFRS9,asafairvaluedrivenbusinessmodelrequiresfairvalueaccounting,andhybrid
contractsareclassiedintheirentirety.TheremainingfairvalueoptionconditioninIAS39
iscarriedforwardtothenewstandardthatis,managementmaystilldesignateanancial
assetasatfairvaluethroughprotorlossoninitialrecognitionifthissignicantlyreduces
recognition or measurement inconsistency, commonly reerred to as an accounting mismatch.
Thedesignationatfairvaluethroughprotorlosswillcontinuetobeirrevocable.
What are transition requirements?
IFRS9iseffectiveforannualperiodsstarting1January2013andisavailableforearly
adoptionfrom12November2009.Thestandardgenerallyappliesretrospectively,with
some exceptions. Comparative inormation is not required to be adjusted retrospectively or
adoptions beore 2012.
IfanentityearlyadoptsIFRS9,itwillnotberequiredtoearlyadoptsubsequentstagesin
theIAS39replacementprojectthatis,impairmentandhedging.Thisistofacilitateearly
adoptionofIFRS9.However,ifanentitychoosestoearlyadoptanyofthesubsequentstages,
it will be required to early adopt all preceding stages rom the same date.
What happens next?
The IASB has issued an exposure drat on amortised cost and impairment, which proposes an
expectedcashowapproach(expectedlossmodel)toimpairmentofnancialassetscarried
at amortised cost. The ED is open or comment until 30 June 2010. It is the second stage in
thereplacementofIAS39.TheIASBhasalsoestablishedanExpertAdvisoryPanel,whichwill
advise on operational aspects o the expected loss model.
TheIASBisexpectedtoissueanEDonclassicationandmeasurementofnancialliabilities
and an ED on hedging in Q2 2010. The IASB is also expected to seek comments on the FASBs
nancialinstrumentsEDalsoexpectedtobeissuedinQ2.ThetwoBoardsareexpected
todeliberatethecommentletterstogetherandtonalisethenewconvergedaccounting
guidancefornancialinstrumentsbytheendof2010.
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Hedgingofportionsofnancialinstruments
IAS39amendment
TheIASBissuedanamendmenttoIAS39,Eligiblehedgeditems,on31July2008.Theamendment makes two changes:
Itprohibitsdesignatinginationasahedgeablecomponentofaxedratedebt.
In a hedge o one-sided risk with options, it prohibits including time value in the
hedged risk.
Eective date
Reportingperiodsbeginningonorafter1July2009.Itshouldbeappliedretrospectively.
EU adoption status
AdoptedbytheEuropeanCommissionon16September2009.
I management issued infation linked debt, can it hedge the infation
component?
Yes,thecontractuallyspeciedinationcomponentofaninationlinkeddebtcanbe
designated as a hedged item in a cash fow or air value hedge.
I management uses options to hedge orecast sales in oreign currency, can it
still designate them as hedges o one-sided risk?
Yes, options may be designated as hedges o one-sided risk or example, the oreignexchange risk that orecast sales in oreign currency will be worth less in the unctional
currency o the entity.
Can these options be perectly eective hedging instruments?
No.Theamendmentclariedthatonlytheintrinsicvalueofthepurchaseoptionscanbe
designated as a hedging instrument. Changes in the time value o the options will be posted to
protorlossaccount.
What should management do i it designated the ull air value o the options as
hedging instruments in the past?
Management should re-designate such options in new hedged relationships on an intrinsic
value basis prospectively as soon as possible.
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ClassicationofrightsissuesIAS32
amendment
ClassicationofrightsissuesanamendmenttoIAS32waspublishedon8October2009.The amendment recognises that the previous requirement to classiy oreign-currency-
denominated rights issued to all existing shareholders on a pro rata basis as derivative liabilities
is not consistent with the substance o the transaction, which represents a transaction with
owners acting in their capacity as such. The amendment thereore creates an exception to the
xedforxedruleinIAS32andrequiresrightsissueswithinthescopeoftheamendmentto
beclassiedasequity.
Eective date
Annual periods beginning on or ater 1 February 2010. It should be applied retrospectively.
Early adoption is permitted.
EU adoption status
AdoptedbytheEuropeanCommissionon24December2009.
What is a rights issue?
A rights issue is used as a means o capital-raising whereby an entity issues a right, option or
warranttoallexistingshareholdersofaclassofequityonaproratabasistoacquireaxed
numberofadditionalsharesataxedstrikeprice.Thestrikepriceisusuallysetbelowcurrent
market share price, and shareholders are economically compelled to exercise the rights so that
their interest in the entity is not diluted. Rights issues are not used or speculative purposes and
are required by laws or regulations in many jurisdictions when raising capital.
Why new guidance now?
Rights issues have become popular in the current environment due to liquidity constraints on
the markets. Entities listed in dierent jurisdictions are normally required by laws or regulations
toissuerightsdenominatedinrespectivelocalcurrencies.Unfortunately,axedstrikeprice
inotherthantheentitysfunctionalcurrencyviolatesxedforxedequityclassication
criterioninIAS32andhenceresultsintheinstrumentbeingclassiedasaderivativeliability
measuredatfairvaluethroughprotorloss.Giventhatrightsissuesareusuallyrelativelylarge
transactions,thiswouldhaveasubstantialeffectonentitiesnancialstatements.
What does the amendment require?
The IASB recognised that classiying oreign-currency-denominated rights issued to all existingshareholders on a pro rata basis as derivative liabilities was not consistent with the substance
o the transaction, which represents a transaction with owners acting in their capacity as such.
TheamendmentthereforecreatedanexceptiontothexedforxedruleinIAS32and
requiredrightsissueswithinthescopeoftheamendmenttobeclassiedasequity.
What is the scope o the new guidance?
The scope o the amendment is narrow and applies only to pro rata rights issues to all existing
shareholders in a class. It does not extend to long-dated oreign currency rights issues or
oreign-currency-denominated convertible bonds. For these instruments, the option to acquire
the issuers equity will continue to be accounted or as a derivative liability, with air value
changesrecordedinprotorloss.
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How will this change current practice?
Rightsissuesarenowrequiredtobeclassiedasequityiftheyareissuedforaxedamountof
cash regardless o the currency in which the exercise price is denominated, provided they are
oered on a pro rata basis to all owners o the same class o equity. Unlike derivative liabilities,
equityinstrumentsarenotsubsequentlyre-measuredatfairvaluethroughprotorloss.The
accountingthereforebecomeslesscomplex,andthereislessvolatilityinprotorloss.
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Group cash-settled share-based
payment transactions IFRS 2
amendments
The IASB issued amendments to IFRS 2, Group cash-settled share-based payment
transactions,inJune2009.Theamendmentsprovideaclearbasistodeterminethe
classicationofshare-basedpaymenttransactionsinconsolidatedandseparatenancial
statements.TheamendmentsincorporateIFRIC8,ScopeofIFRS2,andIFRIC11,IFRS2
Group and treasury share transactions, into IFRS 2. They also expand on the guidance given in
IFRIC 11 to address group arrangements that were not considered in that interpretation.
Eective date
Annual periods beginning on or ater 1 January 2010. Early adoption is permitted.
EU adoption status
Not adopted by the European Commission at the time o going to print.
What was the reason or the amendments?
The amendments were issued to expand on the guidance in IFRIC 11 on accounting or awards
in group situations. IFRS 2 now covers cash-settled awards that will be settled by an entity
within the group that does not employ the employees who receive the awards.
How does an entity account or group cash-settled share-based payment
arrangements?
Where a parent entity issues a cash-settled award to employees o its subsidiary, the
amendmentsconrmthatthiswillbetreatedasacash-settledshare-basedpayment
transactionintheparentsseparateandconsolidatednancialstatements(theparententity
hasgrantedtheawardandhastheobligationtosettleincash);andasanequity-settled
transactioninthesubsidiarysnancialstatements(thesubsidiaryentityhasnoobligationto
settle the award).
Theclassicationofbothcash-settledandequity-settledshare-basedpaymenttransactionsin
groupsituations,inbothconsolidatedandseparatenancialstatements,issummarisedinthe
fow chart below.
What will be the impact o the amendments?
Weexpecttheretobeminimalimpactonconsolidatednancialstatementsbecauseawards
should have been correctly accounted or as cash-settled share-based payment arrangements.
However,becausethereisnewguidanceforgroupcash-settledawards(historically
standards have been silent in this area), subsidiaries may need to account or a change in
accounting policy.
For example, i a subsidiary chose to treat an award granted to its employees by its parent as
cash-settledtomirrortheaccountingtreatmentintheconsolidatednancialstatements,this
will now need to be treated as equity-settled. Management will thereore need to measure the
air value o the award at grant date and transer the credit to equity. This could involve time
and eort in order to look back and determine the air value o the award at grant date.
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Will management need to restate their nancial statements?
Itdepends.Theamendmentsrequireretrospectiveadoption,andthenancial
statements need to refect the amendments as i they had always been applied. The entitys
previousaccountingpolicywilldeterminewhetherornotanentitysnancialstatementsneed
to be restated.
As the amendments to IFRS 2 are ully retrospective, any changes in accounting policy will
requireappropriatedisclosureinaccordancewithIAS8,Accountingpolicies,changesin
accounting estimates and errors.
Classicationofcash-andequity-settledtransactions
Notes:
1 My equity instruments, include equity instruments o my subsidiaries (non-controlling interests).
2Counterpartyincludesemployeesandothersuppliersofgoodsorservicesevenwherethegoodsorservicesareunidentiable.
3 For the entity that settles the obligation, treatment will be as equity-settled only i the transaction is settled in equity instruments o
that entity (including equity instruments o a subsidiary o that entity). For the entity receiving the goods or services, treatment will
be as equity-settled unless there is an obligation to settle in cash or other assets.
Not in scope
o IFRS 2
Equity-settled expense
Equity-settled expense
(Note 3)
Does counterparty get
cash (or other assets)
based on the valueo either my equity
instruments or equity
instruments o anothergroup entity? (Note 2)
Does counterparty getequity instruments o
another entity in thesame group? (Note 2)
Do I have to settle theobligation?
Do I have to provide
those instruments (that
is, am I the settler?)
Does counterparty get
my equity instruments?
(Notes 1 and 2)
Cash-settled expense
No
Yes
No
Yes
No
No
Yes
Yes
No
Yes
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Related-partydisclosuresIAS24
amendment
IAS24,Related-partytransactions,wasamendedinNovember2009.Therevisedstandardremoves the requirement or government-related entities to disclose details o all transactions
withthegovernmentandothergovernment-relatedentities.Italsoclariesandsimpliesthe
denitionofarelatedparty.
ThepreviousversionofIAS24didnotcontainanyspecicguidanceforgovernment-related
entities. They were thereore required to disclose transactions with the government and
other government-related entities. This requirement was onerous in territories with pervasive
governmentcontrol;itplacedasignicantburdenonentitiestoidentifyrelated-party
transactions and collect the inormation required to make the disclosures. For example, a
government-controlled railway was theoretically required to disclose details o its transactions
withthepostofce.Thisinformationwasnotnecessarilyusefultousersofthenancial
statements and was costly and time-consuming to collect.
Thenancialcrisiswidenedtherangeofentitiessubjecttorelated-partydisclosurerequirements.Thenancialsupportprovidedbygovernmentstonancialinstitutionsinmany
countriesmeansthatthegovernmentnowcontrolsorsignicantlyinuencessomeofthose
entities. A government-controlled bank, or example, would be required to disclose details o
its transactions, deposits and commitments with all other government-controlled banks and
with the central bank
Eective date
Annual periods beginning on or ater 1 January 2011. Earlier adoption is permitted either
or the entire standard or or the reduced disclosures or government-related entities.
EU adoption statusNot adopted by the European Commission at the time o going to print.
What is the denition o a government-related entity?
Government-relatedentitiesarenowdenedasentitiesthatarecontrolled,jointlycontrolledor
signicantlyinuencedbyagovernment.
What disclosures are government-related entities required to make?
TheamendmentintroducesanexemptionfromthedisclosurerequirementsofIAS24
or transactions between government-related entities and the government, and all other
government-related entities. Those disclosures are replaced with a requirement to disclose:
The name o the government and the nature o the relationship.
Thenatureandamountofanyindividually-signicanttransactions.
Aqualitativeorquantitativeindicationoftheextentofanycollectively-signicant
transactions.
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What is the impact o the change in disclosure requirements?
Thisisasignicantrelaxationofthedisclosurerequirementsandshouldbeofsubstantial
benettogovernment-relatedentities.Thecomplexityandvolumeofthedisclosuresinthe
nancialstatementsandthecostsofrecord-keepingwillbereduced.Thenewdisclosures
will provide more meaningul inormation about the nature o an entitys relationship with the
government.
Why has the denition o a related party changed?
Thepreviousdenitionofarelatedpartywascomplicatedandcontainedanumberof
inconsistencies. These inconsistencies meant, or example, that there were situations in which
onlyonepartytoatransactionwasrequiredtomakerelated-partydisclosures.Thedenition
has been amended to remove such inconsistencies and make it simpler and easier to apply.
What is the impact o the amended denition?
Whilethenewdenitionwillmakethedenitionofarelatedpartyeasiertoapply,someentities
will be required to make additional disclosures.
The entities that are most likely to be aected are those that are part o a group that includesboth subsidiaries and associates and entities with shareholders that are involved with other
entities. For example, a subsidiary is now required to disclose transactions with an associate
o its parent. Similarly, disclosure is required o transactions between two entities where
both entities are joint ventures (or one is an associate and the other is a joint venture) o a
third entity. In addition, an entity that is controlled by an individual that is part o the key
management personnel o another entity is now required to disclose transactions with that
second entity.
What next steps should management consider?
Management o government-related entities should consider whether they wish to adopt the
amendment early. Early adoption is likely to be attractive or many entities, but managementintending to adopt early should also consider the revised disclosure requirements and put in
place procedures to collect the required inormation. EU entities cannot currently apply the
amendment because the European Commission has not yet adopted it.
Managementofallentitiesshouldconsiderthereviseddenitiontodeterminewhetherany
additional disclosures will be required and put in place procedures to collect that inormation.
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First-time adoption IFRS 1
amendment:nancialinstrument
disclosures
TheBoardhasissuedanamendmenttoIFRS1,First-timeadoptionofIFRS,toproviderst-
time adopters with the same transition relie that existing IFRS preparers received in the March
2009amendmenttoIFRS7,Financialinstruments:Disclosures.
Eective date
Annual periods beginning on or ater 1 July 2010. Earlier adoption is permitted. Early
adoptionisrequiredforarst-timeadopterthathasarstreportingperiodthatbegins
earlierthan1July2010inordertobenetfromthedisclosurerelief.
EU adoption status
Not adopted by the European Commission at the time o going to print.
What triggered this amendment?
Existing IFRS preparers were granted relie rom presenting comparative inormation or the
newdisclosuresrequiredbytheMarch2009amendmentstoIFRS7FinancialInstruments:
Disclosures. The relie was provided because the amendments to IFRS 7 were issued ater
the comparative periods had ended, and the use o hindsight would have been required.
TheBoardthereforepermittedentitiestoexcludecomparativedisclosuresintherstyear
ofapplication.Certainrst-timeadopters(forexample,thosewitharstreportingperiod
beginningonorafter1January2009)wouldotherwiseberequiredtomakethecomparativeperioddisclos