Associated with Nexia TS Public Accounting Corporation Member Firm of Nexia International Associated...

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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


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


3May 2010


Other hot topics & IASB/IFRIC Developments

• IFRIC 15: Agreements for Construction of Real Estates

• IFRS for SMEs

What are we covering? (2)


4May 2010


IFRIC 17 Distributions of Non-Cash Assets to Owners


5May 2010


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


6May 2010


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.



7May 2010


CHART 1 (distribution of available-for-sale securities)


Before distribution After distribution

Public shareholders

Public shareholders

Company A

Company A Assets


8May 2010


CHART 2 (distribution of shares of subsidiaries)


Before distribution After distribution

Public shareholders Public

shareholders

Company A

Company A Subsidiary BSubsidiary B


9May 2010


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


10May 2010


Overview of IFRS 3 (Revised) and IAS 27 (Amendment)

- Business Combinations


11May 2010


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


12May 2010


Principles of IFRS 3R

Excluded elements

Consideration

Previous interest

Non-controlling interest

Goodwill

Assets, liabilities and contingent

liabilities


13May 2010


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)


liabilities (US$200m)

Transaction costs (US$15m)


NCI at fair value (optional)

(US$120m)

Goodwill (US$100m)




14May 2010


FAIR VALUE METHOD

PROPORTIONATE SHARE

Step acquisitions and Non-controlling interests under IFRS 3R


Previous interest (US$60m)

NCI (US$80m)

Goodwill (US$60m)



Goodwill (US$100m)



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)



15May 2010


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


16May 2010


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


17May 2010


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


18May 2010


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


19May 2010


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


20May 2010


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


21May 2010


Amendment to IFRS 2- Group Cash-settled Share based

Payment Transactions


22May 2010


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)


23May 2010


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


24May 2010


Improvements to IFRSs - Effective 2009 / 2010


25May 2010


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


26May 2010


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


27May 2010


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


28May 2010


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


29May 2010


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


30May 2010


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


31May 2010


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


32May 2010


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


33May 2010


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


34May 2010


Hot topics and IASB Developments


35May 2010


IFRIC 15Agreements for construction of

real estates


36May 2010


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


37May 2010



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


38May 2010



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


39May 2010


IFRS For SMEs

Overview


40May 2010


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


41May 2010


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


42May 2010


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


43May 2010


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


44May 2010



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


45May 2010



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.


46May 2010



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.


47May 2010



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


48May 2010


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.


49May 2010


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.


50May 2010


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


51May 2010


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


52May 2010


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


53May 2010


QUESTIONS

AND

ANSWERS


54May 2010


THANK YOU

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