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Topics
in
International
Financial
AccountingA
SummaryChapters
of
the
Book
2011
2012
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- 2 -
Content
Leasing IAS17 Chapter13 p.3 ImpairmentTesting IAS36 Chapter12 p.8 BusinessCombinations IFRS3 Chapter11 p.16 GroupReporting IFRS3/IAS27 Chapter21 p.20 Associates IAS28 Chapter27 p.26 JointVentures IAS31 Chapter28 p.31 DeferredTax IAS12 Chapter7 p.37
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- 3 -
Leasing IAS17 Chapter13
Agreementfortherighttouseanassetforaperiodoftime.
SpecificassetExclusiverightattheassetorAssetisimplicitlyspecifiedbythetransaction
Aspecific
asset
exists
iffulfilment
of
the
arrangement
is
economically
feasible
or
practicable
forthesupplieronlythroughtheuseofthisasset!
Rightofuse=righttocontrol
purchasercontrolstheoperationoftheasseto Purchaseroperatestheassetwithitsownpersonnelo Purchaserhastherighttodirectotherstooperatetheasseto Purchaserdeterminesthemannerofoperation
purchasercontrolsthephysicalaccesstotheasseto Assetislocatedatcompanypremiseso Supplierhasnorightofunrestrictedaccesstotheasset
purchasercontrolsthewhole/substantiallyalloutput(EconomicControl)Exception: Ifthecustomertakes100%oftheoutput,buthastopayeitherafixedprice
peroutputduringthecontractperiodorthecurrentmarketpriceperunitofoutputat
thetimeofdeliveryitisnolease
Differenttypesofleases
Financelease:
All,
or
practically
all,
advantages
and
disadvantages
related
to
the
ownership
of
theassetaretransferred.(Legal)ownershipcouldbetransferred,buttransferisnot
necessary.
Operatinglease:Allleaseagreementswhicharenotfinanceleases.
Stepsinclassification
1 Determinethebusinessrationalebehindtheleaseandtheeconomicimpactofthelease,togetherwitheconomicissuesattheendoftheleaseagreement.
2 Determinetheleaseterm(includingprolongationswhichareexpectedtotakeplace).3 Determinethenetpresentvalue(NPV)oftheminimalleasepayments(including
paymentswhichareexpectedtotakeplace).
4 Determinewhetherornotasignificantpartoftherightsandobligationsaretransferredfromlessortolessee.
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Ingen
123456
Balan
Chan
eralthere
Attheend
Thelessee
theexpect
Thelease
Atincepti
fairvalue
Thelease
significant
TheLease
cesheet
esinLea
illbeafina
oftheleas
hastherigh
edfairvalu
eriodcover
nthedisco
fthe
lease
bjectissos
modificatio
isnoncanc
P&L
ing
celeasein
ownership
ttobuyth
;or
sthemain
ntedlease
bject;or
pecificthat
.
llable
thefollowin
istransferr
leaseobje
artofthee
paymentsa
itcannotb
gcases:
dtotheles
tforanam
conomiclif
reequalto,
usedbyan
see;or
untsignific
oftheleas
orpracticall
otherparty
antlylower
eobject;or
yequalto,
without
- 4 -
than
he
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- 5 -
SaleandLeasebackTransactionsForasaleandleasebacktransactionthatresultsinafinancelease,anyexcessofproceeds
overthecarryingamountisdeferredandamortizedovertheleaseterm.
Foratransactionthatresultsinanoperatinglease:
ifthetransactionisclearlycarriedoutatfairvalue theprofitorlossshouldberecognizedimmediately
if
the
sale
price
is
below
fair
value
profit
or
loss
should
be
recognized
immediately,
exceptifalossiscompensatedforbyfuturerentalsatbelowmarketprice,thelossit
shouldbeamortizedovertheperiodofuse
ifthesalepriceisabovefairvalue theexcessoverfairvalueshouldbedeferredandamortizedovertheperiodofuse
ifthefairvalueatthetimeofthetransactionislessthanthecarryingamount alossequaltothedifferenceshouldberecognizedimmediately
EXTRA
IAS17appliestoallleasesotherthanleaseagreementsforminerals,oil,naturalgas,andsimilar
regenerativeresourcesandlicensingagreementsforfilms,videos,plays,manuscripts,patents,
copyrights,andsimilaritems.[IAS17.2]
Disclosure:Lessees FinanceLease[IAS17.31]
carryingamountofasset reconciliationbetweentotalminimumleasepaymentsandtheirpresentvalue amountsofminimumleasepaymentsatbalancesheetdateandthepresentvaluethereof,for:
o thenextyearo years2through5combinedo
beyond
five
years
contingentrentrecognisedasanexpense totalfutureminimumsubleaseincomeundernoncancellablesubleases generaldescriptionofsignificantleasingarrangements,includingcontingentrentprovisions,
renewalorpurchaseoptions,andrestrictionsimposedondividends,borrowings,orfurther
leasing
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- 6 -
Disclosure:Lessees OperatingLease[IAS17.35]
amountsofminimumleasepaymentsatbalancesheetdateundernoncancellableoperatingleasesfor:
o thenextyearo years2through5combinedo beyondfiveyears
totalfutureminimumsubleaseincomeundernoncancellablesubleases leaseandsubleasepaymentsrecognisedinincomefortheperiod contingentrentrecognisedasanexpense generaldescriptionofsignificantleasingarrangements,includingcontingentrentprovisions,
renewalorpurchaseoptions,andrestrictionsimposedondividends,borrowings,orfurther
leasing
Disclosure:Lessors FinanceLease[IAS17.47]
reconciliationbetweengrossinvestmentintheleaseandthepresentvalueofminimumleasepayments;
grossinvestmentandpresentvalueofminimumleasepaymentsreceivablefor:o thenextyearo years2through5combinedo beyondfiveyears
unearnedfinanceincome unguaranteedresidualvalues accumulatedallowanceforuncollectibleleasepaymentsreceivable contingentrentrecognisedinincome generaldescriptionofsignificantleasingarrangements
Disclosure:Lessors OperatingLease[IAS17.56]
amountsofminimumleasepaymentsatbalancesheetdateundernoncancellableoperatingleasesintheaggregateandfor:
o thenextyearo years2through5combinedo beyondfiveyears
contingentrentrecognisedasinincome generaldescriptionofsignificantleasingarrangements
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- 7 -
Istheleasenoncancellable?
Isownershipexpectedtobetransferredat
theend
of
the
lease
term?
Isthereabargainpurchaseoption?
Aretheleasedassetsofaspecializednature?
Istheleasetermamajorpartofthe
economiclifeoftheleasedasset?
No
No
No
Yes
Yes
Yes
Isthepresentvalueoftheminimumlease
paymentssubstantiallyallofthefairvalueof
theleasedasset?
Dogains/lossesrelatingtoFVchangesaccruetothelessee?
Istheranoptiontocontinuetheleaseatarentlowerthanmarket?
Operatinglease
No
No
Isthesubstanceoftheleasing
arrangement
and
any
related
arrangementssuchthatsubstantiallyall
therisksandrewardsincidentto
ownershiparetransferredtothelessee?
Yes
Yes
Financelease
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Imp
What
The
Imp
Discl
perfor
12.1I
Anim
gener
Thep
excee
Notal
Wher
carryi
12.2
Theo
there
Then
intan
intan
good
Onwh
Thei
which
proce
revalu
irment
aretheobje
carryingval
irmentloss
osuresare
mance
troduction
airmentlo
tingunitex
rposeofth
theirreco
assetsare
assetsaregamount
hentound
lyassetsth
sanyindica
xtassetsm
gableasset
gibleassets
willacquire
atlevelsho
Thestartin
therecove
impairme
individual
Wherean
suchindep
recoverablforthecas
towhicht
pairmentt
isnotafea
sofallocati
edamount.
esting
ctivesofIA
esofnonfi
esarereco
ivenconce
toIAS36
sistheam
ceedsitsre
eimpairme
erableamo
ubjecttoi
recordedatftheasset.
ertakeani
atneedtob
tionthatan
ustbeunde
withindefi
notyetava
din
abusin
uldanimpa
gpointfor
rableamou
ttestingis
ssets.
assetdoesn
endentcas
e
amount
ishgeneratin
eassetbel
strelatest
ureofthed
onratherth
36:
nancialass
nisedand
ningtheim
untbywhi
overablea
ttestisto
untsor,mo
pairmentt
fairvalue,t
pairment
etestedat
assetmay
rtakenani
niteusefull
ilableforus
sscombina
irmenttest
etermining
tin
tthelevel
otgenerate
flows
determineunit(CGU)
ngs.
theassess
epreciation
anasavalu
IAS36
tsdonote
easuredon
pactofimp
hthecarryi
ount.
nsurethat
resimply,t
sting.(Ref
hereisnon
est
heendoft
eimpaired.
pairmentt
ives
e
tion
beperform
f
entofrec
allocation
ationproce
ceedtheir
aconsiste
irmenton
ngamount
assetsaren
atassetsar
rtop.464)eedtotest
hereportin
.
esteveryye
d?
verability
rocess.Dep
ss,evenwh
C
recoverable
tbasis
nentitysfi
ofanasset
otcarrieda
enotovers
orrecovera
periodare
ar:
ftheasseti
reciationis
enanasset
apter1
amount
nancial
racash
amountst
ated.
bilityofthe
thosewher
nthefutur
viewedasa
ismeasured
- 8 -
at
e
,
ata
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- 9 -
Identifyingindicatorsforimpairmenttesting:
External: Declineinasset'smarketvalue,entity'senvironment/market,increasesin
interestrates,Thecarryingamountoftheentity'snetassetsexceedsthe
entity'smarketcapitalization
Internal: Obsolescenceorphysicaldamage,changedusewithintheentity,economic
performanceoftheasset,management'sownforecasts
12.3Impairment
test
for
an
individual
asset
1. Therecoverableamountofanassetoracashgeneratingunitisthehigherofitsfairvaluelesscoststosellanditsvalueinuse.
2. Fairvaluelesscoststosellistheamountobtainablefromthesaleofanassetorcashgeneratingunitinanarm'slengthtransactionbetweenknowledgeable,willingparties,
lessthecosttsofdisposal.
3. Costsofdisposalareincrementalcostsdirectlyattributabletothedisposalofanassetorcashgeneratingunit,excludingfinancecostsandincometaxexpense.
4. Valueinuseisthepresentvalueofthefuturecashflowsexpectedtobederivedfromanassetorcashgeneratingunit.
1.Fromthedefinitionofrecoverableamount,therearetwopossibleamountsagainstwhich
thecarryingamountcanbetestedforimpairment:1)fairvalueinuselesscoststosell2)value
inuse.
Ifeitheroneoftheseamountsisgreaterthancarryingamoun,theassetisnotimpaired.
2.Fairvaluelesscoststosell,part1=fairvalue,part2=costofdisposal.
Wherethereisanactivemarket,fairvalueisthemarketprice.Ifthemarketisnotactive,a
fairvaluemaybedeterminedbyobservingevidencesuchasamountspaidinrecentsales
transactions.
Whencan
the
fair
value
les
cost
to
sell
be
determined?
1.Bindingsaleagreement
2.Tradedinanactivemarket:
Theitemstradedonthemarketarehomogeneous. Willingbuyersandsellerscannormallybefoundatanytime. Pricesareavailabletothepublic.
3.Ifanasset'sfairvalueisequaltoitsmarketvalue,thedifferencebetweenfairvalueandfair
valuelesscoststosellisthedisposalcostsoftheasset.
4.Value
in
use
is
the
present
value
of
future
cash
flows
relating
to
the
asset
being
measured,
inotherwordsthepresentvalueofthefuturecashflowsexpectedtobederivedfromanasset
orcashgeneratingunit.
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Calcul
Theo
Meas
Deter
Theca
Prese
Twoa
TraditExpec
allpos
Deter
Disco
1)tim
2)risk
3)The
4)Oth
may
bportfo
tingvaluei
jectistod
ringthere
iningcash
shflowssh
Projection
ofeconom
Projection
Projection
andconsis
Projection
Netcashfl
Maintena
tValue(P
proachesf
ionalappro
edCashflo
siblecashfl
iningdisc
ntratesho
valueofm
sspecificto
priceforb
erfactorst
e
determinlio.
nuseinvolv
termineth
overablea
flows
uldinclude
ofcashflo
iccondition
ofcashou
ofindirectl
tentbasis
ofcashinfl
owsrelated
ceCashout
)
orcalculatin
ach
adju
wapproach
owsrather
untrate
ldreflect:
oneytothe
theassetfo
aringtheri
atmarketp
d
by
viewin
esthefollo
cashflows
ount
:
shouldbe
sthatwille
flowsnece
yattributab
owsfromt
tothedisp
flows
gPV:
stfor
expec
riskadj
hanjustth
endofthe
rwhichthe
kinherenti
articipants
g
rates
used
ingproces
andapplya
basedonm
istoverth
sarilytous
lecashflo
econtinuin
salofCGU/
tationsabo
stedexpec
mostlikely
sset'susef
futurecash
ntheasset.
ouldrefle
for:
1)
asse
ses:
discountra
anagement'
remaining
oftheass
sthatcanb
guseofthe
asset
tpossible
v
tedcashflo
cashflow
llife
flowestim
tintherat
ts
in
the
ma
te.(Fig.12.
sbestesti
usefullifeo
t/CGU
eallocated
asset/CGU
ariationsin
s,basedo
teshaveno
suchasilli
rket,
2)
WA
,page468)
ateofther
theasset
onareason
cashflow
considera
tbeenadju
uidity.The
CC,
3)
asset
- 10 -
ange
able
ionof
sted.
rate
in
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12.4C
Some
result
Identi
Defini
The s
indep
Oneo
unitw
andth
Impai
Anim
recov
Indet
tothe
amou
There
aniim
CGU.
sectioprofit
ashGenera
assetsdon
ofacombin
iyingacas
tion of CG
allest ident
ndent of th
theproble
ithinanent
efactorsus
mentlossf
airmentlo
rableamou
rminingth
CGUandth
t,mustbei
ductionine
pairmentof
helossisa
12.3,
with
orloss.
ingUnits
tindividual
ationofsev
generatin
:
ifiable grou
cash inflo
mswithusi
ityisarbitra
edinthede
oracashge
soccurswh
nt.
carryinga
atcontribut
ncluded.
achcarryin
eachasset,
countedfo
lossesrelati
xcludingG
lygenerate
eralassets.
unit
of assets t
s from othe
gacashge
rybacausei
termination
neratingun
enthecarr
ountofth
etogenera
amountre
eventhoug
inthesam
ngto
an
as
oodwill
cashflows
at generate
r assets or g
neratinguni
tneedsjud
willvaryfr
it Excludin
ingamoun
assets,all
tingthecas
latestoeac
htheimpai
wayasth
etmeasure
ecausethe
s cash inflo
roups of ass
itisthatthe
ementont
mentityto
ggoodwill
oftheasse
hoseasset
flowsuse
specificas
mentloss
tforanind
dat
cost
be
cashflows
s that are l
ets.
identificati
hepartoft
entity.
tsofaCGU
thataredi
inmeasuri
setandsho
asbasedo
ividualasse
ingrecognis
enerateda
rgely
nofaparti
emanage
exceedthei
ectlyattrib
grecovera
ldbetreat
ananalysi
asdescrib
edimmedia
- 11 -
ethe
cular
ent
r
table
ble
das
ofa
din
telyin
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- 12 -
Corporateassets
Corporateassets,suchastheheadquartersbuilding,areintegraltoallCGUgeneratingcash
flowsbutdonotbythemselvesindependentlygeneratecashflows.Howtobedealtwithin
determiningimpairmentlosses:
Step1)IfanycorporateassetscanbeallocatedonareasonableandconsistentbasistoCGU,
thenthisshouldbedone.Eachunitisthentestedforanimpairmentloss.Wherealossoccurs
inaCGU,thelossisallocatedprorataacrosstheasstesincludingtheportionofthecorporate
assetallocated
to
the
unit.
Step2)Ifsomecorporateassetscannotbeallocatedacrossthecashgeneratingunits,the
entity:
Comparesthecarryingamountofeachunitbeingtestedwithitsrecoverableamountandrecognisesanyimpairmentlossbyallocatingthelosstheassetsoftheunit
IdentifiesthesmallestCGUthatincludestheunitunderreviewandtowhichaportionoftheunallocatedcorporateassetcanbeallocatedonareasonableandconsistent
basis
ComparsthecarryingamountofthelargerCGU,inclusingtheportionofthecorporateasset,withitsallocatedamount.Anyimpairmentlossisthenallocatedacrossthe
assetsof
the
larger
CGU.
Determiningthecarryingamount
Theelementofthecarryingamount:
AssetsthataredirectlyandexclusivelyattributabletotheCGU. Anallocationofassetsthatareindirectlyattributableonareasonableandconsistent
basistotheCGUincluding:corporateassetsandcapitalisedgoodwill
Recognisedliabilities,butonlytotheextentthattherecoverableamountoftheCGUcannotbedeterminedwithoutconsiderationofthoseliabilities
GOLDENRULES
1.Makesureyouarecomparingappleswithapples2.Donotallocatefinancingliabilitiesortax(astheyareexcludedfromVIUcashflows)3. Ifallocatecentralassetsexcludeintragroupchargesfortheassets
12.5CashGeneratingUnitsandGoodwill
Goodwillisrecognisedonlywhenitisacquiredinabusinesscombination.Asdiscussedin
chapter10,IAS38IntangableAssets,doesnotallowtherecognitionofinternallygenerated
goodwillortherevaluationofanyacquiredgoodwill.Further,itisnotpossibletodeterminea
fairvaluelesscoststosellforgoodwill,ortoidentifyasetofcashflowsthatrelates
specificallyto
goodwill.
Goodwillisnotsubjecttoamortisation.Instead,theacquirerteststhecarryingamountof
goodwillannuallyinaccordancewithIAS36.
Whichunitsshouldhavegoodwillallocatedtothem?Thegoodwillshouldbeallocatedtothe
lowestlevelatwhichmanagementmonitorsthegoodwill.
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- 13 -
Wheretheallocationofgoodwillcannotbecompletedbeforetheendoftheannualperiodin
whichthebusinesscombinationoccurred,theinitailallocationistobecompletedbeforethe
endofthefirstannualperiodbeginningaftertheacquisitiondate.
Impairmenttestingofgoodwill
ACGUthathasgoodwillallocatedtoitmustbetestedforimpairmentannuallyormore
frequentlyifthereisanindicationtheunitmaybeimpaired(IAS36).Thisinvolvescomparing
thecarrying
amount
of
the
unit's
assets,
including
goodwill,
with
the
recoverable
amount
amountoftheunit'sassets.
Recognitionofimpairmentloss
Writeofffirst:
GoodwillwriteoffcompletelybeforeimpairingotherassetsFixedassets/Intangibles Writedownprorataaftergoodwill Noassetwritedownbelowrecoverablevalue Revaluedassetsimpairmentagainstrevaluationreserve
Recoverableamount
exceeds
carrying
amount
Iftherecoverableamountexceedsthecarryingamount,thereisnoimpairmentloss.Under
thetest,thegoodwillisprotectedagainstimpairmentby:
Internallygeneratedgoodwill
Unrecognisedidentifiablenetassets
Excessvalueovercarryingamountofrecognisedassets
Carryingamountexceedsrecoverableamount
Ifthecarryingamountexceedstherecoverableamount,thereisanimpairmentloss.Par.104
ofIAS36statesthattheimpairmentlossmustbeallocatedtoreducethecarryingamountof
theassetsoftheunit,orgroupofunits,inthefollowingorder:1)Reducethecarryingamount
ofany
goodwill
allocated
to
the
CGU
2)
reduce
the
other
asstes
of
the
unit
pro
rata
on
the
basisofthecarryingamountofeachassetintheunit.
Restrictions:
Inallocatinganimpairmentloss,anentityshallnotreducethecarryingamountofanasset
belowthehighestof:a)itsfairvaluelesscoststosellb)itvalueinusec)zero.Theamountof
theimpairmentlossthatwouldotherwisehavebeenallocatedtotheassetshallbeallocated
proratatotheotherassetsoftheunit(groupofunits)(fig.12.11,page482).
Timingofimpairmenttests
Thetest
may
be
performed
at
any
time
during
the
year,
provided
it
is
performed
at
the
same
timeeveryyear.ItisalsonotnecessaryforallCGU'stobetestedforimpairmentatthesame
time.IfsizesoftheCGU'sdiffer,itisnecessarytotestthesmallestunitfirst.Itmustalsobe
rememberedthatannualtestingisnotasubstituteformanagementbeingawareofeventsor
changingcircumstancesthatmayindicatepossibleimpairmentandtheneedforadditional
testing.
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- 14 -
12.6Reversalofanimpairmentloss
Subsequenttoanimpairmentlossoccurringbecauseofdoubtsabouttheperformanceof
asstes,itispossibleforcircumstancestochangesuchthat,thentherecoverableamountof
theassetsincreases,considerationcanbegiventoareversalofapastimpairmentloss.
Itispossiblethatareviewoftheevidencewillnotresultinareversalofapreviousimpairment
loss,butinsteadmayleadtochangesinthedepreciation/amortisationmeasureofanasset.
Thereview
may
lead
to
changes
in
expectations
of
useful
life,
residual
value,
and
the
pattern
ofbenefitstobereceived.Iftheevidenceissuchthatthereisachangeintheestimatesin
relationtoanasset,areversalofimpairmentlosscanberecognised.Thereversalprocess
requirestherecognitionofanincreaseinthecarryingamountoftheassettoitsrecoverable
amount.
Canimpairmentsbereversed?
Yes.forassetsotherthangoodwillreversewhenthereisachangeinassumptionsunderlyingthecashflows,suchasachangeineconomicconditions
Practically,lookingforsignificantchangesonly Shouldnotexceedwhattheamortisedcostwouldhavebeen.
Goodwillimpairmentscanneverbereversed!
Reversalofanimpairmentloss individualasset
Wheretherecoverableamountisgreaterthanthecarryingamountofanindividualasset
(otherthangoodwill),thereversalofapreviousimpairmentlossrequiresadjustingthe
carryingamountoftheassettorecoverableamount.Onelimitationisthatthecarrying
amountcannotbeincreasedtoanamountinexcessofthecarryingamountthatwouldhave
beendeterminedhadnoimapirmentlossbeenrecognised.
Reversalof
an
impairment
loss
CGU
Thereversaloftheimpairmentlossisallocatedproratatotheassetsoftheunit,exceptfor
goodwill,withthecarryingamountofthoseassets.Thecarryingamountofanassetcannotbe
increasedabovethelowerofitsrecoverableamountandthecarryingamountthatwould
havebeendeterminedhadnoimpairmentlossbeenrecognisedfortheassetintheprevious
periods.Ifthelatteroccurs,thentheamountofimpairmentlossreversalthatcannotbe
allocatedtoanindividualassetisthenallocatedonaproratabasistotheotherasstesofthe
CGU,exceptforgoodwill.
Reversalofanimpairmentloss Goodwill
Impairmentloss
recognised
for
goodwill
is
not
to
be
reversed
in
aleter
period.
Becasue
of
the
natureofgoodwill,itisnotpossibletodeterminehowmuchofanygoodwillexistinginan
entityisremainingacquiredgoodwillorgoodwillinternallygeneratedsincetheacquisition.If
thereisanexcessofrecoverableamountovercarryingamountandtheexcesshasbeen
allocatedtoallasset's,howeverthereisstillanamounttobeallocated,thisamountwill
recognisedimmediatelyinP&Lasincome.
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- 15 -
12.7Disclosure
IAS36requiresdisclosuresabouttheestimatesusedtomeasuretherecoverableamountofa
cashgeneratingunitwhengoodwilloranintangibleassetwithanindefinitelifeisincludedin
thecarryingamountoftheunit,andthecarryingamountofgoodwillorintangibleassetswith
indefiniteusefullivesallocatedtothatunitissignificantincomparisonwiththeentity'stotal
carryingamountofgoodwillorintangibleassetswithindefiniteusefullives.Wherethe
carryingamountofgoodwillorintangibleassetsisnotsignificantforaunit,par.135requires
thatfact
to
be
disclosed.
"Illustrativeexamples12.2and12.3(page492)arecomprehensiveexamplesthat
demonstratetheaccountingforimpairmentlosseswithandwithoutcorporateassets."
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- 16 -
BusinessCombinations IFRS3 Chapter11
Scope/definitions
DefinitionofabusinesscombinationAbusinesscombinationisatransactionoreventinwhich
anacquirerobtainscontrolofoneormorebusinesses.Abusinessisdefinedasan
integratedsetofactivitiesandassetsthatiscapable(noneedforactualoutputsfrom
asset)ofbeingconductedandmanagedforthepurposeofprovidingareturndirectly
toinvestorsorotherowners,membersorparticipants.Italsoappliestocombinations
ofmutualentitiesandcombinations(notduallistedshares!)[IFRS3.AppendixA]
AcquirermustbeidentifiedUnderIFRS3,anacquirermustbeidentifiedforallbusiness
combinations.[IFRS3.6]
ScopeexclusionsIFRS3doesnotapplytotheformationofajointventure,combinationsof
entitiesorbusinessesundercommoncontrol.Also,IFRS3doesnotapplytothe
acquisitionofanassetoragroupofassetsthatdonotconstituteabusiness(theseare
accountedatcost,fairvalue).[IFRS3.2]
Fairvalueamountonwhichanassetcouldbeexchanged,betweenknowledgeableandwilling
partiesinarmlengthtransaction
Control
Powerovergreaterthan50%ofthevotingcontrol(whichcanbebycontract) Powertogovernthefinancialandoperatingpolicies Powertoappointorremovethemajorityofthedirectors Powertocastthemajorityofvotesatameeting
Thecostofthecombination
Recognizeatfairvalueofconsideration(thecash,shares,earnoutpaid),measuredatacquisitiondate.
Earnout>Theacquireewillreceiveaportionoffuturerevenues/profits fromacquireras
consideration.
Transactioncostsrelatedtothedealformerger/acquisitionisnotrecognized,butincurredascosts.
Acquisitionmethod
1. Identificationofthe'acquirer'thecombiningentitythatobtainscontroloftheacquiree[IFRS3.7]
2. Determinationofthe'acquisitiondate'thedateonwhichtheacquirerobtainscontroloftheacquiree[IFRS3.8]
3.Recognition
and
measurement
of
the
identifiable
assets
acquired,
the
liabilities
assumedandanynoncontrollinginterest(NCI,formerlycalledminorityinterest)inthe
acquiree
4. Recognitionandmeasurementofgoodwilloragainfromabargainpurchase
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1. Identificationofthe'acquirer'Thecompanytakinginitiativeand/ortheoneobtainingcontrol.Thisisimportantbecauseall
assetsandliabilitiesofacquireemostbevaluedatfairvalue.
2. DeterminingtheacquisitiondateThedateonwhichtheacquirerobtainscontroloftheacquiree,thisdoesnotrequirea
transaction.As
the
transaction
can
be
spread
over
time
in
parts,
the
substance
of
the
transactiondeterminestheaccounting,ratherthantheformofthetransaction.
Otherdatesofimportance:
Datethecontractissigned Datethecontractispaid Datenominatedinthecontract Dateonwhichassetsaredelivered Datetheofferbecomeunconditional
3. RecognitionofAcquireebyacquirerRestateaccounts(makesurethesameaccountingmethodsareused)
Alloftheidentifiableassetsandliabilitiesandcontingentliabilitiesaretobeidentifiedand
valuedatfairvalue(allatacquisitiondate!),evenwhenthesewerenotpreviouslyonthe
purchasedcompanysbalancesheet.
Examples:Inventoryusedtobyrecognizedatcost,nowfairvalue
Non currentassetsmeetingtherequirementsofIFRS5,(assetsheldforresale)arerecognised
atfairvaluelesssellingcosts.
Recognise:
Assetsotherthenintangibleassetsrecognisewhenfutureeconomicbenefitwillaccruetotheacquireranditsfairvaluecanbemeasuredreliable;
Liabilitiesotherthencontingentliabilitieswhenitisprobablethattherewillbeanoutflowofrecoursestosettletheobligationanditsfairvaluecanbemeasured
reliable;and
Contingentliabilitiesandintangibleassetswhentheirfairvaluecanbemeasured.Theprofitandlossaccountshouldincludeprofitsandexpensesbasedonthefairvalueofthe
assetsacquired(i.e.chargedepreciationonthefairvaluenotthevalueperthepreacquisition
balancesheet).Minorityshareisstatedattheminoritiesshareofthenetfairvalueofthe
assetsacquired.
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Intangibleassets
IntangibleassetsarerecognisedonlywhenitmeetstherequirementsofIAS38Intangible
Assets,anditsfairvaluecanbereliablemeasured.Tomeettherequirementstheintangible
assetmust:
Beseparate(itcanbesoldortransferredseparately) Arisesfromcontractualorlegalrights
Examples:orderportfolio,trademarks/tradenames (amountsavedfornotneedingroyalties),
R&D(onlywhenverylikelyR&Dwillyieldmoney).
Contingentliabilities
Contingentliabilitiesaremeasuredatfairvalueifthiscanbereliablemeasured.Ifyoucannot
measureitreliablethendiscloseinformationperIAS37.Aftertheirinitialrecognition,
contingenciesshouldbemeasuredatthehigherof:
TheamountthatshouldberecognisedunderIAS37 TheinitialamountlessamortisationperIAS18
ThissectionexcludesfinancialinstrumentsperIAS39butincludesloans.
Deferredtaxes
Shouldbecalculatedastaxauthoritiesdontaccepttherevaluation,ataxasset/liabilityshould
berecognized.
Taxescarriedforwardorbackwardcouldbesuddenlyberecognizedbyacquisition.
Indemnification
Legalclaimsthatareuncertainandwillbeaccountedforbytheseller.Theseclaimsare
specific,incontrarytowarranties.Shouldberecognizedasassetorliability.
Earnouts
Recognizeat
fair
value,
this
amount
will
not
be
amended
in
the
balance
sheet
in
the
future.
Subsequentchangesshouldberecognized(asestimation)asanadjustmentinP&L.
Withinayearthevalueofearnoutofearnoutatacquisitiondateshouldbedetermined.And
earnoutsaresignificanteventsthatshouldbedisclosed(whenbetweenclosingdateand
reportingdate).
Reacquiredrights
Example:boughtbackleasingrights.Onlyforthelengthoftheexistingcontracts.
4. RecognitionandmeasurementofgoodwillGoodwill
>unrecognized
intangible
assets
(synerchies
+future
costumers
+assembled
workforce)
AttheacquisitiondaterecognizegoodwillasanassetGoodwillshouldberecognisedatcost
beingtheamountpaidlessthefairvalueofassetsandliabilitiesacquired.Goodwillshouldbe
carriedasanassetlessanyimpairment.Goodwillshouldnotbeamortized(yearlyimpairment
testingisused).
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Negativegoodwill
Whenitarises,reassesstheidentificationandmeasurementofassetsandliabilitiesandthe
measurementofcost.Youthenrecognisenegativegoodwillimmediatelyintheprofitandloss
account.IFRS3recognisesthatnegativegoodwillcanariseinthreecircumstances:
Errorsincalculation Therequirementofanaccountingstandardtomeasureanassetatotherthenfair
value(forexampleundiscountedtaxassets);or
Abargainpurchase.Otheraspects
Onlyinthestatementsoftheacquirerneedtheacquireetoberevalued.Thestatementsoftheacquireewillremainunamended.
InthecaseoftransactionAtheaccountingmethodchangesfromtheequitymethodtothefairvaluemethod.Soeverythingaccountedinthepreviousperiodisderecognized.
Andtheeverythinginthenewsituationisrecognizedwiththerightmethod.Thiscan
(willusually)leadtoaHoldinggain.
Example:Buy40%ofsharesfor40, ofcompanyyoualreadyown30%(boughtfor20,).
Fairvalueof70%is70, then:
Subsidiary 70,
@cash 40,
@associate 20,
@gain 10,
Nogoodwillisrecognizedwhentheacquirergoesfromcontrolto100%control,theeconomiscentitymethod.
PostDealimplicationsareimportanttoforecastinadvance.Becauseofrevaluationthedepreciationandamortizationwillprobablybehigher,pressingprofitmargins.This
shouldbecommunicatedtostakeholderstopreventthemgettingfalseexpectationsof
performanceafteracquisition.
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GroupReporting IFRS3/IAS27 Chapter21
IFRS3:BusinessCombinations
IAS27:Consolidatedandseparatefinancialstatements
Thepreparationofconsolidatedfinancialstatementsinvolvescombiningthefinancial
statementsof
the
individual
entities
so
that
they
show
the
financial
position
and
performance
ofthegroupofentities,presentediftheywereasingleeconomicactivity.
IFRS3:Businesscombination=atransactionorothereventinwhichanacquirerobtains
controlofoneormorebusinesses:separateentitiesthattogetherformacombinedentity.
Anentitymayacquireallorpartoftheissuedsharesofanotherentity.Whenthereisthe
abilitytocontrol,theentitiesoperateasacombinedentityandthisresultsinaparent
subsidiaryrelationship.Consolidatedfinancialstatementsarethenrequired.
Twoentitiescouldagreetotheformationofanewentity,thenewentityacquiresallthe
sharesoftheothertwoentities.Thenewentitycontrolstheothertwoentitiesandconsolidatedfinancialstatementsarerequired.
Aduallistedstructureinvolvestheformationofacontractualarrangementbetweentwo
entitiesunderwhichtheactivitiesofbothentitiesarebroughttogether,managedand
operatedonaunifiedbasisasiftheywereasingleentitywhileretainingtheirseparatelegal
entities,taxresidenciesandstockexchangelistings.Thereisasharingofrightsbetweenthe
shareholdergroupssuchthattheshareholdershaveaneconomicinterestinthecombined
assetsofbothentities.Consolidatedfinancialstatementsarerequiredbecauseoftheinterest
ofusersoffinancialstatementsinthefinancialperformanceandpositionofthecombined
entitiesrather
than
the
individual
entities.
Consolidationmethod
IAS27:
- Consolidatedfinancialstatementsarefinancialstatementsofagrouppresentedasthoseofasingleeconomicactivity
- Agroupisaparentandallitssubsidiaries- Aparentisanentitythathasoneormoresubsidiaries- Asubsidiaryisanentity,includinganunincorporatedentitysuchasapartnership,that
iscontrolledbyanotherentity
-
In
preparing
the
consolidated
financial
statements,
the
financial
statements
of
the
parentanditssubsidiariesarecombinedlinebylinebyaddingtogetherlikeitemsof
assets,liabilities,equity,incomeandexpenses
- Theconsolidatedfinancialstatementsarerequiredinadditionoftheindividualfinancialstatements:itdoesnotnecessarilymeanthattheentityshouldpreparean
individualfinancialstatementtoo
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Control
- IAS27:Controlisthepowertogovernthefinancialandoperatingpoliciesofanentitysoastoobtainbenefitsfromitsactivities.Therearetwopartstothisdefinition:
1. theabilitytodirectthefinancialandoperatingpoliciesofanotherentity(thepowercriterion)
2. theabilitytoobtainbenefitsfromtheotherentity(thebenefitcriterion)- thedefinitionofcontrolincludesthreecomponents:power,returnsandthelink
betweenpower
and
returns
- distinctioncapacitytocontrolandactualcontrol.Capacitytocontroldoesnotrequiretheholdertoactuallyexercisecontrolandanentitythatisactuallycontrollinganother
maynothavethecapacitytocontrol.
- Existencecapacityofcontrol:1. Itmusthavetheabilitytochangeormodifypolicydecisionsiftheneedforchange
isseentoexist.Aentitymaybepassive.
2. Theabilitytocontrolisanexclusionarypower,butitispossiblethatoneentitymaydelegatecontroltoanotherentity,butthefirstentityhasthecapacitytocontrol
evenifitisthedelegatedpartythatactuallycontrolsthesubsidiary.(nonshared
control)3. IAS27:controlispresumedtoexistwhentheparentowns,directlyorindirectly
throughsubsidiaries,morethanhalfofthevotingpowerofanentity(unilateral
control).Whentheownerownshalforlessofthevotingpowercontrolexists
when:
Thereisthepowertoremovethemajorityofthemembersoftheboard Thereisthepowertocastthemajorityofvotesatmeetingoftheboard
- UnderIAS27controlisnonshared.Nonsharedcontroliscontrolthatisachievedbothbecauseofitsownactionsandbecauseoftheactionsofotherparties(effective
control)
- Determineexistenceofeffectivecontrol: Theexistenceofcontracts Sizeofthevotinginterest Dispersionofothershareholders Levelofdisorganizationorapathyoftheremainingshareholders
- Problemsarisingineffectivecontrol: Temporarycontrol:whentheidentificationoftheparentisbasedonfactors
thatmaychangeovertime
Theabilityofanentitytocontrolanothermaybeaffectedbyrelationshipswithotherparties
Aminorityholderthatdidnothavecontrolmay,duetochangingcircumstancesfind
itself
with
the
capacity
to
control
- Potentialvotingrightsareinstruments,ifexercisedorconverted,givetheentityvotingpoweroverthefinancialandoperatingpoliciesofanotherentity
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Benefits
- Thereasonforincludingtheabilitytobenefit,ratherthansimplydefiningcontrolasasynonymofpoweristoexcludesituationsinwhichanentitymighthavepowerover
anotherentitybutonlyasatrusteeoragent
- Thereturnsaccruingtoacontrollingentitymustvaryaccordingtotheactivitiesofthecontrolledentity:theentitythatreceivesthegreatestreturnsislikelytohavethe
greatestpoweroverthatentity
- PowerandreturnsmustbelinkedIAS27:Asubsidiaryisnotexcludedfromconsolidationbecauseitsbusinessactivitiesare
dissimilarfromthoseoftheotherentitieswithinthegroup.
Informationinconsolidatedfinancialstatements:
- Mustrepresentasfaithfullyaspossiblethefinancialposition,financialperformanceandcashflowsofaparentanditssubsidiaries
- Mustprovidetheinformationthatisrelevanttotheusersofthestatements- Theinformationmustbeunderstandabletotheusers,providinginformationexceeding
thatprovided
in
the
separate
financial
statements
of
the
entities
in
the
group
- Theinformationmustincreasetheabilityoftheuserstocomparethepositionandperformanceofthegroupwithotherentitiesthatareorganizeddifferently
Identifydependentusers:(seeexampleinbook)
- Separationofmanagementfromeconomicinterest:thefurthertheownersareremovedfromthemanagementoftheentity,themorelikelyitisthattheownerswill
bedependentonthesupplyofinformationabouttheentity
- Economicofpoliticalimportance/influence:entitiesthathavedominantpositionsorprivilegeswillalwaysattractinterestedpartiesandpotentiallydependentusers
- Financialcharacteristics:userswillbeattractedtoparticularcharacteristicsbasedontheir
interest
in
the
entity
Presentationconsolidatedfinancialstatements
IAS27:Aparentshallpresentconsolidatedfinancialstatementsinwhichitconsolidatesits
investmentsinsubsidiaries.Aparentneednotpresentitif:
- Theparentisitselfawhollyownedsubsidiary,orisapartiallyownedsubsidiaryofanotherentityanditsotherowners
- Theparentsdebtorequityinstrumentsarenottradedinapublicmarket- Theparentdidnotfile,norisitintheprocessoffiling,itsfinancialstatementswitha
securitiescommissionorotherregulatoryorganizationforthepurposeofissuingany
classof
instruments
in
apublic
market
- TheultimateoranyintermediateparentoftheparentproducesconsolidatedfinancialstatementsavailableforpublicusethatcomplywithIFRS
Foranexampleseebookpp.823
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Separatefinancialstatementsarethosepresentedbyaparent,aninvestorinanassociateora
ventureinajointlycontrolledentity,inwhichtheinvestmentsareaccountedforonthebasis
ofthedirectequityinterestratherthanonthebasisofthereportedresultsandnetassetsof
theinvestees.
Theconsolidatedfinancialstatementsincludeallthesubsidiariesoftheparent.
Identificationof
an
acquirer
Theacquireristhecombiningentitythatobtainscontroloftheothercombiningentitiesor
businesses.Theparentwillbeidentifiesastheacquirer.
IFRS3:theparententityisusuallythelegalacquirerasitissuesitsequityinterestsas
considerationinthecombinationtransaction,withthesubsidiariesbeingthelegalacquirees.
Theaccountingacquirerisdeterminedbasedonwhichentityinthesubsequentbusiness
combinationisthecontrollingentity.
Ifanewentityisformedtoissueequityintereststoeffectabusinesscombination,oneofthe
combiningentitiesthatexistedbeforethecombinationshallbeidentifiedastheacquirerby
applyingthe
guidance
in
B13
B17:
the
entity
likely
to
be
the
acquirer
is
the
one:
- Thathasasignificantlygreaterfairvalue- Thatgivesupthecashorotherassets,inthecasewhereequityinstrumentsare
exchangedforcashorotherassets
- WhosemanagementisabletodominatethebusinesscombinationReverseacquisition:EntityAacquiresallthesharesinentityB,buttheformershareholdersof
Bhold60%ofthesharesofAsoBhasreallytakenoverAbecausetheformershareholdersof
Bareincontrol.Theproblemisthattheanalysisreliesofwhichshareholderscontrolthe
decisionmaking.
Conceptsof
consolidation
Conceptsofconsolidation:theparententityconceptandtheentityconcept.Differencesin
consolidationariseundertheseconceptsonlyoftheparentdoesnotownalltheequityina
subsidiary,inotherwordsifanoncontrollinginterest(NCI)exists.
Choiceconceptofconsolidation:
- Theassetsandliabilitiesofasubsidiaryincludedintheconsolidatedfinancialstatements
- TheclassificationoftheNCIasequityorliability,andthemeasurementofNCI- Theadjustmentsfortheeffectsoftransactionswithinthegroup
Entityconcept
- Thegroupconsistsoftheassetsandliabilitiesoftheparentaswellasalltheassetsandliabilitiesofthesubsidiaries
- TheNCIisclassifiesasanequityholderorcontributorofcapitaltothegroupinthesamecapacityastheequityholders/ownersoftheparent
- Wheretherearetransactionsbetweenmembersofthegroup,theeffectsofthesetransactionsareadjustedinfull
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- NCIisdisclosedinthequitysectionoftheconsolidatedfinancialstatementsanditsmeasurementisbasedonashareofconsolidatedequityandnotonashareofthe
recordedequityofthesubsidiaryinwhichtheNCIownershipinterestisheld
Parententityconcept
- Theconsolidatedgroupconsistsoftheassetsandliabilitiesoftheparentandalltheassetsandliabilitiesofthesubsidiaries
- TheNCIisclassifiesasaliability- Adjustmentsfortransactionswithinthegroupinvolvebothpartialandtotal
eliminationprocedures.Onlytheparentsshareoftheintragroupprofitiseliminated
wherethesubsidiaryisthesellingentity,butalltheprofitiseliminatedwherethe
parentistheseller.
- TheNCIisreportedintheliabilitysectionoftheconsolidatedstatementoffinancialpositionandiscalculatedasitsproportionateshareoftherecordedequityofthe
subsidiary,withnoadjustmentsfortransactionswithinthegroup.
Proprietaryconceptofconsolidation
- Thegroupconsistsoftheassetsandliabilitiesoftheparentandtheparentsproportionalshareoftheassetsandliabilitiesofthesubsidiary.Theconsolidatedfinancialstatementsdonotincludeallthenetassetsofasubsidiary;onlytheparents
share
- AstheNCIisoutsidethegroup,theNCIshareofsubsidiaryequityisnotdisclosed,andneitheristheNCIshareofthenetassetsofthesubsidiary
- Transactionsbetweentheparentandthesubsidiaryareadjustedproportionally- NCIisnotdisclosed
TheaccountingtreatmentsadoptedinIAS27areconsistentwiththeadoptionoftheentity
concept:
- Theconsolidatedfinancialstatementsincludealltheassetsandliabilitiesofthegroup- TheNCIdoesnotfitintothedefinitionofaliability
Formatofconsolidatedfinancialstatements
Thesameasforsingleentities,theonlyadditionalrequirementsareinrelationshiptothe
disclosureoftheNCI:NCIshallbepresentedintheconsolidatedstatementoffinancial
positionwithinequity,separatelyfromtheequityoftheownersoftheparent
IAS1:anentityshalldisclosethefollowingitemsinthestatementofcomprehensiveincome
as allocationsofprofititlossfortheperiod:
- Profitorlossfortheperiodattributabletononcontrollinginterestandownersoftheparent
- Totalcomprehensiveincomefortheperiodattributabletononcontrollinginterestandownersoftheparent
Intheconsolidatedstatementofchangesinequitydisclosetotalcomprehensiveincomefor
theperios,showingseparatelythetotalamountsattributabletoownersoftheparentandto
noncontrollinginterests
Forexamplesoftheformatseebookpp.831
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Onlytheconsolidatedfiguresarerequired,butitisexpectedthatmostentitieswilldisclose
bothaconsolidatedandaparentcolumn.
Theminimumdisclosureinthestatementoffinancialpositionaretheamountsofnon
controllinginterests,presentedwithinequityandissuedcapitalandreservesattributableto
ownersofaparent.
Otherdisclosuresintheconsolidatedfinancialstatements:
- Thenatureoftherelationshipbetweentheparentandasubsidiarywhentheparentdoesnotown,directlyorindirectly,morethanhalfofthevotingpower
- Thereasonswhytheownershipofmorethanhalfofthevotingorpotentialvotingpowerofaninvesteedoesnotconstitutecontrol
- Theendofthereportingperiodofthefinancialstatementsofasubsidiarywhensuchfinancialstatementsareusedtoprepareconsolidatedfinancialstatementsandareas
ofadateorforaperiodthatisdifferentfromthatoftheparentsfinancialstatements,
andthereasonforusingadifferentdateorperiod
- ThenatureandextentofanysignificantrestrictionsontheabilityofsubsidiariestotransferfundstotheparentintheformofcashdividendsortorepayloansofadvancesWhenanentityelectsnottoprepareconsolidatedfinancialstatements,thefollowing
disclosuresintheseparatefinancialstatementsoftheparentareneeded:
- Thefactthatthefinancialstatementsareseparate,thattheexcemptionfromconsolidationhasbeenused,thenameandcountryofincorporationorresidenceof
theentitywhoseconsolidatedfinancialstatementsthatcomplywithIFRShavebeen
producedforpublicuseandtheaddresswherethoseconsolidatedfinancial
statementsareobtainable
- Alistofsignificantinvestmentsinsubsidiaries,jointlycontrolledentitiesandassociates,
including
the
name,
country
and
incorporation
or
residence,
proportion
of
ownershipinterestand,ifdifferent,proportionofvotingpowerheld
- Adescriptionofthemethodusedtoaccountfortheinvestments
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Associates IAS28 Chapter27
Anassociateisanentity,includinganunincorporatedentitysuchasapartnership,overwhich
theinvestorhassignificantinfluenceandthatisneitherasubsidiarynoraninterestinajoint
venture.
Significantinfluenceisthepowertoparticipateinthefinancialandoperatingpolicydecisions
oftheinvesteebutisnotcontrolorjointcontroloverthosepolicies.
Threetypesorlevelsofcontrolthatoneentitycanexerciseoveranother:controlor
dominance(subsidiary),significantinfluence(associates)andjointcontrol(jointventures).
Factorsthatmayprovideevidenceoftheexistenceofsignificantinfluence:
1. Representationontheboardofdirectorsorequivalentgoverningbodyoftheinvestee
2. Participationinpolicymakingprocesses,includingparticipationindecisionsaboutdividendsorotherdistributions
3. Materialtransactionsbetweentheinvestorandtheinvestee4. Interchangemanagerialpersonnel5. Provisionofessentialtechnicalinformation
Associatesareaccountedforusingtheequitymethodintheinvestorsconsolidatedfinancial
statements.(Goodexampleoftheequitymethod:page1110)
1.Whatistheequitymethod?
Undertheequitymethod,theinvestmentisinitiallyrecognizedatcost(Goodwillincluded).
Theinvestmentisincreasedordecreasedtorecognizetheinvestorsshareoftheprofitorloss
oftheassociateafterthedateofacquisition.Theinvestor'sshareoftheassociate'sprofitor
lossisadjustedfortheeffectofanyfairvaluedifferencesrecognizedonacquisitionofthe
associateandanyotherrequiredadjustments.
Keysteps:o Recognizetheinitialinvestmentintheassociateatcosto Increaseordecreasethecarryingamountoftheinvestmentbytheinvestorshareof
theprofitorlossoftheinvesteeafterthedateofacquisition
o Reducethecarryingamountoftheinvestmentbydistributionsreceivedfromtheassociate
o Increaseordecreasethecarryingamountoftheinvestmentforchangesintheinvestorsshareofthechangesintheinvesteestheircomprehensiveincome.This
appliestoreserveswherechangesinassociatesequityhavenotalreadybeenincluded
inprofitorloss.Hence,changesinassetrevaluationandforeigncurrencytranslation
reservesare
recognized;
but
movements
in
general
reserve,
which
are
an
appropriationfromretainedearnings,arenotrecognized.
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Adjustmentssimilartothoserequiredforthepurposesofincludingsubsidiariesinthe
consolidatedfinancialstatementsshouldbemadewhentheassociatesareincorporatedinto
thegroup'sconsolidatedfinancialstatementsortheeconomicinterestfinancialstatements
ofacompanythathasassociatesbutdoesnothaveanysubsidiaries.Thetypeofadjustments
thatmaybenecessarycoverthefollowingmatters:
Toachieveconsistencyofaccountingpolicies;
Toincludeanyimpactsofdifferencesbetweenfairvaluesandbookvaluesoftheassociate
onacquisition
date
(for
example
depreciation
of
the
depreciable
assets
based
on
their
fair
valuesatacquisitiondate)outofwhichgoodwillwillbecalculatedalso;and
Toeliminatetheeffectsofintragrouptransactions;
2.Whenshouldtheequitymethodstart?
Aninvestmentshouldberecordedundertheequitymethodfromthedateonwhichitfalls
withinthedefinitionofassociate,thatis,thedatethattheinvestorgainssignificantinfluence.
3.Whenshouldtheequitymethodstop?
Theuseoftheequitymethodshouldbestoppedfromthedatethat:
1.theinvestorceasestohavesignificantinfluence(althoughitmaystillholdtheinvestment)
2.theinvestmentinassociateisreclassifiedas'heldforsale'inaccordancewithIFRS5(seemoduleNoncurrentAssetsHeldforSaleandDiscontinuedOperations)
4.Mechanicsoftheequitymethod
Acquiredassociatesareinitiallyrecordedatthecostoftheinvestment.Anydifference
betweenthecostoftheinvestmentandtheinvestor'sshareinthenetfairvaluesofthe
associate'sidentifiableassetsandliabilitiesisgoodwill.Thesefairvaluesshouldbeascertained
inaccordancewiththeprinciplesofIFRS3(revised),Businesscombinations'.Thegoodwillis
includedwithinthecarryingamountoftheassociateandnotshownasaseparateasset.
5.Whathappenswhentheinvestorsandtheassociatesreportingdatesaredifferent?
ReportingdatesandsignificantinfluenceWhenthereportingdatesoftheinvestorand
associatearedifferent,theassociateprepares,unlessimpracticable,fortheuseofthe
investor,statementsasatthesamedateasthefinancialstatementsoftheinvestor.Ifthe
reportingdateoftheassociatesfinancialstatementsaredifferentfromtheinvestor'sandas
longasthedifferencedoesn'texceedthreemonths,adjustmentsshouldbemadeforthe
effectsofanysignificanteventsortransactionsbetweentheinvestorandtheassociatethat
occurbetweenthereportingdates.
6.Transactionswithassociates
Themethodusedtoeliminateintragrouptransactionswithassociatesisdifferentfromthat
adoptedfor
subsidiaries.
The
normal
method
of
adjustment
for
asubsidiary
company
would
betoeliminateprofitsandlossesfully.However,thestandardstatesthatprofitsandlosses
resultingfrom'upstream'and'downstream'transactionsbetweenaninvestor(includingits
consolidatedsubsidiaries)andanassociateareeliminatedtotheextentoftheinvestor's
interestintheassociate.
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7.Goodwill
Positivegoodwillrelatingtotheacquisitionofanassociateisincludedinthecarryingamount
oftheinvestment.Goodwillmaynotbeamortized,asthisisnolongerpermittedbyIFRS3
(revised),Businesscombinations.Separatedisclosureofgoodwillarisingonacquisitionofan
associateisnotrequired.Itisincludedinthecarryingamountoftheassociateandnotshown
asaseparateasset.Negativegoodwill(nowtermedexcessoftheinvestor'sshareofthenet
fairvalueoftheassociate'sidentifiableassets,liabilitiesoverthecostoftheinvestment')is
requiredto
be
taken
to
profit
or
loss
in
the
period
the
associate
was
acquired
and
included
in
theinvestor'sshareoftheassociate'spostacquisitionaftertaxresult.
8.Impairment
Oftenwhereanassociateismakinglosses,theremaybeasignificantdiminutioninthe
associate'svalue.However,asmentionedlater,undertheequitymethodaninvestor
recognizesanassociate'slosses.IAS28requiresthataftertheapplicationoftheequity
method,includingtherecognitionoflosses,therequirementsofIAS39,'Financial
instruments:Recognitionandmeasurement',shouldbeappliedtodeterminewhetheritis
necessarytorecognizeanyadditionalimpairmentloss.
9.Distributionsfromassociates
Consolidatedbalancesheet:
Undertheequitymethod,distributionsreceivedfromanassociatereducethecarrying
amountoftheinvestmentrecordedbytheinvestor.
Consolidatedstatementofcomprehensiveincome:
Thebasicprincipleisthattheinvestortakesaccountofitsshareoftheposttaxprofitsofthe
associatewhetherornottheassociatedistributesitsprofitsasdividends.Theassociates
revenues,costofsalesetc.arenotcombinedwiththoseoftheinvestorgroup.Insteadthe
investorsgroupsshareoftheassociatesnetprofitisdisclosedononelineinthestatement
ofcomprehensiveincome.Thereforethedividendsreceivedfromtheassociatehaveno
impacton
the
groups
statement
of
comprehensive
income.
Under
the
equity
method
the
full
amountoftheinvestorsshareoftheinvesteesprofitaftertaxisrecognizedinthestatement
ofcomprehensiveincome.
10.Recognitionoflosses
Wouldtheassociateslossescontinuetoberecognized,iftheinvestorsshareoflosses
equalsorexceedsthecarryingamountoftheirinvestment?Oncetheinvestorsshareof
lossesofanassociateequalsorexceedsthecarryingamountoftheinvestment(includingany
longtermintereststhatinsubstanceformpartoftheinvestorsnetinvestmentinthe
associate,suchaspreferencesharesand(unsecured)longtermreceivablesorloanstothe
associate),theinvestorshoulddiscontinuerecognizingitsshareoffurtherlossesinthe
statementofcomprehensiveincome.
11.Acquisitions
Investmentbecomesanassociate
Aninvestormayachievesignificantinfluenceoveranexistinginvestmentinanentitysuch
thatitbecomesanassociate,mostcommonlyviaacquisitionoffurthersharesbutpotentially
viaachangeinrelationshipwithoutarelatedchangeinstake.
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- 29 -
IAS28notesthattheconceptsunderlyingtheproceduresusedintheacquisitionofa
subsidiaryarealsoadoptedontheacquisitionofaninvestmentinanassociate.
IAS28requiresthatontheacquisitionofanassociate,anydifferencebetweenthecostof
theinvestmentandtheinvestor'sshareofthefairvaluesoftheassociate'sidentifiable
assets,andliabilitiesacquiredisaccountedforinaccordancewithIFRS3(revised),'Business
combinations'.Hence,ontheacquisitionofaninvestmentinanassociateafairvalue
exerciseneedstobeundertaken.
12.Howshouldtheinvestmentintheassociateberecordedintheseparatefinancial
statementsoftheinvestor?
Aninvestmentinanassociateshouldbeincludedintheseparatefinancialstatementsofthe
investoreither:
1)atcost,or
2)asafinancialassetaccordingtoIAS39
Investinginanassociateinstages
Inabusinesscombinationachievedinstages,theacquirershallremeasureitspreviouslyheld
equityinterestintheacquireeatitsacquisitiondatefairvaluesandrecognizetheresulting
gainorloss,ifany,inprofitorloss.Inpriorreportingperiods,theacquirermayhave
recognizedchangesinthevalueofitsequityinterestintheacquireeinothercomprehensive
income.Ifso,theamountthatwasrecognizedinothercomprehensiveincomeshallbe
recognizedonthesamebasisaswouldberequirediftheacquirerhaddisposeddirectlyofthe
previouslyheldequityinterest.
o Thepreviouslyheldinvestmentisrevaluedtofairvaluewithanygain/lossbeingtakingtoprofitorloss.
o Thepreviouslyheldinvestmenthadbeenmeasuredatfairvaluewithchangesinfairvalue
being
recognized
directly
in
equity,
those
amounts
are
transferred
to
current
periodprofitandloss.
Becominganassociateafteracquiringanownershipinterest
Aninvestormayacquireanownershipinterestinaninvesteeonacertaindate,butthe
investeemaynotbeclassifiedasanassociateuntilalaterdate.Theinvestorinitially
recognizesitsinvestmentintheinvesteeatitscostofinvestment,basedonthefairvalueof
whatwasgivenuptoacquiretheinvestment.
Theequitymethodisappliedatthedatetheinvestorobtainssignificantinfluenceoverthe
investee.
Step1:remeasuretheinvestmenttofairvalue,takinganychangetoprofitandlossforthe
period
Step2:measuresthefairvaluesoftheidentifiableassetsandliabilitiesoftheinvestee
Step3:measuresanygoodwillorincomeexcessasthedifferencebetweenthecostofthe
investmentandtheinvestorsshareofthenetfairvalueoftheidentifiableassetsand
liabilitiesacquired.
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Share
Thein
reach
equal
ofthe
IAS28
a)
b)
Disclo
Invest
curre
accou
statesucha
o
o
o
oflossesof
estorreco
szero.The
orexceeds
investment
33indete
itsshareo
generated
associate
thepresen
toberecei
sure
mentsinas
tassetsan
tshareof
entof
com
ssociatesm
Wherean
investee,
influence,
havesuch
Wherean
investee,
significan
doeshave
Wherean
associate
lossesofa
theassocia
nizeslosses
investordis
hecarrying
returnstoa
rminingthe
thepresen
bythe
asso
ndtheprec
tvalueoft
vedfromth
ociatesacc
discloseda
rofitorloss
prehensivei
ustalsobes
investorho
uthasappl
theinvesto
influenceis
investorho
uthasnot
influence,
suchinflue
investorha
hasincurre
nassociate,
te
onlytothe
continuest
amountof
positivea
valueinus
tvalueofth
iate,includ
edesonthe
eestimate
einvestme
untedforu
saseparat
ofassociat
ncome.The
eparatelyd
ldslesstha
iedtheequi
rmustdiscl
overcome.
ldsmoreth
ppliedthe
heinvestor
nceisoverc
discontinu
losses,
the
bothforth
pointwher
euseofth
heinvestm
ount,equit
oftheinve
eestimate
ingthe
cash
ultimatedi
futurecas
tandfrom
singtheeq
iteminthe
mustbedi
investors
s
isclosed.
20%ofthe
tymethod
sethereas
n20%oft
equitymet
mustdisclo
ome
edtheappli
investorm
eperiodan
ethecarryi
equityme
nt.Oncet
yaccountin
stment,ani
futurecas
flow
from
sposalofth
flowsexpe
itsultimate
itymethod
statement
sclosedasa
hareof
any
votingorp
ecauseitb
onsthepre
evotingor
odbecause
sethereas
cationofth
stdisclose
cumulativ
gamount
hodwhent
eequityac
gresumes.
investoresti
flowsexpe
heoperatio
investmen
ctedtoaris
disposal
tobeclassi
offinancial
separateit
discontinui
otentialvoti
elievesitha
sumptionth
potentialv
itbelievesi
nsthepres
eequityme
theunrecog
ly.
ftheinvest
heshareof
ountedbal
mates:
ctedtobe
nsof
the
t
fromdivid
fiedasnon
position.Th
eminthe
goperatio
ngpowero
ssignificant
atitdoesn
tingpower
tdoesnot
mptionth
thodbecau
nizedshare
- 30 -
ment
losses
ance
ends
e
sof
the
t
ofthe
ave
tit
ethe
of
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- 31 -
JointVentures IAS31 Chapter28
Ajointventureisacontractualarrangementwherebytwoormorepartiesundertakean
economicactivitythatissubjecttojointcontrol.Aventurerispartytoajointventureandhas
jointcontroloverthatjointventure.Aninvestorinajointventureisapartytoajointventure
anddoesnothavejointcontroloverthatjointventure.Controlisthepowertogovernthe
financialand
operating
policies
of
an
entity
so
as
to
obtain
benefits
from
its
activities.
Therearetwomajorcharacteristicsofajointventure:
1. ContractualarrangementItistheexistenceofacontractualarrangementthatdistinguishescertaininvestmentsin
associatesfrominvestmentsinjointventures.Theventuresareboundbyacontractual
arrangementthatdetailstheoperationandmanagementofthejointventure.
a) theactivity,durationandreportingobligationsofthejointventureb) theappointmentoftheboardofdirectorsorequivalentgoverningbodyofthejoint
ventureandthevotingrightsoftheventures
c) capitalcontributionsbytheventuresd) thesharingbytheventuresoftheoutput,income,expenseorresultsofthejoint
venture
2. JointcontrolAsinglejointventurecannotcontrolthejointventure,otherwisethatventurerwouldbea
parententity.Joint controlisdefinedas: Thecontractuallyagreedsharingofcontrolover
aneconomicactivity.
IAS3111and12providethefollowingguidanceindeterminingtheexistenceofjoint
control
nosingleventurerisinapositiontocontroltheactivityunilaterally thedecisionsinareasessentialtothegoalsofthejointventurerequiretheconsent
oftheventures
oneventurermaybeappointedasthemangeroroperatorofthejointventure;however,thispartyactswithinthefinancialandoperatingpoliciesdetailedinthe
contractualarrangementandconsentedtobytheventures
Formsofjointventures
IAS31identifiesthreeformsofjointventure:
jointlycontrolledoperation.Thereisnocorporation,partnershiporfinancialstructureestablishedseparatefromtheventuresthemselves.Eachjointventureusesitsown
assetsandincursitsownexpensestocreateajointproduct.
Jointlycontrolledassets.Thejointventuremayrelatetotheshareduseofasingleassetsuchasanoilorgaspipeline,acommunicationnetworkorapropertysuchas
farmland.Thecontractualarrangementprovidesforeachventurertousetheassetat
particularperiodoftimeorforparticularnumberofhours.Aswiththejointlyowned
operation,thereisnospecificstructurecreatedforthejointventure;theventures
simplyshareanasset.
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- 32 -
Jointlycontrolledentities:24statesthatajointlycontrolledentityisajointventurethatinvolvestheestablishmentofcorporation,partnershiporotherentityinwhich
eachventurerhasaninterest.
ProposedchangesunderED9
Thenamesofthethreetypesofjointarrangementsbechangeasfollows:
Jointlycontrolledoperationbecomesjointoperation Jointlycontrolledassetbecomesjointasset Jointlycontrolledentitybecomesjointventure
Jointlycontrolledoperations
Inrespectofitsinterestsinjointlycontrolledoperations,aventurershallrecognizeinits
financialstatements:
a)Theassetsthatitcontrolsandtheliabilitiesthatitincurs
b)Theexpensesthatitincursanditsshareoftheincomethatitearnsfromthesaleofgoods
orservicebythejointventure.
Jointly
controlled
assets
IAS3121detailstheaccountingforinterestsinjointlycontrolledassets:
Inrespectofitsinterestinjointlycontrolledassets,aventurershallrecognizeinitsfinancial
statements:
a) itshareofthejointlycontrolledassets,classifiedaccordingtothenatureoftheassetb) anyliabilitiesthatithasincurredc) itsshareofanyliabilitiesincurredjointlywiththeotherventuresinrelationtothejoint
venture
d) anyincomefromthesaleoruseofitsshareoftheoutputofthejointventure,togetherwithitsshareofanyexpenseincurredythejointventure
e) anyexpensesthatithasincurredinrespectofitinterestinthejointventureJointlyControlledEntity
Forexample,theMobilePhoneJointVenturesbetweenUSTandtheotherventures,where
underacontractualarrangement,aseparateentityiscreatedandjointlycontrolledbythe
ventures.
Aventurershouldaccountforitsinvestmentbasedonthetypeofjointventure.
Themostcommontypeofjointventureisajointlycontrolledentity.Forthis,theventurer
reportsitsinterestinitsconsolidatedfinancialstatementsusingeitherproportionate
consolidationortheequitymethod.Thisoptionisexpectedtobeeliminatedwiththe
finalizationofExposureDraft9'Jointarrangements'scheduledformid2009,whichwill
requireonlytheuseoftheequitymethod.
WhatdoesIAS31applyto?
AllinvestorsthathaveinvestmentsinjointventuresapplytherequirementsofIAS31tothose
investments.
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Contr
Thec
andre
ventu
ando
prede
dates.
Recor
1.Con
Aven
report
consol
'Joint
meth
2.Pro
Thea
theve
liabilit
incom
entity.
3.Equ
IAS31
when
ctualAgre
ntractuala
portingobl
ehasbeen
erations,e.
erminedde
Inthissitua
ingjointv
solidateda
urershould
ingformats
idationmet
rrangemen
d.
ortionate
plicationof
nturerinclu
iesforwhic
eoftheven
itymethod
currentlyr
usingthee
ment
rangement
igationsoft
createdDur
g.theaircra
adline.Rep
tionitisass
ntures
counts
reportitsin
forproporti
hodisexpe
ts'schedule
onsolidatio
proportion
desitsshar
itisjointly
turerinclud
ferstoIAS
uitymetho
usuallydeal
hejointven
ation:This
ftmanufac
rtingoblig
umedthat
terestinaj
onatecons
tedtobee
dformid2
n
teconsolid
oftheasse
responsible
eitsshareo
8Investm
.(seeasso
swiththef
ture.Activi
ouldnorm
ure,where
tions:This
STanditsj
ointlycontr
lidationor
liminatedw
09,which
ationmean
tsthatitco
.Theconso
ftheincom
ntsinasso
iates)
llowingma
y:Thisisth
allyonlyap
theactivity
concernsb
ointventur
olledentity
theequity
iththefinal
illrequire
sthatthec
ntrolsjointl
lidatedstat
eandexpe
iatesfort
tters.Thea
epurposef
lytojointl
iscarriedo
threportin
sallreport
usingeither
ethod.The
isationofEx
nlytheuse
nsolidated
anditssha
mentofco
sesofthej
eaccountin
ctivity,dura
rwhichth
controlled
twitha
standards
underIFRS.
oneofthe
proportion
posureDraf
oftheequi
balanceshe
reofthe
mprehensiv
intlycontr
gtreatmen
- 33 -
tion
joint
assets
and
two
ate
t9
y
etof
e
lled
t
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6.Sep
IAS31
avent
theIA
A)atc
B)ina
Thesa
entiti
7.Exc
There
equity
The
'Non
ofIFR
The
comp
compThe
inpar
Trans
There
trans
cont
How
Thefo
capita
arateaccou
doesnots
urer.Howe
27require
ost
ccordance
memethod
s.
ptionstop
arethreee
methodun
investment
urrentasse
5applyto
entityisonl
nylegislati
ny;or
entureris
graph2(c)
actionsbet
canbetran
actionsint
ibutionsby
houldave
llowinggui
lcontributi
nts
ecifythetr
er,whenp
ments,and
ithIAS39.
shallbeap
roportionat
ceptionsfr
derIAS31.
inthejoint
tsheldfors
suchinvest
requiredt
nwilldicta
whollyow
fIAS31.
eenavent
actionsbet
enormalc
aventurer
tureracco
elinesappl
nsmade
du
atmentof
eparingsep
accountfor
liedconsis
econsolida
mtherequ
heyare:
entureiscl
leanddisc
ents;or
prepares
ethetype
edsubsidia
urerandaj
weenaven
urseofop
oajointve
ntforcont
tononmo
ringboth
th
jointventu
aratefinan
itsinvestm
entlytorep
tionandeq
irementsof
assifiedash
ntinuedop
paratefina
ffinancials
ryandcert
ointventur
urerandaj
rations
ture
ibutionsto
netarycont
eformatio
reinthese
ialstateme
ntsinjointl
ortinvestm
uitymetho
proportion
eldforsale
erations'.T
cialstatem
tatements
inotherco
e
ointventur
ajointven
ibutions,s
and
the
or
paratefinan
nts,aninve
ycontrolle
entsinalljo
teconsolid
inaccordan
eaccounti
entsunder
obeprepa
nditionsare
inthefoll
ure?
chasanas
inarycours
cialstatem
torshallfol
entities,ei
intlycontro
ationorthe
cewithIFR
grequirem
IAS27.Loca
edbyapar
metasdes
wingsituat
et,andto
eof
busine
- 34 -
ntsof
low
her:
lled
5,
ents
l
icular
ribed
ions:
s.
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- 35 -
Ventureraccountfortransactionswithajointventure:
Venturerssaleoftheassettothejointventureforanamountinexcessoftheventurerscarryingvalue.
Venturerssaleoftheassettothejointventureforanamountlessthantheventurerscarryingvalue
Venturerspurchaseoftheassetfromthejointventurewitharesultinggaintothejoint
venture
VenturerspurchaseoftheassetfromthejointventureatalosstothejointventureHowshouldcontributionsonformationofajointventureberecordedinthejointventure
itself?
ThereisnospecificguidanceinIAS31(orelsewhereinIFRS)onhowajointventureitself
recordscontributionsreceivedonitsformation.
Commonpracticeistorecordthenetassetscontributedinthejointventuresfinancial
statementsattheircarryingvaluesrecordedintheventurersfinancialstatements
immediatelybeforethecontribution.
Disclosuresrequired
by
IAS
31
Aventurerisrequiredtodisclosetheaggregateamountofvariouscontingentliabilities,unlesstheprobabilityoflossisremote,separatelyfortheamountofother
contingentliabilities
Aventurerisrequiredtodisclosetheaggregateamountofvariouscapitalcommitment Aventurershalldisclosealistinganddescriptionofinterestsinsignificantjoint
venturesandtheproportionofownershipinterestheldinjointlycontrolledentities
Forjointlycontrolledentitiesdisclosureisrequiredoftheaggregateamountsofeachofcurrentassets,longtermassets,currentliabilities,longtermliabilities,incomeand
expensesrelatingtointerestsinjointventure
Aventurershalldisclosethemethoditusestorecognizeitsinterestinjointlycontrolledentities
Disclosuresrequiredbyed9
Anentityisrequiredtoprovideadescriptionofthenatureandextentofitsoperationsconductedthrougheachofthethreetypesofjointarrangementjointoperations,
jointassetsandjointventures
Disclosureisrequiredinrelationtocapitalcommitments Disclosureisrequiredconcerningcontingentliabilities Disclosureisrequiredresultingfromtheneedtoapplytheequitymethodratherthan
the
proportionate
consolidation
method.
In
addition
to
providing
a
list
and
description
ofinterestinsignificantjointventuresandtheproportionofownershipinterestheld,
foreachindividuallymaterialjointventure,andintotalforotherjointventures,
summarizedfinancialinformationisrequired,includingtheventurersinterestinthe
amountofeachof:
Currentassets Noncurrentassets Currentliabilities
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- 36 -
Noncurrentliabilities Revenues Profitorloss
Aventurerisrequiredtodiscloseseparatelytheventurersshareoftheprofitorlossofjointventuresaccountedforusingtheequitymethodandthecarryingamountof
thoseinterests.Thesedisclosuresarerequiredtorepresentintotalforalljoint
ventures.
Aventurerisrequiredtorecogniseinothercomprehensiveincomeitsshareofchangesrecognizedinothercomprehensiveincomebyjointventures.
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- 37 -
DeferredTax IAS12 Chapter7
Thenatureofincometax
Incometaxesareleviedbygovernmentsonincomeearnedbyindividualsandentitiesinorder
toraisemoneytofundtheprovisionofgovernmentservicesandinfrastructure.The
percentagepayableandthedeterminationoftaxableincomearegovernedbyincometax
legislationadministered
by
adedicated
government
body.
Differencesbetweenaccountingprofitandtaxableprofit
Accountingprofit:profitorlossforaperiodbeforedeductingtaxexpense. Taxableprofit:theexcessoftaxableincomeovertaxationdeductionsallowableagainst
thatincome
Becauseaccountingprofitandtaxableincomearedeterminedbydifferentprinciples,theyareunlikelytobethesameinoneperiod
Permanentdifferences:arisewhenthetreatmentofatransactionbytaxationlegislationandaccountingstandardsissuchthatamountsrecognizedaspartof
accountingprofitareneverrecognizedaspartoftaxableprofit,orviceversa.
Temporarydifferences:arisewhentheperiodinwhichrevenuesandexpensesarerecognizedforaccountingpurposesisdifferentfromtheperiodinwhichsuch
revenuesandexpensesaretreatedastaxableincomeandallowabledeductionsfor
taxpurposes.
Taxabletemporarydifferences:differencesthatresultintheentitypayingmoretaxinthefuture
Deductibletemporarydifferences:differencesthatresultintheentityrecoveringtaxviaadditionaldeductibleexpensesinthefuture
Accountingforincometaxes
IAS12requiresthetaxconsequencesoftransactionsandothereventstobeaccountedforin
thesamemannerandthesameperiodasthetransactionsthemselves.(examplep.231)
Calculationofcurrenttax(forexampleseepp.232236)
Currenttaxistherecognitionoftaxespayabletothetaxationauthoritiesinrespectofa
particularperiod. IAS12:Currenttaxliabilities(assets)forthecurrentandpriorperiodsshall
bemeasuredattheamountexpectedtobepaid(recoveredfrom)thetaxationauthorities,
usingthe
tax
rates
(and
tax
laws)
that
have
been
enacted
or
substantively
enacted
by
the
end
ofthereportingperiod.Soifataxratehaschanged(orifachangeisannounced)therate
applicabletothetaxableprofitfortheperiodmustbeapplied.
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- 38 -
Figure1:calculationofcurrenttax
Recognitionofcurrenttax
Currenttaxforthecurrentandpriorperiodsshall,totheextentunpaid,berecognizedasa
liability.Iftheamountsalreadypaidinrespectofcurrentandpriorperiodsexceedsthe
amountdueforthoseperiods,theexcessshallberecognizedasanasset.
Paymentof
tax
(for
example
see
p.237)
Taxationlegislationmayrequiretaxationdebtstobepaidannuallyuponlodgementofa
taxationreturnoratsomespecifiedtimeafterlodgement(suchasonreceiptofan
assessmentnotice,oratasetdateortime).Alternatively,thetaxationdebtmaybepaidby
instalmentthroughoutthetaxationyear.
Taxlosses
Taxlossesarecreatedwhenallowabledeductionsexceedtaxableincome.IAS12envisages
threepossibletreatmentsfortaxlosses:
1) Theymaybecarriedforward:createadeductibletemporarydifferenceandthereforeadeferred
tax
asset
in
that
the
company
will
pay
less
tax
on
future
taxable
profits.
(example
p.
238)
2) Theymaybecarriedback:thebenefitrelatingtoataxlossthatcanbecarriedbacktorecovercurrenttaxofapreviousperiodshallberecognizedasanasset
3) TheymaybesimplylostCalculationofdeferredtax
Asalreadyexplained,IAS12adoptsthephilosophythatthetaxconsequencesoftransactions
thatoccurduringaperiodshouldberecognizedinincometaxexpenseforthatperiod.
Temporarydifferenceswerediscussedaswell.Temporarydifferencesresultinthecarrying
amountsofanentitysassetsandliabilitiesbeingdifferentfromtheamountsthatwouldarise
ifastatement
of
financial
position
was
prepared
for
the
taxation
authority.
The
amounts
for
theassetsandliabilitiesthatwerereportedtothetaxationauthorityarecalledtheentitystax
base.Attheendofthereportingperiod,acomparisonofanentityscarryingamountsof
assetsandliabilitiesandtheirtaxbasesrevealthetemporarydifferencesthatexist,and
adjustmentswillthenbemadetodeferredassetsandliabilities.
Accounting profit (loss)
+ (-) accounting expenses not deductible for tax
+ (-) accounting expenses where the amount differs from deductible amounts
+ (-) taxable income where the amount differs from accounting revenue
- (+)accounting revenues not subject to taxation
- (+) accounting revenue where the amount differs from taxable income
- (+) deductible amounts where the amount differs from accounting expense
= taxable profitThe current tax rate is then applied to taxable profit to derive the current tax
payable
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- 39 -
Thefollowingstepshavetobemadeinordertocalculatethedeferredtax;
1) Determinethecarryingamounts(CA)ofitemsrecognizedinthestatementoffinancialpositionandtheirtaxbases
a. Determiningcarryingamounts:CAareassetandliabilitybalancesnetofvaluationallowances,accumulateddepreciation,amortizationandimpairment
losses(e.g.accountsreceivableallowancefordoubtfuldebts)
b. Determiningtaxbases: taxbasesneedtobecalculatedforassetsandliabilities.i. Taxbasesofassets: carryingamountfuturetaxableamounts+future
deductibleamounts
ii. Taxbasesofliabilities:carryingamount+futuretaxableamountsfuturedeductibleamounts
2) Determinetheassessableanddeductibletemporarydifferencesrelatingtothefuturetaxconsequencesofitemsrecognizedattheendofthecurrentperiod
a. Ataxabletemporarydifferenceexistswhenthefutureamountofanassetorliability
exceeds
any
future
deductible
amounts.
(illustrative
example
7.4,
p.242)
b. Adeductibletemporarydifferenceexistswhenthefuturetaxableamountofanassetorliabilityislessthanthefuturedeductibleamounts(illustrativeexample
7.5,p.242)
3) Calculateandrecognizethedeferredtaxassetsandliabilitiesarisingfromthesetemporarydifferencesaftertakingintoaccountanyrelevantrecognitionexceptions
andoffsetconsiderations.
Deferredtax
assets
and
liabilities
shall
be
measured
at
the
tax
rates
that
are
expected
toapplytotheperiodwhentheassetisrealizedortheliabilitysettled,basedontax
rates(andtaxlaws)thathavebeenenactedorsubstantivelyenactedbytheendofthe
reportingperiod.Thus,ifthetaxrateiscurrently30%butwillriseto32%inthenext
reportingperiod,deferredamountsshouldbemeasuredat32%.
Excludeddifferences: IAS12mandatesthefollowingexceptionstotherequirement
thatadeferredtaxliabilityandadeferredtaxassetberecognizedforalltaxableand
deductibletemporarydifferences
Theinitialrecognitionofgoodwill Goodwillforwhichamortisationisnotdeductiblefortaxpurposes Theinitialrecognitionofanassetorliabilityinatransactionwhich;
o Isnotabusinesscombinationo Atthetimeofthetransaction,affectsneitheraccountingprofitnortaxable
profit(taxloss)
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4) Recognisethenetmovementindeferredtaxassetsandliabilitiesduringtheperiodasdeferredtaxexpenseorincomeinprofitorloss(unlessanaccountingstandard
requiresrecognitiondirectlyinequityoraspartofabusinesscombination).
a. Deferredtaxliabilitiesmustberecognizedforalltaxabletemporarydifferences.Innormalcircumstancesaliabilityisrecognizedwhen,andonly
when,itisprobablethatanoutflowofresources embodyingeconomic
benefitswill
result
from
the
settlement
of
apresent
obligation
and
the
amount
atwhichthesettlementwilltakeplacecanbemeasuredreliably.However,
thesecriteriaarealwaystrueincaseofadeferredtaxliability.
b. Deferredtaxassetsmustberecognizedforalldeductibletemporarydifferencesandfromthecarryforwardoftaxlosses,butonlytotheextentthat
itisprobablethatfuturetaxableprofitswillbeavailableagainstwhichthe
temporarydifferencescanbeutilized.Normally,anassetisrecognizedwhenit
isprobablethatthefutureeconomicbenefitsfillflowtotheentity,andthe
assethasacostorvaluethatcanbemeasuredreliably.
c. Recognitionofdeferredamountsarisingfrominvestments:Therecognitionofadeferredtaxliabilityinrelationtoinvestments(insubsidiaries,branchesand
associates,andwithinterestsinjointventures),isrequired,exceptwhereboth
ofthefollowingconditionsaresatisfied;
i. Theparent,investororventureisabletocontrolthetimingofthereversalofthetemporarydifference,and
ii. Itisprobablethatthetemporarydifferencewillnotreverseintheforeseeablefuture
Deferredtaxassetsassociatedwithinvestmentswouldnormallyarisewhenthe
investmenthasbeenwrittendowntotherecoverableamount,orwhenthe
applicationoffairvalueorequityaccountinghasbeenwrittenitdownbelowits
taxbase.Therecognitionofsuchadeferredtaxassetisallowedonlytothe
extentthatthetemporarydifferencewillreverseintheforeseeablefutureand
taxableprofitwillbeavailableagainstwhichthetemporarydifferencecanbe
utilized.
Changeoftaxrates(seeillustrativeexample7.8,p.251)
Whenanewtaxrateisenacted(orsubstantivelyenacted),thenewrateshouldbeappliedin
calculatingthecurrenttaxliabilityandadjustmentstodeferredtaxaccountsduringtheyear.
Itshould
also
be
applied
to
the
deferred
amounts
recognized
in
prior
years.
A
journal
adjustmentmustbepassedtoincreaseorreducethecarryingamountsofdeferredtaxassets
andliabilities.
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Amendedprioryeartaxfigures
Intaxationjurisdictionswhereentitiesselfassesstheirtaxableprofit,itispossiblethatthe
taxationauthoritywillamendthatassessmentbychangingtheamountoftaxableor
deductibleitems.Thisamendmentcouldresultintheentitybeingliabletopayextrataxor
becomingeligibleforataxationrefund.Uponreceiptofanamendedassessment,theentity
shouldanalysethereasonfortheadjustmentandconsiderwhetherbothcurrentanddeferred
taxareaffected.
Deferredtaxarisingfromabusinesscombination
Theamountofdeferredtaxarisinginrelationtotheacquisitionofanentityorbusinessis
recognizedandincludedaspartofnetassetsacquiredwhendeterminingthegoodwillor
excessarisingonacquisition.
Fordisclosuresseep.253 257
(forthefirstthreestepsaboveseeillustrativeexample7.6,p.244)