a practical guide to new ifrss for 2010

8/9/2019 A Practical Guide to New IFRSs for 2010

1/49

A practical guide to new

IFRSs for 2010February 2010


2/49

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 [email protected]

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


3/49PricewaterhouseCoopers A practical guide to new IFRSs or 2010 | 1

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


4/492 | PricewaterhouseCoopers A practical guide to new IFRSs or 2010

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.



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


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


IFRS 2, Share-based payments Early adoption is permitted. 43IFRIC9,Reassessmentofembeddedderivatives

Early adoption is permitted. 44

IFRIC16,Hedgesofanetinvestmentinaoreign operation


Changes that apply rom 1 January 2010

Amendment to IFRS 2, Share basedpayments Group cash-settled share-based payment transactions


Amendments to IFRS 1, First-timeadoption, or additional exemptions


IFRIC 15, Agreements or construction

ofrealestate,effective1January2009although EU endorsed or 1 January 2010



IFRS 5, Non-current assets held or saleand discontinued operations


IFRS8,Operatingsegments Early adoption is permitted. 44

IAS1,Presentationofnancialstatements Early adoption is permitted. 41

1 As at February 2010.



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


Changes that apply rom 1 February 2010

Amendments to IAS 32, Financialinstruments:Presentation,onclassicationo rights issues


Changes that apply rom 1 July 2010

Amendment to IFRS 1, First-time

adoption, on exemption o new air valuedisclosures


IFRIC19,Extinguishingnancialliabilitieswith equity instruments



AmendmenttoIAS24,Related partydisclosures


AmendmenttoIFRIC14,IAS19Thelimitonadenedbenetasset,minimumunding requirements and their interaction



IFRS9,Financial instruments Early adoption is permitted. 19

1 As at February 2010.



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.



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.



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.



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.



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.



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.



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.



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;



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.



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.



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



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).


FV consideration

+ amount o NCI (air value or share in net assets)


- 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.


FV consideration


- 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



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.



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.



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.



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).



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.



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.



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.



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.



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.



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.



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



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.



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.



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

a practical guide to new ifrss for 2010

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