Financial Reporting Standards UpdateFinancial Reporting Standards Update

Tony Sweetman

Kaplan Publishing

February 2012

tony.sweetman@kaplan.co.uk

GROUP ACCOUNTING GROUP ACCOUNTING

New and revised reporting standards

New and revised reporting standards

• IFRS 10 - Consolidated Financial Statements

– replaces most of IAS 27• IFRS 11 - Joint Arrangements

– replaces IAS 31• IFRS 12 – Disclosure of Interests in Other Entities

– replaces parts of IAS 27• IAS 27 – Separate Financial Statements (revised)• IAS 28 – Investments in Associates and Joint

Ventures (revised)• Effective from 1 January 2013

IFRS 10 – Consolidated Financial Statements

IFRS 10 – Consolidated Financial Statements

• Provides single definition for control that must be subject to continuous assessment:– Power over the investee– Exposure of rights to variable returns– Ability to use power to affect those returns

• Does not change basic mechanics of consolidation

Accounting for associates & joint ventures

Accounting for associates & joint ventures

• IAS 28 (revised) does not change accounting for associates using the equity method

• It now includes accounting for joint arrangements which comply with the definition of a joint venture per IFRS 11

IFRS 11 – Joint ArrangementsIFRS 11 – Joint Arrangements

• Joint arrangements - arrangements where two or more parties have joint control, and that this will only apply if the relevant activities require unanimous consent of those who collectively control the arrangement

• Joint arrangements may be either:– joint ventures, or– joint operations

IFRS 11 – Joint ArrangementsIFRS 11 – Joint Arrangements

• Joint ventures are defined as joint arrangements whereby the parties have joint control of the arrangement and have rights to the net assets of the arrangement. The equity method of accounting per IAS 28 (revised) should be used in this situation.

IFRS 11 – Joint ArrangementsIFRS 11 – Joint Arrangements

• Joint operations are defined as joint arrangements whereby the parties that have joint control have rights to the assets and obligations for the liabilities. Normally, there will not be a separate entity established to conduct joint operations.

THE FINANCIAL REPORTING FRAMEWORK THE FINANCIAL REPORTING FRAMEWORK

IFRS 13 – Fair Value Measurement

IFRS 13 – Fair Value Measurement

• Issued in 2011, and effective for accounting periods commencing on or after 1 January 2013, with early adoption permitted

• Single source of guidance when a FVM is required by a reporting standard

• Common framework for FVM in both US GAAP and IFRS

IFRS 13 – Fair Value Measurement

IFRS 13 – Fair Value Measurement

• IFRS 13 does not apply to:– Share-based payments covered by IFRS 2– Lease transactions covered by IAS 17

• IFRS 13 does not apply where a different measure is required by a reporting standard, e.g.:– Net realisable value– Value in use

IFRS 13 – Definition of fair value

IFRS 13 – Definition of fair value

• “...the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.”

IFRS 13 para 9

• May apply to an individual asset or liability, or to a collection of assets and/or liabilities, depending upon requirements of a particular reporting standard

IFRS 13 – Definition of fair value

IFRS 13 – Definition of fair value

• Comments on definition:– It is an exit price based upon an active

market, or otherwise based upon a valuation technique

– It is not the result of a distress transaction– Presumed to take place in principal market

or, failing that, the most advantageous market

– Transactions costs ignored – they are not a characteristic of the asset or liability to be measured

IFRS 13 – Fair value hierarchyIFRS 13 – Fair value hierarchy

• Established by IFRS 13 to categorise inputs to measure fair value

• An asset or liability is regarded as having been measured using the lowest level of inputs that is significant to its measurement:– Level 1 inputs – “observable” quoted prices

in an active market for an identical asset or liability at the measurement date

IFRS 13 – Fair value hierarchyIFRS 13 – Fair value hierarchy

– Level 2 inputs – observable inputs, other than those included in level 1 above. This may include:

• prices in active markets for similar, not identical, assets or liabilities

• prices in inactive markets for identical assets or liabilities

– Level 3 inputs – unobservable inputs, based on the best information available:

• internally produced forecasts and data

PERFORMANCE REPORTINGPERFORMANCE REPORTING

IAS 1 – Presentation of financial statements

IAS 1 – Presentation of financial statements

• Amended to require OCI to be separately classified between:– Items which will not be reclassified (i.e. recycled)

through profit or loss in a later period • e.g. changes in revaluation surplus

– Items that may be reclassified through profit or loss in a later period

• e.g. foreign exchange gains and losses on retranslation of a foreign subsidiary

• Effective from 1 July 2012

EMPLOYEE BENEFITSEMPLOYEE BENEFITS

IAS 19 - Employee benefitsIAS 19 - Employee benefits

• Radical revision in 2011

• Effective from 1 January 2013

IAS 19 - Employee benefitsIAS 19 - Employee benefits

Defined benefit schemesDefined benefit schemes

• Service cost component includes:– Current service cost– Past service cost– Curtailments and settlements

• Net interest component includes:– Finance cost on plan obligation, less

interest return on plan assets

Defined benefit schemesDefined benefit schemes

• Remeasurement component comprises:– Actuarial gains and losses on the plan

obligation– Actuarial gains and losses on the plan

assets– Income received on plan assets, less any

amount included within net interest component

Defined benefit schemesDefined benefit schemes

• Impact of revision in 2011:– Actuarial gains and losses now renamed

and included within remeasurement component

– Remeasurement component now taken to OCI – previously three alternative treatments

– Simplification of accounting for past service costs

IAS 19 - Other issuesIAS 19 - Other issues

SEGMENT REPORTINGSEGMENT REPORTING

FINANCIAL INSTRUMENTSFINANCIAL INSTRUMENTS

IFRS 9 - Financial InstrumentsIFRS 9 - Financial Instruments

• Piecemeal updating to replace IAS 39

• Initially issued November 2009 to deal with financial assets

• Updated October 2010 to deal with financial liabilities

• Effective date 1 January 2015

• IAS 39 still relevant for impairment, hedging and derivatives until withdrawn

IFRS 9 - financial assets – recognition and measurement

IFRS 9 - financial assets – recognition and measurement

Impairment of financial assetsImpairment of financial assets

• Financial assets at fair value through profit or loss - the accounting treatment includes accounting for the effect of any impairment

• Financial assets at fair value through other comprehensive income – the effect of any impairment is taken to OCI

• Financial assets at amortised cost – need annual assessment of whether there is evidence of impairment – if so, do impairment test

Financial liabilitiesFinancial liabilities

• Effectively transferred IAS 39 requirements to IFRS 9:– Financial liabilities at fair value through

profit or loss– Other financial liabilities at amortised cost– Fair value option for financial liabilities

TAX TAX

IAS 12 – Income taxesIAS 12 – Income taxes

• Amended December 2010 re investment property measured at fair value – normal presumption that carrying value will be recovered through sale – this presumption can be rebutted

• Consequence – may change tax rate to apply on temporary difference based upon when expected to reverse

• Effective from 1 January 2012

NON-FINANCIAL REPORTINGNON-FINANCIAL REPORTING

PS1 – Management CommentaryPS1 – Management Commentary

• Practice Statement 1 – issued December 2010 and can be adopted any time thereafter

• Provides broad non-binding framework for use when an entity prepares a management commentary relating to IFRS-compliant FS

• Provides management’s view of performance, position and progress

• Should supplement and complement information in the FS – not merely repetition

PS1 – Management CommentaryPS1 – Management Commentary

• Elements of a management commentary:– nature of the business– objectives, and strategies to achieve the

objectives– significant resources, risks and

relationships– operational results, and future prospects– critical performance measures and

indicators, together with commentary

SPECIALISED ENTITIES SPECIALISED ENTITIES

Small and medium-sized entities (SME)

Small and medium-sized entities (SME)

A SME is typically defined as:

• owner-managed by a relatively small group of shareholders,

• relatively small in terms of revenues generated and assets and liabilities under control of the entity,

• relatively small number of employees,

• undertake less complex transactions.

IFRS for SMEIFRS for SME

• Issued by the IASB in July 2009 and adopted by many countries subsequently

• Provides a framework for preparation of financial statements for eligible entities

• Substantially reduced financial reporting compliance burden in comparison with full IFRS compliance

IFRS for SMEIFRS for SME

Omitted subject matter from IFRS for SME:

• EPS (IAS 33)

• Interim reporting (IAS 34)

• Segmental reporting (IFRS 8)

• Assets held-for-sale (IFRS 5)

• No size criteria for eligibility – only public accountability criteria

IFRS for SMEIFRS for SME

Simplified reporting under IFRS for SME:

• R&D always expensed

• Goodwill amortised over 10 years

• No revaluation of PP&E

• Finance costs never capitalised

IFRS for SMEIFRS for SME

Expected benefits of adoption:

• Improved comparability for users of accounts of SME

• Reduced financial reporting compliance costs for preparers of accounts

• IFRS for SME may provide a platform for progression towards adoption of full IFRS GAAP as entities grow

IFRS for SMEIFRS for SME

• In principle, approved for use in the UK, subject to appropriate legal and regulatory issues dealt with

UK FRSSE (2008)UK FRSSE (2008)

• Introduced 1997 and periodically updated

• Current version updated previous version for effect of CA2006

• Size criteria – small per CA2006

Net Gross

Turnover (£m) 6.5 7.8

Balance sheet (£m) 3.26 3.9

Employees (max) 50 50

UK FRSSE (2008)UK FRSSE (2008)

• Does not apply to:– Listed entities– Large or medium-sized entities or groups– Entities complying with IFRS– Entities undertaking excluded activities

• Use only limited specified headings in BS and P&L as applicable plus reduced and simplified disclosures

UK DevelopmentsUK Developments

• Possible multi-tier development of corporate reporting in UK:– Listed entities – apply IFRS – Unlisted entities could apply:

• Full IFRS• Full UK GAAP• Abbreviated accounts as small/medium*• UK FRSSE*• FRS for SME (when approved)*

*if applicable

Financial Reporting Standards UpdateFinancial Reporting Standards Update

Tony Sweetman

Kaplan Publishing

February 2012

tony.sweetman@kaplan.co.uk