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Nexia TS Public Accounting CorporationMember Firm of Nexia International Associated Offices Worldwide
NEXIA TS PUBLIC ACCOUNTING CORPORATION
Key Developments in IFRS – 2010
Presented by Jojo Alviedo
May 2010
Key Developments in IFRS – 2010
2May 2010
Nexia TS associated with Smith & Williamson
Key changes affecting FY2009/2010 financial statements
What are we covering? (1)
W.e.f FRS ref Description
1 July 2009 IFRIC 17 Distributions of Non-cash Assets to Owners
IFRS 3R & IAS 27R Business Combinations & Consolidated and Separate Financial Statements
1 Jan 2010 Amendments to IFRS 2 Group Cash settled share-based payment transactions
Annual improvements Improvement to IFRSs 2009
Key Developments in IFRS – 2010
3May 2010
Nexia TS associated with Smith & Williamson
Other hot topics & IASB/IFRIC Developments
• IFRIC 15: Agreements for Construction of Real Estates
• IFRS for SMEs
What are we covering? (2)
Key Developments in IFRS – 2010
4May 2010
Nexia TS associated with Smith & Williamson
IFRIC 17 Distributions of Non-Cash Assets to Owners
Key Developments in IFRS – 2010
5May 2010
Nexia TS associated with Smith & Williamson
Effective date: Applicable from years beginning on or after 1 July 2009 Early application permitted
Applies to: Distributions of non-cash assets Distributions that give owners choice of receiving cash or non-cash
assets
Does not apply to: Uneven distributions – some owners benefit more than others Non-cash assets that are owned by same parties before and after
distribution Non-cash asset is a subsidiary that continues to be a subsidiary after the
distribution
IFRIC 17 - Application
Key Developments in IFRS – 2010
6May 2010
Nexia TS associated with Smith & Williamson
IFRIC 17 clarifies that:– a dividend payable should be recognised when the dividend is appropriately
authorised and is no longer at the discretion of the entity – an entity should measure the dividend payable at the fair value of the net
assets to be distributed – an entity should remeasure the liability at each reporting date and at
settlement, with changes recognised directly in equity – an entity should recognise the difference between the dividend paid and the
carrying amount of the net assets distributed in profit or loss, and should disclose it separately
– an entity should provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation
IFRIC 17 applies to pro rata distributions of non-cash assets (allowners are treated equally) but does not apply to common controltransactions.
IFRIC 17 - Application
Key Developments in IFRS – 2010
7May 2010
Nexia TS associated with Smith & Williamson
CHART 1 (distribution of available-for-sale securities)
IFRIC 17 - Application
Before distribution After distribution
Public shareholders
Public shareholders
Company A
Company A Assets
Key Developments in IFRS – 2010
8May 2010
Nexia TS associated with Smith & Williamson
CHART 2 (distribution of shares of subsidiaries)
IFRIC 17 - Application
Before distribution After distribution
Public shareholders Public
shareholders
Company A
Company A Subsidiary BSubsidiary B
Key Developments in IFRS – 2010
9May 2010
Nexia TS associated with Smith & Williamson
Fair value
Choice of cash/non-cash distribution consider fair value and probability of each alternative
Review dividend carrying value at each settlement date adjust to equity
Upon settlement, difference between book value of distributed assets and dividends charged to P/L
IFRIC 17 - Measurement
Key Developments in IFRS – 2010
10May 2010
Nexia TS associated with Smith & Williamson
Overview of IFRS 3 (Revised) and IAS 27 (Amendment)
- Business Combinations
Key Developments in IFRS – 2010
11May 2010
Nexia TS associated with Smith & Williamson
True or False?
How ready are you?
1. Acquisition costs are capitalised
2. Only probable earn-out payment is part of the consideration
3. Contingent consideration always re-measured at fair value
4. Step acquisition can lead to a gain/loss!
5. No gain or loss on partial disposal where control retained
False
True
True
False
False
Key Developments in IFRS – 2010
12May 2010
Nexia TS associated with Smith & Williamson
Principles of IFRS 3R
Excluded elements
Consideration
Previous interest
Non-controlling interest
Goodwill
Assets, liabilities and contingent
liabilities
Key Developments in IFRS – 2010
13May 2010
Nexia TS associated with Smith & Williamson
Let’s consider a simple scenario
Boy Racer bought a 60% stake in Future Champion for US$180m. It incurred transaction costs of US$15m. The fair value of the identifiable net assets is US$200m.
IFRS 3R – fair value of business
IFRS 3 – cost allocation
How does IFRS 3R differ from IFRS 3?
Transaction costs (US$15m)
Consideration (US$180m)
NCI (US$80m)
Goodwill (US$75m)
Assets, liabilities and contingent
liabilities (US$200m)
Transaction costs (US$15m)
Consideration (US$180m)
NCI at fair value (optional)
(US$120m)
Goodwill (US$100m)
Assets, liabilities and contingent
liabilities (US$200m)
Key Developments in IFRS – 2010
14May 2010
Nexia TS associated with Smith & Williamson
FAIR VALUE METHOD
PROPORTIONATE SHARE
Step acquisitions and Non-controlling interests under IFRS 3R
Consideration (US$120m)
Previous interest (US$60m)
NCI (US$80m)
Goodwill (US$60m)
Assets, liabilities and contingent
liabilities (US$200m)
Goodwill (US$100m)
Assets, liabilities and contingent
liabilities (US$200m)
Racing Cars plc bought a 40% stake in Go Faster for US$120m. It already holds a 20% interest. The fair value of the identifiable net assets is also US$200m.
Boy Racer bought a 40% stake in Future Champion for US$120m. It already holds a 20% stake in the company.
Previous interest (US$60m)
NCI (US$120m)
Consideration (US$120m)
Key Developments in IFRS – 2010
15May 2010
Nexia TS associated with Smith & Williamson
Principles of IAS 27R: single economic entity
Group financial statements single economic entity
Equity providers include parent
company shareholders & NCI
Losses can be allocated to NCI even
if result in debit balance
TRANSACTION WITH EQUITY HOLDERS -
no goodwill and no gain/loss in income
statement
Key Developments in IFRS – 2010
16May 2010
Nexia TS associated with Smith & Williamson
Ownership changes: increasing stake and retaining control
US$’m
NCI 80
Share of profit 20
Carrying value of NCI
100
2 years later, Racing Car and Boy Racer both decided to buy the remaining 40% in the companies they originally invested in for US$160m.
Both companies have made profits of US$50m since Racing Car and Boy Racer bought their original stakes
GO FASTER FUTURE CHAMPION
US$’m
NCI 120
Share of profit 20
Carrying value of NCI
140
Cash US$160m
Debit to CI’s equity US$60m
Debit to CI’s equity US$20m
CV of NCI bought
Key Developments in IFRS – 2010
17May 2010
Nexia TS associated with Smith & Williamson
Greater Use of Fair Value
All elements of consideration (incl. contingent consideration)
Identifiable assets and liabilities: additional guidance
Non Controlling Interest
Acquisition in stages: Previously held interests
Retained interests on disposal
Key Developments in IFRS – 2010
18May 2010
Nexia TS associated with Smith & Williamson
Impact on earnings
Transaction costs are expensed
Changes in estimates of earn out payments recognised in
P&L
Full goodwill may mean increased impairment charge
in future
Share options given to vendors may be expensed
Recognition of deferred tax assets in P&L
Disposals to non-controlling interests do not affect P&L
Pre-existing interests are fair valued through P&L
Key Developments in IFRS – 2010
19May 2010
Nexia TS associated with Smith & Williamson
Business Implications
Review strategy for business acquisitions
o Full or partial goodwill model
o Acquisitions in stages versus acquisition of 100% from the outset
Be vigilant of the accounting implications when drafting clauses in contracts
Implement processes to deal with the greater use of fair value accounting
Financial statements will look different – be ready to explain to stakeholders
Key Developments in IFRS – 2010
20May 2010
Nexia TS associated with Smith & Williamson
Application
Standard applicable from years beginning on or after 1 July 2009
• Early application permitted
• Both standards should be applied together
• Prospective – previous accounting largely unchanged
Key Developments in IFRS – 2010
21May 2010
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Amendment to IFRS 2- Group Cash-settled Share based
Payment Transactions
Key Developments in IFRS – 2010
22May 2010
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Classification of share-based payment transactions
o Equity-settled
o When receives goods or services as consideration for its own instrument or has no obligation to settle the transaction with the supplier (Measured based on FV at grant date)
o Cash-settled
o When acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the equity instruments of the entity or another group entity (Measured based on FV at each reporting date)
Key Developments in IFRS – 2010
23May 2010
Nexia TS associated with Smith & Williamson
Classification of Group share-based payment transactions
Award Consolidated FS
Separate FS of Parent
Separate FS of Sub
Sub grants awards on parent’s shares to its own employees to be settled in parent’s shares
Parent grants awards on its own shares to employees of Sub to be settled in parent’s shares
Parent grants awards on its own shares to employees of Sub to be settled in cash based on price of parent’s shares
Equity settled
Cash settledN/AEquity settled
Equity settledEquity settled
Equity settledCash settledCash settled
Key Developments in IFRS – 2010
24May 2010
Nexia TS associated with Smith & Williamson
Improvements to IFRSs - Effective 2009 / 2010
Key Developments in IFRS – 2010
25May 2010
Nexia TS associated with Smith & Williamson
Improvements to IFRS
Non-urgent, minor amendments to standards (2nd annual improvement project)
• Inconsistency in standards
• Clarification of wordings
Effective date for annual periods commencing on or after 1 July 2009 / 1 January 2010
Key Developments in IFRS – 2010
26May 2010
Nexia TS associated with Smith & Williamson
Key amendments
IAS 1 – Current / Non current classification on convertible instruments
IAS 7 – Statement of Cash Flows – Investing activities
IAS 18 – Revenue (Appendix) – Agent vs Principal
IAS 39 – Loan prepayment penalties
– Scope exemption for business combination contracts
IFRIC 16 – Hedges of net investment in a foreign operation
Key Developments in IFRS – 2010
27May 2010
Nexia TS associated with Smith & Williamson
IAS 1: Classification of liability component of a convertible instrument
A convertible bond (CB) can be converted into ordinary shares of the issuer at time during the tenure of the bond or settle in cash at maturity at 31 December 2010. As at 31 December 2008, the liability component of the CB should be classified as:
(A) Current liability
(B) Non-current liability
Key Developments in IFRS – 2010
28May 2010
Nexia TS associated with Smith & Williamson
IAS 7: Cash flows – Investing activities
Research and development cost, not capitalised would be classified as cash flows from:
(A) Operating activities
(B) Investing activities
Key Developments in IFRS – 2010
29May 2010
Nexia TS associated with Smith & Williamson
IAS 18 guidance on Agent vs Principal
Para 21 in Appendix to FRS 18 added
Key principles Primary obligation to perform Inventory risk Selling price risk: Ability to determine prices Credit risk
Additional feature for agency relationship – Predetermined amount i.e. fixed fee or stated % of amount billed.
Judgement
Key Developments in IFRS – 2010
30May 2010
Nexia TS associated with Smith & Williamson
Annual improvements: IAS 39 – Loan prepayment penalties
Oldo Loan prepayment options are embedded derivatives (i.e. must be separately
accounted for and fair valued).
UNLESSo Option’s exercise prices is approximately equal to amortised cost of host debt
instrument.
Problemo Prepayment price is usually meant to compensate lender for loss of future interest.o A prepayment price computed on a future loss basis often will not equal the amortised
cost.o Amortised cost Past interest rateo Compensation for future loss Future interest rate
Newo Loan prepayment option price that reimburses lost interest can be closely-related
o Loan interest = Principal prepaid x Interest differentialo Interest differential = EIR of host debt – Reinvestment rate at prepayment date
Key Developments in IFRS – 2010
31May 2010
Nexia TS associated with Smith & Williamson
Annual improvements: IAS 39 – Scope exemption for business combination
Old
o A contract between an acquirer and a vendor in a business combination to buy/sell acquiree at future date is out of scope of IAS 39.
o Options resulting in business combination can be excluded from the scope of IAS 39.
Newo Forward contracts between an acquirer and a selling shareholder
that will result in business combination are out of scope of IAS 39.
o Options resulting in business combination are within scope of IAS 39.
o Forward contract should not exceed a “reasonable” period necessary to obtain approvals and complete the transaction
Key Developments in IFRS – 2010
32May 2010
Nexia TS associated with Smith & Williamson
Annual improvements: IFRIC 16 – Hedges of Net Investment in Foreign Operation
Oldo The hedging instrument may be held by any entity or entities within
the group
Except o The foreign operation that itself is being hedged
Problem o From a group perspective, should it matter where the hedging
instrument is held?
Newo Foreign operation that is being hedged can also hold the hedging
instrument
Key Developments in IFRS – 2010
33May 2010
Nexia TS associated with Smith & Williamson
Other Improvements – Minimal Effect on Accounting
IAS 17 – Classification of land element of a lease
IAS 38 – Measuring the fair value of an intangible asset acquired in a business combination
IFRS 2 – Scope of IFRS 2 and revised IFRS 3
IFRS 5 – Disclosures for non-current assets held for sale or discounted operations
IFRIC 9 – Change in Scope of IFRIC 9 and revised IFRS 3
Key Developments in IFRS – 2010
34May 2010
Nexia TS associated with Smith & Williamson
Hot topics and IASB Developments
Key Developments in IFRS – 2010
35May 2010
Nexia TS associated with Smith & Williamson
IFRIC 15Agreements for construction of
real estates
Key Developments in IFRS – 2010
36May 2010
Nexia TS associated with Smith & Williamson
IFRIC 15 – Real estate sales
Definition of construction contact – “specifically negotiated”
IAS 11 (rather than IAS 18) if
Buyer specifies the major structural design
If IAS 18, determine whether it is sale of goods or services
Agreement for sale of services
Entity not required to acquire and supply construction materials
Use percentage of completion method as required by IAS 18
Key Developments in IFRS – 2010
37May 2010
Nexia TS associated with Smith & Williamson
IFRIC 15 – Real estate sales
Agreement for sale of goods
Entity is required to provide services together with construction materials
Transfer of risks and rewards in entirely at single time – recognise in full only when IAS 18 criteria fulfilled
Further work required on delivered property = liability
Continual transfer of control and risks and rewards - % of completion
Future goods or services separate from property to be delivered = separate component
Key Developments in IFRS – 2010
38May 2010
Nexia TS associated with Smith & Williamson
IFRIC 15 – Real estate sales
The following indicators support a continual transfer of control and risks and rewards. True/False?
Buyer has the right to engage a different developer to complete the rest of the development
Buyer owns the land on which the property is built
Developer has the legal right to be paid for all work performed at any point in time
Buyer is required to pay a deposit at the point of purchase that is refundable only if developer fails to deliver the unit
True
True
True
False
Key Developments in IFRS – 2010
39May 2010
Nexia TS associated with Smith & Williamson
IFRS For SMEs
Overview
Key Developments in IFRS – 2010
40May 2010
Nexia TS associated with Smith & Williamson
IFRS for SME - Agenda
1. General Overview
2. Scope
3. Some fundamental differences / Other simplifications for IFRS
4. Topics excluded from SME standard
5. Implications
6. Adoption by other territories
Key Developments in IFRS – 2010
41May 2010
Nexia TS associated with Smith & Williamson
General Overview
1. Starting point: pervasive concepts and principles of full IFRS
2. Modifications from Full IFRS based on:
Needs of users of SME financial statements
Cost – benefit considerations
3. Stand alone document; Option to refer to Full IFRS only permitted for IAS 39 (Measurement and Recognition)
4. Maintenance and subsequent updates
5. First time adoption
Key Developments in IFRS – 2010
42May 2010
Nexia TS associated with Smith & Williamson
Scope
Listed entities
Non-listed entities
Public acc. Non-public accountability
IFRS
IFRS SME
Mandatory Permitted
Not permitted Scope: entities that do not have public accountability
Expected use by:
• (subsidiaries of) multinationals
• High end middle market
Key Developments in IFRS – 2010
43May 2010
Nexia TS associated with Smith & Williamson
Fundamental measurement / recognition differences with full IFRS (1)
A) Non-financial assets / investments
Full IFRS IFRS for SMEs
Goodwill and other intangible assets
Cost-impairment model
Indefinite useful life
Cost-amortisation – impairment model
Useful life presumption: 10 years
Investment property Option: cost model or fair value model
No choice: Fair value model; Cost method – if cannot determine FV
Investments in associates and joint ventures
Investment in Associate – Only equity method permitted
Quoted associates/ JV’s – FVTPL model (for which there is published price quotation)
Unquoted associates/ JV’s – Choice of (i) Cost Method (ii) Equity Method
Key Developments in IFRS – 2010
44May 2010
Nexia TS associated with Smith & Williamson
Fundamental measurement / recognition differences with full IFRS (2)
B) Income / Expenses Full IFRS IFRS for SMEs
Government grant accounting Two broad approaches – Income and capital approach
Grants that don not impose future performance conditions are recognised as income when receivable
Borrowing costs
Research & Development
Capitalise (for R&D: if conditions are met)
Expense as incurred
Exchange Differences on Monetary Items
Reclassify exchange differences recognised in OCI, to P&L on disposal
Not reclassified to P&L on disposal
Defined benefit plans Projected Unit Method Use IAS 19 Projected unit method if this information is readily determinable
If not: simplified approach
Key Developments in IFRS – 2010
45May 2010
Nexia TS associated with Smith & Williamson
Fundamental measurement / recognition differences with full IFRS (3)
C) Consolidation
Business Combination
Full IFRS IFRS for SMEs
Business Combinations
( Some examples)
Based on IFRS 3 (revised)
Transaction cost are expensed off under IFRS 3R
- Contingent consideration is recognised regardless of the probability of payment
Based on IFRS 3 (existing)
Transaction costs are included in the acquisition costs
- Contingent consideration is recognised as part of acquisition cost if probable and FV measured reliably
Consolidation (Reporting periods)
Full IFRS gives additional guidance on maximum difference of reporting periods (3 months) and adjust for transactions that occur in gap period
The consolidated FS of the parent & subsidiary to be drawn up at the same reporting dates, unless it is impracticable to do so.
Key Developments in IFRS – 2010
46May 2010
Nexia TS associated with Smith & Williamson
Fundamental measurement / recognition differences with full IFRS (4)
D) Others Full IFRS IFRS for SMEs
Income taxes Based on existing IAS 12• Tax basis: Expected manner of recovery i.e. either through use or sale• No disclosure of valuation allowance• Uncertain tax positions: Disclose only the contingencies
Similar to ED Taxes (Egs)
• Tax basis: Through sale
• Valuation Allowance• Uncertain tax positions: Probability – Use probability weighted average for expected outcomes
Different from ED (i.e. current IAS 12):
When different tax rate applies to distributed income, measure current and deferred taxes at the rate expected to apply to undistributed profits, with adj. in subsequent periods if profits distributed.
Key Developments in IFRS – 2010
47May 2010
Nexia TS associated with Smith & Williamson
Fundamental measurement / recognition differences with full IFRS (5)
D) Others Full IFRS IFRS for SMEs
Share-based payments In case of SBP with cash alternatives wherein terms provide “counterparty” with choice of settlement ~ accounting akin to compound instrument.
Accounting for transaction, as a cash settled SBP, unless entity has past practice of equity settlement, or option to settle in cash has no commercial substance. In such cases, account as equity settled.
Financial instruments IAS 32, 39, IFRS7 Two sections on IFRS for SME; Basic FI and other FI Issues; Much simplified hedge accounting and derecognition principles
Key Developments in IFRS – 2010
48May 2010
Nexia TS associated with Smith & Williamson
Other Noticeable Simplifications
Statement of changes in equity (Pls see next slide for illustration)
Under certain conditions this statement may be merged with the income statement, which results in a ‘statement of income and retained earnings’.
Disclosure requirements reduced
No disclosure require of risk management policies (IFRS 7 disclosures) and sensitivity percentages of key estimates
No requirement to present additional statement of financial position when change in accounting policy/restatement or reclassification of items. (IAS 1R)
Non-current Assets held for Sale
Assets held for sale category and related special measurement requirements not covered, although the decision to sell and asset is considered an impairment indicator.
Key Developments in IFRS – 2010
49May 2010
Nexia TS associated with Smith & Williamson
XYZ Group
Consolidated statement of comprehensive income and retained earnings for the year ended 31 December 20X2
(Alternative 1 – Illustrating the classification of expenses by function)
6,863,545 5,808,653
(5,178,530) (4,422,575)
1,685,015 3,386,078
88,850 25,000
(175,550) (156,800)
(810,230) (660,389)
(106,763) (100,030)
(26,366) (36,712)
654,956 457,147
(270,250) (189,559)
384,706 267,588
2,171,353 2,003,765
(150,000) (100,000)
2,406,059 2,171,353
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Finance costs
Profit before tax
Income tax expense
Profit for the year
Retained earnings at start of year
Dividends
Retained earnings at end of year
Notes 20X2 20X1
CU CU
5
6
7
8
9
Note: the format illustrated above aggregates expenses according to their function (cost of sales, distribution, administrative etc). As the only changes to XYZ Group’s equity during the year arose from profit or loss and payment of dividends, it has elected to present a single statement of comprehensive income and retained earnings instead of separate statements of comprehensive income and changes in equity.
Key Developments in IFRS – 2010
50May 2010
Nexia TS associated with Smith & Williamson
Omitted from SME standard
A number of topics are omitted from the SME as compared to full IFRS
Standard:
- Segment reporting
- Interim financial reporting
- Earnings per share
- Insurance contracts
Key Developments in IFRS – 2010
51May 2010
Nexia TS associated with Smith & Williamson
Implications for Companies
Appropriate for countries which is already in full compliance with IFRS in all material aspects?
Costs/time to retrain staff, redesign systems/process
May not make sense for subsidiaries of listed companies and companies with plans for listing
Fair value accounting still feature strongly
May still be excessive for very small or micro entities
Key Developments in IFRS – 2010
52May 2010
Nexia TS associated with Smith & Williamson
Adoption of the SME Standard
UK / Ireland: Yes, expected to be mandatory in 2011/2012
Netherlands – Expected to be mandatory – date to be confirmed
US: Permitted effective immediately but not mandatory
Australia, SE Asia: Regulators currently assessing
France, Germany: reluctant
Other EU member states: Differs from country to country
Key Developments in IFRS – 2010
53May 2010
Nexia TS associated with Smith & Williamson
QUESTIONS
AND
ANSWERS
Key Developments in IFRS – 2010
54May 2010
Nexia TS associated with Smith & Williamson
THANK YOU