i Cap if Rs Questions

BUSINESS WITH CONFIDENCE icaew.com

IFRS Seminar Karachi, Pakistan November 2014

MIKE TURNER, ACA (UK), CPA (USA), CFA (USA)

Mike is a UK Chartered Accountant, US Certified Public Accountant and Certified Financial Analyst (CFA) and an expert facilitator specialising in IFRS, US-GAAP and IPSAS.

He has a long track record of delivering tailor-made training solutions around the world with more than 20 years of experience spanning the Big 4 accounting firms as well as private and public entities.

Mike is responsible for the design and development of various IFRS, IPSAS and US GAAP training courses around the world from fundamental to advanced stages and has delivered workshops in most continents and across a wide range of cultures.

Mike was the co-founder, course designer, examiner and facilitator for the US-GAAP Diploma for Chartered Accountants Ireland from 2008 to 2010.

He also co-authored a complete set of training materials in US GAAP. Delegates on this programme were experience qualified accountants that attended 20 days of training to

comprehensively cover US GAAP standards and pronouncements.

Over the past four years, he has delivered more than 300 training days training for ICAEW in Bangladesh (IFRS), Cambodia (IFRS & IPSAS), Ghana (IFRS), Nigeria (IFRS), Myanmar (IFRS & IPSAS), Philippines (US GAAP, IFRS and COSO control framework), Sri Lanka (IFRS), and Tanzania (IFRS & IPSAS).

In addition to delivery of training, he has developed a 6 week IFRS training program in IFRS under a World Bank funded project for ICAEW for the Nigerian SEC in 2013. Each delegate received 30 days training over a 12 month period, and Mike personally developed the materials and questions for his training experience.

He will provide a blend of technical knowledge and practical experience as he himself offers such a skill set combination that will be invaluable to the overall success of the program.

He brings not only unparalleled technical expertise but also a unique ability to integrate technical financial accounting and management issues into the training environment through tailored, real-life exercises that underscore the practicalities of achieving agreed-upon learning objectives.

Various courses designed and delivered by Mike Turner Abu Dhabi Accountability Authority: -  IFRS / IPSAS – intermediate to advanced.

Allied Command Operations (ACO) Europe: -  IPSAS – intermediate and advanced.

Allied Command Transformation (ACT) United States: -  IPSAS – intermediate and advanced.

African Development Bank: -  IPSAS and IFRS – intermediate to advanced.

Auditor General of Myanmar: -  IPSAS – introduction to intermediate – focus on

implementation issues.

Association of Certified Chartered Accountants: -  IFRS – basic to final level exam preparation.

Asian Development Bank: -  IFRS, US GAAP and COSO Internal Control

Program – intermediate to advanced and advanced course banking specific.

BA Aerospace: - US GAAP – intermediate

BPP Professional Education: -  IFRS in house and exam based training

courses.

Chartered Accountants Ireland IFRS: -  Intermediate to advanced and US GAAP

Intermediate to advanced

General Motors Acceptance Corporation (GMAC): -  US GAAP – advanced.

Hewlet Packard: -  US GAAP – advanced.

Institute of Chartered Accountants of England and Wales (ICAEW) : -  IFRS Diploma in IFRS – advanced.

ING Bank: -  IFRS – advanced.

Institute of Chartered Accounts of Nigeria: -  Train-the-trainer program.

KICPAA ( Cambodian Chartered Accountants): -  IFRS and IPSAS – intermediate.

Meteor Telecoms Ireland: -  IFRS – advanced update Telecom specific.

Myanmar Institute of Certified Public Accountants: -  IFRS – intermediate to advanced.

NATO School Oberammergau Germany: -  IPSAS – intermediate and advanced.

River State Government Nigeria: -  IPSAS – intermediate.

Securities Exchange Nigeria: -  IFRS – intermediate to advanced.

Samba (Saudi Arabia – previously Citibank): -  IFRS – update course – advanced issues.

Tutor biography

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Institute of Chartered Accountants of Pakistan IFRS Seminar

ICAEW BUSINESS WITH CONFIDENCE icaew.com

1. IFRS 15 Revenue from Contracts with Customers 2. IFRS 13 Fair Value Measurement and Valuation Techniques 3. IAS 36 Impairment 4. IAS 9 Financial Instruments

Course Contents


IFRS 15 Revenue from Contracts with Customers

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•  New revenue recognition standard was issued: IFRS 15 Revenue from Contracts with Customers and it should fill the gap between IFRS and US GAAP.

•  You’ll need to apply IFRS 15 for reporting periods beginning on or after 1 January 2017 (early application permitted)



IFRS 15 will replace the following standards and interpretations: •  IAS 18 Revenue, •  IAS 11 Construction Contracts •  SIC 31 Revenue – Barter Transaction Involving Advertising

Services •  IFRIC 13 Customer Loyalty Programs •  IFRS 15 Agreements for the Construction of Real Estate and •  IFRIC 18 Transfer of Assets from Customers


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Objective: single, principle-based revenue standard §  Improve accounting for contracts with customers

-  More robust framework for recognizing revenue -  Increased comparability across industries & capital

markets -  Better disclosures



Scope

Excluded

Lease contracts

Insurance contracts

Financial instruments

including financial services fees that are integral part of effective

interest rate

Included

All other contracts with customers

including unbundled services from lease & insurance

contracts

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Core Principle

Core Principle

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration

to which the entity expects to be entitled in exchange for those goods or services


1. Identify contract(s) with the customer

2. Identify performance obligations

3. Determine transaction price

4. Allocate transaction price

5. Recognize revenue when performance obligation is satisfied

Steps to Apply the Core Principle

Five-Step Model Framework

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Step 1: Identify the Contract(s)

Objective: To identify the bundle of contractual rights and obligations to which an entity would apply the revenue model

§  Contract Existence—model applies if both parties are committed to perform their obligations and enforce their rights under the contract

§  Contract combinations—contracts entered into at/near the same time with the same customer (or related parties) should be combined if one or more of the following criteria are met §  The contracts are negotiated as a package with a single commercial objective §  The amount of consideration to be paid in one contract depends on the price or

performance of the other contract §  The goods or services promised in the contracts (or some goods or services

promised in the contracts) are a single performance obligation


Step 1 (cont’d): Identify the Contract(s)

Objective: To identify the bundle of contractual rights and obligations to which an entity would apply the revenue model

§  Contract modifications §  Account for as a separate contract if distinct goods or services are

added at their standalone selling price §  Otherwise, reevaluate remaining goods or services in the modified

contract •  If distinct, account for prospectively •  If not distinct, account for using cumulative catch-up adjustment

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Step 2: Identify Performance Obligation(s)

Objective: To identify the promised goods or services that are distinct & should be accounted for separately

A promise to transfer a good or service (or a bundle of goods or services) is a performance obligation only if the promised good or service is distinct

-  The customer can benefit from the good or service on its own or together with other readily available resources

-  The entity’s promise to transfer goods and services are separable from other promised goods or services in the contract


Step 2 (cont’d): ID Separate P.O.’s

Organization does not provide a

significant service of integrating the good or service into a combined

item (inputs to produce

an output)

Purchasing (or not purchasing) the good or service

would not significantly affect the remainder of

the contract

The good or service does not

significantly modify or

customize other promised goods

or services

Indicators that a good or service is distinct within context of the contract

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Step 3: Determine Transaction Price

Objective: To determine amount of consideration that an entity expects to be entitled in exchange for promised goods or services

§  Variable consideration – estimate using method the entity expects to

better predict the amount of consideration, either:

•  Expected value or most likely amount §  Time value of money – adjust only if there is a significant financing

component §  Collectibility – revenue should be measured at the amount of consideration

to which the entity is entitled (i.e. an amount that is not adjusted for customer credit risk)

•  However, at inception of contract, the expectation of significant credit risk may indicate the entity is willing to provide a price concession


Step 3 (cont’d): Constraint on Revenue Objective: Recognize revenue at an amount that would not be subject to significant revenue reversals that might arise from subsequent changes in the estimate of the amount of variable consideration to which the entity is entitled

§  Variable consideration: discounts, rebates, refunds, credits, incentives, bonuses, penalties, contingencies, concessions, etc.

§  Include in the transaction price the minimum amount of variable consideration the entity determines would not be subject to a significant revenue reversal

§  Indicators provided to assist an entity in making this determination

§  No circumstances specified for which the minimum amount could be zero (that is, no exception provided for sales-based royalties and/or other amounts that are difficult to measure)

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Step 4: Allocate Transaction Price

Objective: To allocate to each separate performance obligation the amount to which the entity expects to be entitled

§  Allocate the transaction price to the separate performance obligations using

the relative standalone selling price method

§  Discounts & contingent consideration should be allocated entirely to one or more, but not all, performance obligation(s) if

-  The entity regularly sells the goods and services associated with the performance obligation(s) on a standalone basis at a discount; and

-  The amount of total discount in the contract equals the amount of discount at which the goods and services in those p.o.’s are sold


Step 5: Recognize Revenue

Objective: To recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service

Criteria •  Customer receives & consumes the

benefits of entity’s performance as the entity performs (e.g. cleaning service)

•  Entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced (e.g. a home addition)

•  Entity’s performance does not create an asset with an alternative use to the entity and the entity has a right to payment for performance completed to date & it expects to fulfill the contract as promised

Performance obligations satisfied over time

•  A performance obligation is satisfied over time if one or more criteria are met (see accompanying list)

•  Revenue is recognized by measuring progress towards complete satisfaction of performance obligation

•  Identify the appropriate measure of progress (input or output)

•  Only recognize revenue if can reasonably measure progress

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Step 5 (cont’d): Recognize Revenue

Objective: To recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service

Performance obligations satisfied at a point in time

•  All other performance obligations are satisfied at a point in time

•  Revenue is recognized at point in time when the customer obtains control of promised asset. Indicators of control include:

•  a present right to payment •  legal title •  physical possession •  risks and rewards of

ownership •  customer acceptance


Onerous Performance Obligations §  The revenue standard will not include an onerous test

§  Instead, an entity will apply the onerous tests in existing IFRS or US GAAP

IFRS Requirements in IAS 37 for onerous contracts

would apply to all contracts with customers

US GAAP

Existing guidance for recognition of losses will be retained, including guidance in Subtopic 605-35 for

losses on construction and production contracts

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Any questions?


IFRS 13 Fair Value Measurement and Valuation Techniques

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Key Concept – IFRS 13

•  A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions.


The Fair Value Hierarchy – IFRS 13

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The steps to determine Fair Value under IFRS 13 are defined below:

•  Step 1: Determine Unit of Account

•  Step 2: Determine Potential Markets Based on the Valuation Premise

»  -Identification of optimal asset group for valuation •  Step 3: Determine Markets for Basis of Valuation

-Selection of optimal asset usage for valuation •  Step 4: Apply the Appropriate Valuation Technique(s) to

determine Fair Value -Orderly / Not-orderly


Determine Unit of account Step 1

Financial Repor7ng

Step 2

Markets

Financial assets Non – financial assets and liabili;es and liabili;es

Valua7on Premise: Standalone

Consider elec7on to value based on net posi7on (group)*

Determine highest and best use (valua7on premise):

Standalone Or

In combina7on with other assets/liabili7es

Incorporate perspec7ve of market par7cipants

Step 3

Access to any poten7al market(s)?

Is there a principal market

Yes

No What is the most

advantageous market (value all poten7al

markets)

Develop a hypothe7cal (most likely) market

No

Step 4

Yes

Evaluate valua7on technique(s)

Market approach

Income approach

Cash approach

Market par7cipants

inputs

Fair Value

Outcome

Allocate fair value to unit of account

Financial Repor7ng

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Valuation techniques

Maximise the use of relevant observable inputs and minimising the use of unobservable inputs

Market approach

Cost approach

Income approach

uses prices and other relevant information generated by market transactions involving identical or similar assets, liabilities or a group of assets and liabilities

reflects the amount that would be required currently to replace the service capacity of an asset i.e. current replacement cost

converts future amounts (e.g., cash flows or income and expenses) to a single current amount reflecting current market expectations about those future amounts.


Any questions?

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IAS 36 – Impairment


Definition

•  Impairment loss – excess of carrying amount over recoverable amount

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Key stages in the impairment process

Assess whether there is an indication that an asset may be

impaired •  STAGE 1

If there is an indication of

impairment, then measure the asset’s recoverable amount.

•  STAGE 2

Reduce the asset’s carrying amount to

its recoverable amount

•  STAGE 3


Stage 1: Indicators of impairment There are two sources of impairment indicators: Internal Indicators

•  Evidence of obsolescence or

physical damage

•  Significant adverse changes in the extent or manner of use of an asset

•  Evidence of deterioration in economic performance of an asset

External Indicators •  Market value has declined

significantly more than expected

•  Significant adverse changes, in the technological, market, economic or legal environment

•  Increases in market interest rates during the period

•  The carrying amount of the net assets of the reporting entity is more than its market capitalisation.

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Recoverable amount =

Higher of

Fair value less costs to sell

Value in use

•  Best evidence is binding sale agreement

•  Use bid price (where a spread) •  Less costs to sell

•  Management approved budgets/forecasts

•  Discount at pre-tax rate

The amount obtainable from sale in an arm’s length transaction less disposal costs

Present value of cash flows expected from continuing use and ultimate disposal.

Stage 2: Measuring recoverable amount


Calculating the value in use of the asset

Two steps involved in calculating the value in use of an asset

Step 1: Estimate the future cash inflows and outflows that are expected to arise in relation to the asset

Step 2: Discount the scheduled cash flows to arrive at a present value. The discount rate to be used should be the risk-free rate of interest adjusted to reflect the risk associated with the particular asset and entity

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Stage 3 - Recognising an impairment loss

If the recoverable amount of an asset is less than its carrying amount, the asset should be reduced to its recoverable amount. The difference is an impairment loss. Where an item has been revalued - impair by reducing the revaluation reserve


Recognition of losses

Assets carried at historical cost

•  Expense in I/S IAS 16 •  First use up B/S •  then I/S

Revalued assets

Debit entry

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Cash generating units

•  The recoverable amount (RA) should be determined on an individual asset basis as far as possible.

•  If, however, the individual asset does not generate cash flows largely independent from other

•  assets, then the asset is grouped with other assets to form what is referred to in IAS 36 as a ‘cash-generating unit’

Definition A cash-generating unit is smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows of other assets or groups of assets.


Allocation of impairment loss (CGU)

The impairment loss should be allocated in the following order:

(a)  first, to any goodwill allocated (b)  to other assets pro-rata

No asset should be reduced below its recoverable amount (or 0)

Credit entry

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Goodwill

Goodwill will often contribute towards a number of cash-generating units rather than a single unit.

Goodwill will also be allocated to a group of units for the purpose of determining carrying amounts.

impairment loss should in the first instance be allocated against the carrying amount of the goodwill of the group of cash-generating units

If the impairment loss is greater than the carrying amount of the relevant goodwill, the excess should be allocated to the other non-current assets of the group of cash-generating units on a pro-rata basis


After the impairment review

•  Depreciation/amortisation charge is adjusted to allocate asset’s revised depreciable amount over remaining Useful Life

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Reversals - individual assets

•  A reversal of an impairment loss is recognised as income immediately unless the asset is carried at revalued amount

•  For a revalued asset any reversal of an impairment loss is treated as a revaluation increase.


3 Situations where the recoverable amount of the asset should be assessed for

impairment annually

Where the entity has intangible assets that have been identified as having indefinite lives

Where the entity has an intangible asset that is not yet ready for use

Where goodwill has been recorded as a result of a business combination

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Any questions?


IFRS 9 – Financial Instruments

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IFRS 9 – Financial Instruments •  IASB Published the final version of IFRS 9 Financial Instruments in July 2014.

•  IFRS 9 addresses the so-called ‘own credit’ issue, whereby banks and others book gains through profit or loss.

•  The standard also includes an improved hedge accounting model.

•  IFRS 9 is now complete!

•  IASB has an active project on accounting for dynamic risk management.

•  IFRS 9 is effective for annual periods beginning on or after 1 January 2018.

•  The standard is available for early application.


Held to maturity Long-term Fixed maturity Positive intent & ability

At FV through P/L Short-term Held for trading

Available for sale Medium to long-term Sell as and when

Initial measurement Subsequent measurement

Fair value Include transaction costs

Fair value Exclude transaction costs

Amortised cost

Fair value with gains & losses to OCI

Fair value with gains & losses to profit or loss

Loans & receivables Fixed or determinable payments Not quoted in an active market

IAS 39

Financial assets

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Financial Instruments: Expected Credit Losses (July 2014)

•  Simplified approach that uses an 'expected loss' model

•  Applies to all financial assets not measured at fair value through profit or loss (including lease receivables).

•  Credit losses would be recognised in three stages

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Differences in the FASB/IASB Models

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FASB Model IASB Model Measurement approach

A single measurement approach – measure the loss allowance as the estimate of all contractual cash flows not expected to be collected

Dual measurement approach-distinguish between instruments that have not (stage 1) and have (stage 2) deteriorated significantly

Initial recognition, deterioration that is not significant, or low credit risk (stage 1)

Loss allowance as the lifetime expected credit losses

Loss allowance measured as 12-month expected credit losses

Significant deterioration in credit quality (stage 2) or objective evidence of impairment (stage 3)

Loss allowance measured as lifetime expected credit loss

Accounting for interest revenue on non-performing assets

Interest revenue accrual ceases if it is not probable that entity would receive substantially all the principle or substantially all of interest

Interest revenue calculated by applying effective interest rate to the gross carrying amount (stages 1 & 2) and to the net carrying amount (stage 3) of the instruments

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Differences in the FASB/IASB Models (con’t.) FASB - Model IASB - Model

On Day 1, recognize an estimate of full expected credit loss

On Day 1, recognize an estimate of a portion of expected credit loss

No threshold, so no need for a “significant deterioration” criterion

Remainder of expected credit loss recognized when threshold reached: §  Threshold is ―significant deteriorationǁ‖

(e.g., deteriorates from Investment Grade to Non- Investment Grade)

Estimates updated each period §  Changes flow through current period provision

Applicable “stages” and resulting estimates updated each period §  Changes flow through current period provision


Impairment IAS 39 vs. IFRS 9

IAS 39 IFRS 9

•  Fair Value to P&L Not required Not required

•  Amortised Cost Required Required

•  Fair Value to OCI Required Not required Recycle losses No recycling when impaired Deemed realized

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Questions? 51


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Participants Exercises

Fair Value

Participants’ Exercise 1

Greek Bonds – an investment that went south a few years ago, Greece was facing the possibility of default on their sovereign debt. Prior to their debt restructuring, their bonds were being purchased by hedge fund and opportunistic investors between 20 to 30% of par value.

As the German prime minister, Angel Merkel, had made a number of statements that Europe will stand together and Greece will not default to calm the capital markets, this was a key consideration in the potential upside of the bonds being repaid at full.

At December 31, prior to the Greek debt restructuring, an entity has a holding of Greek bonds requiring a valuation.

Required:

Based on general knowledge of the markets (the course tutor may provide more details), consider and discuss if the Greek bonds would be classified based on the hierarchy in IFRS 13 as level one, two or three, with supporting arguments for the level selected.

Participants’+Exercise+2+! An asset can be sold in two markets. London Scotland Expected selling price 120 100 Market specific transaction costs 20 10 Transportation costs to the market 25 10 Net amount expected to be received 75 80

Required: a) Discuss the fair value of the asset that can be sold in either London or Scotland.

b) Consider if your answer would differ if the product was primarily sold in Scotland.


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Participants’+Exercise+3+! Research-‐it Inc. acquires a research and development (R&D) project in a business combination. The entity does not intend to complete the project. If completed, the project would compete with one of its own projects (to provide the next generation of the entity’s commercialised technology). Instead, the entity intends to hold or lock up the project to prevent its competitors from obtaining access to the technology.

Required:

Discuss and consider how Research-‐it Inc. should calculate the fair value of the R&D would be determined in a business combination and any other issues identified.

Participants’+Exercise+4+! Beverage Co acquires land where a factory is located in a business combination. The land is currently being used to for the factory site. The land is in a central city centre that has highly appreciated, and a number of nearby sites have been developed for residential high rise apartments. The fair value of the land as a factory site is $10 million. The fair value of the land and factory is $20 million. If the factory is demolished, it will have a net cost of $2 million net of any scrap proceeds. It is not practical to relocate the factory.

The fair value of the land if vacant for residential development is $15 million, excluding rezoning costs. If the land is developed into apartments, the residual land-‐value (value of the land less the development costs is $25 million, and the value of the land if deducting a normal profit margin for a developer is $17 million (excluding rezoning costs).

In order for the land to be converted to residential land, there would be rezoning and legal fees of $1 million.

Required:

Discuss and consider how the fair value of the land would be determined and any other issues identified.


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Participants Exercises Impairment of Non Current Assets

Participants’+Exercise+1+!

Deft Touch Inc. produces generators for use in UPS electrical systems. The generators are manufactured in three production facilities located in Bangalore, Lagos and Johannesburg.

The Bangalore facility produces the component “B” and then the final generators are assembled in either the Lagos or Johannesburg facilities – in aggregate, the capacities of the Lagos and Johannesburg facilities are not fully utilized. Deft’s products are sold worldwide from either Lagos or Johannesburg. No restrictions exist for which location can meet an order and is often determined by which facility has the necessary stock on hand. Required: For each of the following cases, what are the cash generating units for Bangalore, Logos and Johannesburg? 1 There is an active market for Bangalore’s product. 2 There is no active market for Bangalore’s product.

(© Mike Turner)

Participants’+Exercise+2+! FMCG Co is a manufacturer and has a number of factories around the globe and units of operation. a) The factory in New Mexico produces all shampoos for the US market. There is a dedicated

assembly line for the Dandruff Love Me Not Shampoo.

b) The factory in New York is equipped with solar panels. The factory uses the power. Consider both scenarios I. Under US legislation, all surplus renewable energy generated is required by law to be

purchased by the local utility company.

II. The solar panels are located in a country where the electric company is not obligated to purchase surplus power, and it is not legal for an entity to sell power to another entity except for the national power company.


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c) In their plant in Africa, they have an independent power plant. Under the laws of the country, it is not allowed to sell power from independent power plants in the country where this power plant is domiciled.

d) The corporate offices in Central London have a separate stand-‐alone building that is a

seven story parking lot. With the significant shortage of parking in central London, FMCG would have no problem to rent them out on an individual basis.

e) FMCG has recently acquired a major competitor that manufactures detergents. Prior to the end of the reporting period, FMCG has begun a process of integrating this recent acquisition with their existing detergent division.

Required: Discuss and suggest the cash generating unit for each of the above scenarios. (© Mike Turner)

Participants’+Exercise+3+!

Glen Oaks Chemist Ltd. is located in a small industrial town with two main employers. One of the employers in the shipbuilding industry, has recently significantly reduced its workforce, this being an impairment indicator under IAS 36. The impairment event occurred on 30 June 20X1. The business in its entirety is considered one cash-‐generating unit.

After an impairment review, the value in use of the business was estimated at €12,000, and the net selling prices (after selling costs) are listed below:

Carrying value As at 30 June 20X1

Net selling price

Inventory 5,000 3,000

Delivery vehicle 7,000 5,000

Computers 3,000 2,500

Leasehold improvements 10,000 0

25,000 10,500

Notes:

1. The selling price of the inventory is how much Mr. Murphy would purchase the inventory for his chemist in a neighbouring town. If Glen Oaks continue in business,


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these products would be sold to retail customers at €6,000, and the selling costs are approximately €2,000.

2. If the assets are sold, the leasehold improvements would have a value of nil and it is

unlikely that a buyer of the business can be found to purchase it as a going concern. Required:

a) Calculate the amount that the assets of Glen Oaks Chemist ltd should be recorded in the statement of position at 30 June 20X1 if the value in use was $11,000.

b) Calculate the amount that the assets of Glen Oaks Chemist ltd should be recorded in

the statement of position at 30 June 20X1.

(© Mike Turner)


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