kpmg audit niif insights an overview
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September 2011
September2011
AN OVERVIEW
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INSIGHTS INTO IFRS:AN OVERVIEW
Insights into IFRS: An overviewbrings together all of the
individual overview sections from our publication Insights
into IFRS,KPMGs practical guide to International Financial
Reporting Standards, 8thEdition 2011/12.
The overview of the requirements of IFRSs and the
interpretative positions described in Insights into IFRSreflect the work of both current and former members of
the KPMG International Standards Group and were made
possible by the invaluable input of many people working
in KPMG member firms worldwide. This overview should
be read in conjunction with Insights into IFRSin order to
understand more fully the requirements of IFRSs.
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CONTENTS1. Background 4
1.1 Introduction 4
1.2 The Conceptual Framework 5
2. General issues 9
2.1 Form and components of financial statements 9
2.2 Changes in equity 11
2.3 Statement of cash flows 12
2.4 Basis of accounting 13
2.5 Consolidation 14
2.5A Consolidation: IFRS 10 16
2.6 Business combinations 18
2.7 Foreign currency translation 21
2.8 Accounting policies, errors and estimates 23
2.9 Events after the reporting period 24
3. Specific statement of financial position items 25
3.1 General 25
3.2 Property, plant and equipment 26
3.3 Intangible assets and goodwill 28
3.4 Investment property 30
3.5 Investments in associates and the equity method 32
3.6 Investments in joint ventures and proportionate
consolidation 35
3.6A Investments in joint arrangements 373.7 [Not used]
3.8 Inventories 38
3.9 Biological assets 39
3.10 Impairment of non-financial assets 40
3.11 [Not used]
3.12 Provisions, contingent assets and liabilities 43
3.13 Income taxes 45
4. Specific statement of comprehensive income items 47
4.1 General 47
4.2 Revenue 49
4.3 Government grants 51
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4.4 Employee benefits 52
4.5 Share-based payments 61
4.6 Borrowing costs 63
5. Special topics 64
5.1 Leases 64
5.2 Operating segments 66
5.3 Earnings per share 67
5.4 Non-current assets held for sale and discontinued
operations 69
5.5 Related party disclosures 71
5.6 [Not used]
5.7 Non-monetary transactions 72
5.8 Accompanying financial and other information 73
5.9 Interim financial reporting 74
5.10 Insurance contracts 76
5.11 Extractive activities 78
5.12 Service concession arrangements 79
5.13 Common control transactions and Newco formations 816. First-time adoption of IFRSs 83
6.1 First-time adoption of IFRSs 83
7. Financial instruments 87
7.1 Scope and definitions 87
7.2 Derivatives and embedded derivatives 88
7.3 Equity and financial liabilities 89
7.4 Classification of financial assets and financial
liabilities 91
7.5 Recognition and derecognition 92
7.6 Measurement and gains and losses 94
7.7 Hedge accounting 99
7.8 Presentation and disclosure 100
7A Financial instruments: IFRS 9 103
Appendix I: Currently effective requirements and
forthcoming requirements 106
Appendix II: Future developments 119
About this publication 133
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1. BACKGROUND
1.1 Introduction (IFRS Foundation Constitution, Preface to IFRSs, IAS 1)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
IFRSs is the term used to indicate the whole body of IASB authoritative literature.
IFRSs are designed for use by profit-oriented entities.
Any entity claiming compliance with IFRSs complies with all standards and
interpretations, including disclosure requirements, and makes an explicit and
unreserved statement of compliance with IFRSs.
The bold- and plain-type paragraphs of IFRSs have equal authority.
The overriding requirement of IFRSs is for the financial statements to give a fair
presentation (or true and fair view).
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1.2 The Conceptual Framework (IASB Conceptual Framework)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
The IASB uses its Conceptual Framework when developing new or revised IFRSs or
amending existing IFRSs.
The Conceptual Framework is a point of reference for preparers of financial statements
in the absence of specific guidance in IFRSs. Transactions with owners in their capacity as owners are recognised directly in equity.
IFRSs require financial statements to be prepared on a modified historical cost basis
with a growing emphasis on fair value.
Fair valueis the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arms length transaction.
FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENTIFRS 13 provides a single source of guidance on howfair value is measured. This guidance
is applied when fair value is required or permitted by other IFRSs; IFRS 13 does not
establish requirements for whenfair value is required or permitted.
IFRS 13 provides a framework for determining fair value, i.e. it clarifies the factors to be
considered in estimating fair value. While it includes descriptions of certain valuation
approaches and techniques, it does not establish valuation standards on how valuations
should be performed.
Definition
Under IFRS 13, fair valueis the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date, i.e. an exit price. The transfer notion, referred to in the valuation of a
liability, is different from the settlement notion that is included in the current definition of
fair value in IAS 39.
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General requirements
The fair value of a non-financial asset is based on its highest and best use from the
perspective of market participants, which may be on a stand-alone basis or based on its
use in combination with complementary assets or liabilities.
IFRS 13 generally does not specify the unit of account for measurement. This is
established instead under the specific IFRS that requires or permits the fair value
measurement or disclosure. For example, the unit of account in IAS 39 or IFRS 9 generally
is an individual financial instrument whereas the unit of account in IAS 36 often is a group
of assets or a group of assets and liabilities comprising a cash-generating unit.IFRS 13 discusses three valuation approaches: the market, income and cost approaches.
Several valuation techniques are available under each approach. An entity uses a valuation
technique to measure fair value that is appropriate in the circumstances, maximising the
use of relevant observable inputs and minimising the use of unobservable inputs. The best
evidence of fair value is a quoted price in an active market for an identical asset or liability.
For liabilities, when a quoted price for the transfer of an identical or similar liability is not
available and the liability is held by another entity as an asset, the liability is valued from
the perspective of a market participant that holdsthe asset. Failing that, other valuationtechniques are used to value the liability from the perspective of a market participant that
owesthe liability. A similar approach is also used when valuing an entitys own equity
instruments.
Inputs used in measuring fair value reflect the characteristics of the asset or liability that a
market participant would take into account and are not based on the entitys specific use
or plans. Such asset- or liability-specific characteristics include the condition and location
of an asset or restrictions on an assets sale or use that are a characteristic of the asset
rather than of the entitys holding.
Fair value hierarchy
Inputs to valuation techniques used to measure fair value are prioritised in what is referred
to as the fair value hierarchy. The concept of a fair value hierarchy was already included
in IFRS 7 and the definitions of the three levels have not changed from those currently in
IFRS 7.
Level 1.Fair values measured using quoted prices (unadjusted) in active markets for
identical assets or liabilities.
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Level 2.Fair values measured using inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
Level 3. Fair values measured using inputs for the asset or liability that are not based on
observable market data (i.e. unobservable inputs).
Fair value measurements determined using valuation techniques are classified in their
entirety based on the lowest level input that is significant to the measurement. Assessing
significance requires judgement, considering factors specific to the asset or liability.
When multiple unobservable inputs are used, in our view the unobservable inputs shouldbe considered in total for the purposes of determining their significance.
Principal or most advantageous market
An entity values assets, liabilities and its own equity instruments assuming a transaction
in the principal market for the asset or liability, i.e. the market with the highest volume and
level of activity. In the absence of a principal market, it is assumed that the transaction
would occur in the most advantageous market. This is the market that would maximise
the amount that would be received to sell an asset or minimise the amount that wouldbe paid to transfer a liability, taking into account transport and transaction costs. In
either case, the entity must have access to the market on the measurement date. In
the absence of evidence to the contrary, the market in which the entity would normally
sell the asset or transfer the liability is assumed to be the principal market or most
advantageous market.
Transaction costs
Transaction costs are not a component of a fair value measurement although they are
considered in determining the most advantageous market.
Premium or discount
Although a premium or a discount may be an appropriate input to a valuation technique, it
should not be applied if it is inconsistent with the relevant unit of account. For example, a
control premium is not applied if the unit of account is an individual share even if the entity
has a large holding. Blockage factors reflect size as a characteristic of an entitys holding
rather than of the asset and therefore cannot be applied.
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Non-performance risk
Non-performance risk, including own credit risk, is considered in measuring the fair value
of a liability, but separate inputs to reflect restrictions on the transfer of a liability or an
entitys own equity instruments are not applied.
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2. GENERAL ISSUES
2.1 Form and components of financial statements (IAS 1, IAS 27)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
The following are presented: a statement of financial position; a statement ofcomprehensive income; a statement of changes in equity; a statement of cash flows;
and notes including accounting policies.
In addition, a statement of financial position as at the beginning of the earliest
comparative period is presented when an entity restates comparative information
following a change in accounting policy, correction of an error or reclassification of items
in the financial statements.
Comparative information is required for the preceding period only, but additional periods
and information may be presented.
An entity with one or more subsidiaries presents consolidated financial statements
unless specific criteria are met.
An entity without subsidiaries but with an associate or jointly controlled entity prepares
individual financial statements unless specific criteria are met.
In its individual financial statements, generally an entity accounts for an investment in
an associate using the equity method, and an investment in a jointly controlled entity
using the equity method or proportionate consolidation. An entity is permitted, but not required, to present separate financial statements in
addition to consolidated or individual financial statements.
FORTHCOMINGREQUIREMENTS
PRESENTATIONOFOTHERCOMPREHENSIVEINCOME
Presentation of Other Comprehensive Income Amendments to IAS 1amends IAS 1 to: require an entity to present separately the items of other comprehensive income that
would be reclassified to profit or loss in the future if certain conditions are met from
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those that would never be reclassified to profit or loss. Consequently an entity that
presents items of other comprehensive income before related tax effects would also
have to allocate the aggregated tax amount between these sections; and
change the title of the statement of comprehensive income to the statement of profit
or loss and other comprehensive income. However, an entity is still allowed to use
other titles.
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2.2 Changes in equity (IAS 1)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
An entity presents a statement of changes in equity as part of a complete set of
financial statements.
All owner-related changes in equity are presented in the statement of changes in equity,
separately from non-owner changes in equity.
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2.3 Statement of cash flows (IAS 7)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
The statement of cash flows presents cash flows during the period classified by
operating, investing and financing activities.
Net cash flows from all three categories are totalled to show the change in cash and
cash equivalents during the period, which then is used to reconcile opening and closingcash and cash equivalents.
Cash and cash equivalents includes certain short-term investments and, in some cases,
bank overdrafts.
Cash flows from operating activities may be presented using either the direct method
or the indirect method.
Foreign currency cash flows are translated at the exchange rates at the dates of the
cash flows (or using averages when appropriate).
Generally all financing and investing cash flows are reported gross. Cash flows are
offset only in limited circumstances.
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2.4 Basis of accounting (IAS 1, IAS 21, IAS 29, IFRIC 7)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Financial statements are prepared on a modified historical cost basis with a growing
emphasis on fair value.
When an entitys functional currency is hyperinflationary, its financial statements should
be adjusted to state all items in the measuring unit current at the reporting date.
FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included in
individual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes a
comprehensive disclosure framework for fair value measurements. See 1.2 for furtherdetails.
REVISEDCONSOLIDATIONREQUIREMENTS
Under IFRS 10, the concept of a special purpose entity (SPE) no longer exists and the
consolidation conclusion is no longer based solely on a risks and rewards analysis for such
entities. The consolidation conclusion for entities currently SPEs in the scope of SIC-12
may need to be reconsidered under IFRS 10. See 2.5A for further details.
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2.5 Consolidation (IAS 27, SIC-12)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Consolidation is based on control, which is the power to govern, either directly or
indirectly, the financial and operating policies of an entity so as to obtain benefits from
its activities.
The ability to control is considered separately from the exercise of that control. The assessment of control may be based on either a power-to-govern or a de facto
control model.
Potential voting rights that are currently exercisable are considered in assessing control.
A special purpose entity (SPE) is an entity created to accomplish a narrow and well-
defined objective. SPEs are consolidated based on control. The determination of control
includes an analysis of the risks and benefits associated with an SPE.
All subsidiaries are consolidated, including subsidiaries of venture capital organisationsand unit trusts, and those acquired exclusively with a view to subsequent disposal.
A parent and its subsidiaries generally use the same reporting date when consolidated
financial statements are prepared. If this is impracticable, then the difference between
the reporting date of a parent and its subsidiary cannot be more than three months.
Adjustments are made for the effects of significant transactions and events between
the two dates.
Uniform accounting policies are used throughout the group.
The acquirer in a business combination can elect, on a transaction-by-transaction
basis, to measure ordinary non-controlling interests (NCI) at fair value or at their
proportionate interest in the recognised amount of the identifiable net assets of the
acquiree at the acquisition date. Ordinary NCIare present ownership interests that
entitle their holders to a proportionate share of the entitys net assets in liquidation.
Other NCI generally are measured at fair value.
An entity recognises a liability for the present value of the (estimated) exercise price of
put options held by NCI, but there is no detailed guidance on the accounting for such
put options.
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Losses in a subsidiary may create a deficit balance in NCI.
NCI in the statement of financial position are classified as equity but are presented
separately from the parent shareholders equity.
Profit or loss and comprehensive income for the period are allocated to NCI and owners
of the parent.
Intra-group transactions are eliminated in full.
On the loss of control of a subsidiary, the assets and liabilities of the subsidiary and
the carrying amount of the NCI are derecognised. The consideration received and anyretained interest, measured at fair value, are recognised. Amounts recognised in other
comprehensive income are reclassified as required by other IFRSs. Any resulting gain or
loss is recognised in profit or loss.
Changes in the parents ownership interest in a subsidiary without a loss of control are
accounted for as equity transactions and no gain or loss is recognised in profit or loss.
FORTHCOMINGREQUIREMENTS
REVISEDCONSOLIDATIONREQUIREMENTS
See 2.5A for an overview of the revised consolidation requirements under IFRS 10.
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2.5A Consolidation: IFRS 10 (IFRS 10)
OVERVIEWOFFORTHCOMINGREQUIREMENTS
Control involves power, exposure to variability in returns and a linkage between the two
and is assessed on a continuous basis.
The investor considers the purpose and design of the investee so as to identify its
relevant activities, how decisions about such activities are made, who has the currentability to direct those activities and who receives returns therefrom.
Control is usually assessed over a legal entity, but also can be assessed over only
specified assets and liabilities of an entity, referred to as a silo, when certain conditions
are met.
There is a gating question in the model, which is to determine whether voting rights
or rights other than voting rights are relevant when assessing whether the investor has
power over the relevant activities of the investee.
Only substantive rights held by the investor and others are considered.
If voting rights are relevant when assessing power, then substantive potential voting
rights are taken into account and the investor assesses whether it holds voting rights
sufficient to unilaterally direct the relevant activities of the investee, which can include
de factopower.
If voting rights are not relevant when assessing power, then the investor considers
the purpose and design of the investee as well as evidence that the investor has the
practical ability to direct the relevant activities unilaterally, indications that the investorhas a special relationship with the investee, and whether the investor has a large
exposure to variability in returns.
Returns are defined broadly and include distributions of economic benefits and changes
in the value of the investment, as well as fees, remuneration, tax benefits, economies
of scale, cost savings and other synergies.
An investor that has decision-making power over an investee and exposure to variability
in returns determines whether it acts as a principal or as an agent to determine whether
there is a linkage between power and returns. When the decision maker is an agent, thelink between power and returns is absent and the decision makers delegated power is
treated as if it were held by its principal(s).
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To determine whether it is an agent, the decision maker considers substantive removal
and other rights held by a single or multiple parties, whether its remuneration is on
arms length terms, its other economic interests and the overall relationship between
itself and other parties.
An entity takes into account the rights of parties acting on its behalf when assessing
whether it controls an investee.
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FORTHCOMINGREQUIREMENTS
REVISEDCONSOLIDATIONREQUIREMENTS
IFRS 10 supersedes IAS 27 in determining whether one entity controls another, and
introduces a number of changes from the control model in IAS 27. See 2.5A for further
details.
FAIRVALUEMEASUREMENT
IFRS 13 sets out general principles to be applied when measuring fair value; previously
there was no general guidance in respect of determining the fair value of the identifiableassets acquired and the liabilities assumed as part of a business combination. See 1.2 for
further details.
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2.7 Foreign currency translation (IAS 21, IAS 29)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
An entity measures its assets, liabilities, income and expenses in its functional
currency, which is the currency of the primary economic environment in which it
operates.
All transactions that are not denominated in an entitys functional currency are foreigncurrency transactions; exchange differences arising on translation generally are
recognised in profit or loss.
The financial statements of foreign operations are translated for the purpose of
consolidation as follows: assets and liabilities are translated at the closing rate; income
and expenses are translated at actual rates or appropriate averages; and equity
components (excluding the current year movements, which are translated at actual
rates) are translated at historical rates.
Exchange differences arising on the translation of the financial statements of a foreignoperation are recognised in other comprehensive income and accumulated in a
separate component of equity. The amount attributable to any non-controlling interests
(NCI) is allocated to and recognised as part of NCI.
If the functional currency of a foreign operation is the currency of a hyperinflationary
economy, then current purchasing power adjustments are made to its financial
statements prior to translation and the financial statements are translated into a
different presentation currency at the closing rate at the end of the current period.
However, if the presentation currency is not the currency of a hyperinflationaryeconomy, then comparative amounts are not restated.
When an entity disposes of an interest in a foreign operation, which includes losing
control over a foreign subsidiary, the cumulative exchange differences recognised in
other comprehensive income and accumulated in a separate component of equity
are reclassified to profit or loss. A partial disposal of a foreign subsidiary may lead
to a proportionate reclassification to NCI, while other partial disposals result in a
proportionate reclassification to profit or loss.
An entity may present its financial statements in a currency other than its functionalcurrency (presentation currency).
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When financial statements are translated into a presentation currency other than the
entitys functional currency, the entity uses the same method as for translating the
financial statements of a foreign operation.
An entity may present supplementary financial information in a currency other than its
presentation currency if certain disclosures are made.
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2.8 Accounting policies, errors and estimates (IAS 1, IAS 8)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Accounting policiesare the specific principles, bases, conventions, rules and practices
that an entity applies in preparing and presenting financial statements.
A hierarchy of alternative sources is specified when IFRSs do not cover a particular
issue. Unless otherwise permitted specifically by an IFRS, the accounting policies adopted by
an entity are applied consistently to all similar items.
An accounting policy is changed in response to a new or revised IFRS, or on a voluntary
basis if the new policy is more appropriate.
Generally, accounting policy changes and corrections of prior period errors are made by
adjusting opening equity and restating comparatives unless this is impracticable.
Changes in accounting estimates are accounted for prospectively.
When it is difficult to determine whether a change is a change in accounting policy or a
change in estimate, it is treated as a change in estimate.
Comparatives are restated unless impracticable if the classification or presentation of
items in the financial statements is changed.
A statement of financial position as at the beginning of the earliest comparative period
is presented when an entity restates comparative information following a change in
accounting policy, correction of an error, or reclassification of items in the financialstatements.
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2.9 Events after the reporting period (IAS 1, IAS 10)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
The financial statements are adjusted to reflect events that occur after the end of the
reporting period, but before the financial statements are authorised for issue, if those
events provide evidence of conditions that existed at the end of the reporting period.
Financial statements are not adjusted for events that are indicative of conditions thatarose after the end of the reporting period, except when the going concern assumption
no longer is appropriate.
Dividends declared after the end of the reporting period are not recognised as a liability
in the financial statements.
Liabilities generally are classified as current or non-current based on circumstances at
the end of the reporting period.
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3. SPECIFIC STATEMENT OF FINANCIALPOSITION ITEMS
3.1 General (IAS 1)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Generally an entity presents its statement of financial position classified between
current and non-current assets and liabilities. An unclassified statement of financial
position based on the order of liquidity is acceptable only when it provides reliable and
more relevant information.
While IFRSs require certain items to be presented in the statement of financial position,
there is no prescribed format.
A liability that is payable on demand because certain conditions are breached is
classified as current even if the lender has agreed, after the end of the reporting periodbut before the financial statements are authorised for issue, not to demand repayment.
Assets and liabilities that are part of working capital are classified as current even if they
are due to be settled more than 12 months after the end of the reporting period.
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3.2 Property, plant and equipment (IAS 16, IFRIC 1, IFRIC 18)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Property, plant and equipment is recognised initially at cost.
Cost includes all expenditure directly attributable to bringing the asset to the location
and working condition for its intended use.
Cost includes the estimated cost of dismantling and removing the asset and restoringthe site.
Changes to an existing decommissioning or restoration obligation generally are added
to or deducted from the cost of the related asset and depreciated prospectively over
the remaining useful life of the asset.
Property, plant and equipment is depreciated over its useful life.
An item of property, plant and equipment is depreciated even if it is idle, but not if it is
held for sale.
Estimates of useful life and residual value, and the method of depreciation, are
reviewed at least at each annual reporting date. Any changes are accounted for
prospectively as a change in estimate.
When an item of property, plant and equipment comprises individual components
for which different depreciation methods or rates are appropriate, each component is
depreciated separately.
Subsequent expenditure is capitalised only when it is probable that it will give rise tofuture economic benefits.
Property, plant and equipment may be revalued to fair value if fair value can be
measured reliably. All items in the same class are revalued at the same time and the
revaluations are kept up to date.
Compensation for the loss or impairment of property, plant and equipment is
recognised in profit or loss when receivable.
The gain or loss on disposal is the difference between the net proceeds received and
the carrying amount of the asset.
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FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included in
individual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes a
comprehensive disclosure framework for fair value measurements. See 1.2 for further
details.
IFRS 13 also amends IAS 16 as regards its disclosure requirements for assets carried at
revalued amounts, with new additional requirements being included within IFRS 13 forsuch assets. See 1.2 for further details.
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3.3 Intangible assets and goodwill (IFRS 3, IAS 38, SIC-32)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
An intangible assetis an identifiable non-monetary asset without physical substance.
An intangible asset is identifiableif it is separable or arises from contractual or legal
rights.
Intangible assets generally are recognised initially at cost.
The initial measurement of an intangible asset depends on whether it has been
acquired separately, as part of a business combination, or was generated internally.
Goodwill is recognised only in a business combination and is measured as a residual.
Acquired goodwill and other intangible assets with indefinite useful lives are not
amortised, but instead are subject to impairment testing at least annually.
Intangible assets with finite useful lives are amortised over their expected useful lives.
Subsequent expenditure on an intangible asset is capitalised only if the definition of an
intangible asset and the recognition criteria are met.
Intangible assets may be revalued to fair value only if there is an active market.
Internal research expenditure is expensed as incurred. Internal development
expenditure is capitalised if specific criteria are met. These capitalisation criteria are
applied to all internally developed intangible assets.
Advertising and promotional expenditure is expensed as incurred. Expenditure on relocation or a re-organisation is expensed as incurred.
The following are not capitalised as intangible assets: internally generated goodwill,
costs to develop customer lists, start-up costs and training costs.
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FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included in
individual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes a
comprehensive disclosure framework for fair value measurements.
In particular, IFRS 13 deletes the definition of an active market in IAS 38; the definition in
IFRS 13 is applied instead. An active marketis a market in which transactions for the asset
or liability take place with sufficient frequency and volume for pricing information to beprovided on an ongoing basis. See 1.2 for further details.
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FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included in
individual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes a
comprehensive disclosure framework for fair value measurements.
In particular, IFRS 13 deletes the guidance in paragraph 51 of IAS 40. As a result, an entity
may include future cash flows arising from planned improvements to the extent that they
reflect the assumptions of market participants.
See 1.2 for further details.
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3.5 Investments in associates and the equity method (IAS 28)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
The definition of an associate is based on significant influence, which is the power to
participate in the financial and operating policies of an entity.
There is a rebuttable presumption of significant influence if an entity holds 20 to
50 percent of the voting rights of another entity. Potential voting rights that are currently exercisable are considered in assessing
significant influence.
Generally, associates are accounted for using the equity method in the consolidated
financial statements.
Venture capital organisations, mutual funds, unit trusts and similar entities may elect to
account for investments in associates as financial assets.
Equity accounting is not applied to an investee that is acquired with a view to itssubsequent disposal if the criteria are met for classification as held for sale.
In applying the equity method, an associates accounting policies should be consistent
with those of the investor.
The reporting date of an associate may not differ from the investors by more than three
months, and should be consistent from period to period. Adjustments are made for the
effects of significant events and transactions between the two dates.
When an equity-accounted investee incurs losses, the carrying amount of the investorsinterest is reduced but not to below zero. Further losses are recognised by the investor
only to the extent that the investor has an obligation to fund losses or has made
payments on behalf of the investee.
Unrealised profits and losses on transactions with associates are eliminated to the
extent of the investors interest in the investee.
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In our view, when an entity contributes a controlling interest in a subsidiary in exchange
for an interest in an associate, the entity may choose to either recognise the gain or loss
in full or eliminate the gain or loss to the extent of the investors interest in the investee.
A loss of significant influence or joint control is an economic event that changes
the nature of the investment. The fair value of any retained investment is taken into
account to calculate the gain or loss on the transaction, as if the investment were fully
disposed of. This gain or loss is recognised in profit or loss. Amounts recognised in other
comprehensive income are reclassified or transferred as required by other IFRSs.
FORTHCOMINGREQUIREMENTS
VENTURECAPITALORGANISATIONSANDSIMILARENTITIES
IAS 28 (2011) retains the exception for venture capital organisations, and certain
similar entities, although it is now characterised as a measurement rather than a scope
exception. The exception also applies to a portion of an investment in an associate held by
such entities. However, it does not apply to a portion of an investment in an IFRS 11 joint
venture (currently jointly controlled entity).
CLASSIFICATIONASHELDFORSALE
IAS 28 (2011) contains more specific provisions in respect of the application of IFRS 5 to
investments in associates or joint ventures. IFRS 5 applies to an investment, or a portion
of an investment, in an associate or a joint venture that meets the criteria for classification
as held for sale. For any retained portion of the investment that has not been classified as
held for sale, the entity applies the equity method until disposal of the portion classified
as held for sale. After disposal, any retained interest in the investment is accounted for in
accordance with IAS 39 or by using the equity method if the retained interest continues to
be an associate or a joint venture.
MEASUREMENTOFINVESTMENTS
On the adoption of IFRS 9, all equity investments are measured at fair value, including
retrospectively by restatement if the investments were held at cost under paragraph 46(c)
of IAS 39 prior to adoption of IFRS 9. In addition, the cumulative gain or loss in other
comprehensive income may be transferred within equity but will not be reclassified to
profit or loss.
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CHANGEINOWNERSHIPINTEREST
If an entitys ownership interest in an equity-accounted investee is reduced, but the
equity method continues to be applied, then an entity reclassifies to profit or loss any
equity-accounted gain or loss previously recognised in other comprehensive income in
proportion to the reduction in the ownership interest. IAS 28 (2011) makes clear that such
reclassification applies only if that gain or loss would be required to be reclassified to profit
or loss on disposal of the related asset or liability. Cumulative translation adjustments
on foreign operations are an example of such a gain or loss that is now proportionately
reclassified in such circumstances.
Under IAS 28 (2011), if an investment in an associate becomes an investment in a joint
venture, or vice versa, then the equity method continues to be applied and there is no
remeasurement of the retained interest.
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3.6 Investments in joint ventures and proportionateconsolidation (IAS 31, SIC-13)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Ajoint ventureis an entity, asset or operation that is subject to contractually established
joint control.
Jointly controlled entities may be accounted for either by proportionate consolidation orusing the equity method in the consolidated financial statements.
Venture capital organisations, mutual funds, unit trusts and similar entities may elect to
account for investments in jointly controlled entities as financial assets.
Proportionate consolidation is not applied to an investee that is acquired with a view to
its subsequent disposal if the criteria are met for classification as held for sale.
Unrealised profits and losses on transactions with jointly controlled entities are
eliminated to the extent of the investors interest in the investee.
Gains and losses on non-monetary contributions, other than a subsidiary, in return
for an equity interest in a jointly controlled entity generally are eliminated to the
extent of the investors interest in the investee.
In our view, when an entity contributes a controlling interest in a subsidiary in exchange
for an interest in a jointly controlled entity, the entity may choose to either recognise the
gain or loss in full or eliminate the gain or loss to the extent of the investors interest in
the investee.
A loss of joint control is an economic event that changes the nature of the investment.
The fair value of any retained investment is taken into account to calculate the gain or
loss on the transaction, as if the investment were fully disposed of. This gain or loss is
recognised in profit or loss. Amounts recognised in other comprehensive income are
reclassified or transferred as required by other IFRSs.
For jointly controlled assets, the investor accounts for its share of the jointly controlled
assets, the liabilities and expenses it incurs and its share of any income or output.
For jointly controlled operations, the investor accounts for the assets it controls, theliabilities and expenses it incurs and its share of the income from the joint operation.
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FORTHCOMINGREQUIREMENTS
VENTURECAPITALORGANISATIONSANDSIMILARENTITIES
IAS 28 (2011) retains the exception for venture capital organisations, and certain
similar entities, although it is now characterised as a measurement rather than a scope
exception. The exception also applies to a portion of an investment in an associate held by
such entities. However, it does not apply to a portion of an investment in an IFRS 11 joint
venture (currently jointly controlled entity).
CLASSIFICATIONASHELDFORSALE
IAS 28 (2011) contains more specific provisions in respect of the application of IFRS 5 to
investments in associates or joint ventures. IFRS 5 applies to an investment, or a portion
of an investment, in an associate or a joint venture that meets the criteria for classification
as held for sale. For any retained portion of the investment that has not been classified as
held for sale, the entity applies the equity method until disposal of the portion classified
as held for sale. After disposal, any retained interest in the investment is accounted for in
accordance with IAS 39 or by using the equity method if the retained interest continues to
be an associate or a joint venture.
NON-MONETARYCONTRIBUTIONSBYVENTURERS
SIC-13 has been substantially incorporated into IAS 28 (2011). However, two of the pre-
conditions for the recognition of a gain or loss were not carried forward as they were not
considered necessary, namely:
the transfer of significant risks and rewards; and
the reliable measurement of the gain or loss.
ACCOUNTINGFORJOINTLYCONTROLLEDENTITIES
Under IFRS 11, all joint ventures are accounted for using the equity method in accordance
with IAS 28 (2011), unless the entity is exempt from applying the equity method. The
option to use proportionate consolidation has been eliminated by IFRS 11. See 3.6A for
further details.
Under IAS 28 (2011), if an investment in an associate becomes an investment in a joint
venture, or vice versa, then the equity method continues to be applied and there is noremeasurement of the retained interest.
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3.6A Investments in joint arrangements (IFRS 11)
OVERVIEWOFFORTHCOMINGREQUIREMENTS
Ajoint arrangementis an arrangement over which two or more parties have joint
control. There are two types of joint arrangements: a joint operation and a joint venture.
In ajoint operation, the parties to the arrangement have rights to the assets and
obligations for the liabilities related to the arrangement. In ajoint venture, the parties to the arrangement have rights to the net assets of the
arrangement.
A joint arrangement not structured through a separate vehicle is a joint operation.
A joint arrangement structured through a separate vehicle may be either a joint
operation or a joint venture, depending on the legal form of the vehicle, contractual
arrangement and other facts and circumstances of the arrangement.
Generally, a joint venturer accounts for its interest in a joint venture using the equitymethod in accordance with IAS 28 (2011).
A joint operator recognises, in relation to its involvement in a joint operation, its assets,
liabilities and transactions, including its share in those arising jointly, and accounts for
them in accordance with the relevant IFRSs.
All parties to a joint arrangement are within the scope of IFRS 11, even if they do not
have joint control.
A party to a joint operation, who does not have joint control, recognises its assets,liabilities and transactions, including its share in those arising jointly if it has rights to the
assets and obligations for the liabilities of the joint operation.
A party to a joint venture, who does not have joint control, accounts for its interest in
accordance with IAS 39, or IAS 28 (2011) if significant influence exists.
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3.8 Inventories (IAS 2)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Generally, inventories are measured at the lower of cost and net realisable value.
Cost includes all direct expenditure to get inventory ready for sale, including attributable
overheads.
The cost of inventory generally is determined using the first-in, first-out (FIFO) orweighted average method. The use of the last-in, first-out (LIFO) method is prohibited.
Other cost formulas, such as the standard cost or retail method, may be used when the
results approximate actual cost.
The cost of inventory is recognised as an expense when the inventory is sold.
Inventory is written down to net realisable value when net realisable value is less
than cost.
If the net realisable value of an item that has been written down subsequently
increases, then the write-down is reversed.
FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 deletes the fair value measurement guidance currently included in paragraph 7
of IAS 2; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishes
a comprehensive disclosure framework for fair value measurements. See 1.2 for
further details.
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3.9 Biological assets (IAS 41)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Biological assets are measured at fair value less costs to sell unless it is not possible to
measure fair value reliably, in which case they are measured at cost.
All gains and losses from changes in fair value less costs to sell are recognised in profit
or loss. Agricultural produce harvested from a biological asset is measured at fair value less
costs to sell at the point of harvest.
FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes
a comprehensive disclosure framework for fair value measurements. See 1.2 for
further details.
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3.10 Impairment of non-financial assets (IAS 36, IFRIC 10)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
IAS 36 covers the impairment of a variety of non-financial assets, including property,
plant and equipment; intangible assets and goodwill; investment property; biological
assets carried at cost less accumulated depreciation; and investments in subsidiaries,
joint ventures and associates.
Impairment testing is required when there is an indication of impairment.
Annual impairment testing is required for goodwill and intangible assets that either are
not yet available for use or have an indefinite useful life. This impairment test may be
performed at any time during the year provided that it is performed at the same time
each year.
Goodwill is allocated to cash-generating units (CGUs) or groups of CGUs that are
expected to benefit from the synergies of the business combination from which it
arose. The allocation is based on the level at which goodwill is monitored internally,restricted by the size of the entitys operating segments.
Whenever possible an impairment test is performed for an individual asset. Otherwise,
assets are tested for impairment in CGUs. Goodwill always is tested for impairment at
the level of a CGU or a group of CGUs.
A CGU is the smallest group of assets that generates cash inflows from continuing use
that are largely independent of the cash inflows of other assets or groups thereof.
The carrying amount of goodwill is grossed up for impairment testing if the goodwillarose in a transaction in which non-controlling interests were measured initially based
on their proportionate share of identifiable net assets.
An impairment loss is recognised if an assets or CGUs carrying amount exceeds the
greater of its fair value less costs to sell and value in use, which is based on the net
present value of future cash flows.
Estimates of future cash flows used in the value in use calculation are specific to the
entity and need not be the same as those of market participants.
The discount rate used in the value in use calculation reflects the markets assessment
of the risks specific to the asset or CGU, as well as the time value of money.
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An impairment loss for a CGU is allocated first to any goodwill and then pro ratato other
assets in the CGU that are within the scope of IAS 36.
An impairment loss generally is recognised in profit or loss. However, an impairment
loss on a revalued asset is recognised in other comprehensive income, and presented
in the revaluation reserve within equity, to the extent that it reverses a previous
revaluation surplus related to the same asset. Any excess is recognised in profit or loss.
Reversals of impairment are recognised, other than for impairments of goodwill.
A reversal of an impairment loss generally is recognised in profit or loss. However, a
reversal of an impairment loss on a revalued asset is recognised in profit or loss only tothe extent that it reverses a previous impairment loss recognised in profit or loss related
to the same asset. Any excess is recognised in other comprehensive income and
presented in the revaluation reserve.
FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included in
individual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes
a comprehensive disclosure framework for fair value measurements. See 1.2 for
further details.
Regarding the use of depreciated replacement cost to determine fair value less costs of
disposal, this method is not ruled out by IFRS 13 assuming that market participants would
value the asset or CGU in this manner.
At this early stage it is not clear whether the fair value less costs of disposal of a
listed subsidiary that constitutes a CGU could be valued taking into account a control
premium. On the one hand, the unit of account in accordance with IAS 36 is the CGU (the
subsidiary) as a whole, which implies that a control premium may be appropriate. But on
the other hand, IFRS 13 states that when a Level 1 input (i.e. fair values measured using
quoted prices (unadjusted) in active markets for identical assets or liabilities) is available
for an asset or liability, it is used without adjustment except in specific circumstances that
do not apply in this case.
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Fair value less costs of disposal of an associate
In determining the fair value less costs of disposal of an associate, IFRS 13 allows a
premium to be added to fair value measurements in certain circumstances. However,
there is uncertainty as to whether this is possible when the shares of an equity-accounted
investee are publicly traded.
INVESTMENTSINJOINTVENTURES
Under IFRS 11, joint ventures (currently jointly controlled entities) are accounted for using
the equity method and the option of using proportionate consolidation is eliminated. Ontransition, the guidance on impairment testing for associates applies to investments in
joint ventures. See 3.6A for further details.
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3.12 Provisions, contingent assets and liabilities (IAS 37, IFRIC 1, IFRIC 5, IFRIC 6)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
A provision is recognised for a legal or constructive obligation arising from a past event,
if there is a probable outflow of resources and the amount can be estimated reliably.
Probablein this context means more likely than not.
A constructive obligationarises when an entitys actions create valid expectations ofthird parties that it will accept and discharge certain responsibilities.
A provision is measured at the best estimate of the expenditure to be incurred.
If there is a large population, then the obligation generally is measured at its
expected value.
Provisions are discounted if the effect of discounting is material.
A reimbursement right is recognised as a separate asset when recovery is virtually
certain, capped at the amount of the related provision.
A provision is not recognised for future operating losses.
A provision for restructuring costs is not recognised until there is a formal plan and
details of the restructuring have been communicated to those affected by the plan.
Provisions are not recognised for repairs or maintenance of own assets or for self-
insurance prior to an obligation being incurred.
A provision is recognised for a contract that is onerous, i.e. one in which the
unavoidable costs of meeting the obligations under the contract exceed the benefits tobe derived.
Contingent liabilitiesare present obligations with uncertainties about either the
probability of outflows of resources or the amount of the outflows, and possible
obligations whose existence is uncertain.
Contingent liabilities are not recognised except for contingent liabilities that represent
present obligations in a business combination.
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Income tax related to items recognised outside profit or loss is itself recognised outside
profit or loss.
FORTHCOMINGREQUIREMENTS
TAXBASEOFINVESTMENTPROPERTY
Deferred Tax: Recovery of Underlying Assets Amendments to IAS 12introduces a
rebuttable presumption that the carrying amount of investment property measured at
fair value will be recovered through sale. Therefore, deferred taxes arising from suchinvestment property are measured based on the tax consequences resulting from
recovering the carrying amount of the investment property entirely through sale.
The presumption is rebutted if the investment property is depreciable and held in a
business model whose objective is to consume substantially all of the economic benefits
of the investment property through use.
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4. SPECIFIC STATEMENT OF COMPREHENSIVEINCOME ITEMS
4.1 General (IAS 1)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
A statement of comprehensive income is presented as either a single statement or an
income statement (displaying components of profit or loss) with a separate statement
of comprehensive income (beginning with profit or loss and displaying components
of other comprehensive income).
While IFRSs require certain items to be presented in the statement of comprehensive
income, there is no prescribed format.
An analysis of expenses is required, either by nature or by function, in the statement of
comprehensive income or in the notes.
Material items of income or expense are presented separately either in the notes or, when
necessary, in the statement of comprehensive income.
The presentation or disclosure of items of income and expense characterised as
extraordinary items is prohibited.
Items of income and expense are not offset unless required or permitted by another
IFRS, or when the amounts relate to similar transactions or events that are not material.
In our view, components of profit or loss should not be presented net of tax unless
required specifically.
Reclassification adjustments from other comprehensive income to profit or loss are
disclosed in the statement of comprehensive income or in the notes to the financial
statements.
Amounts of income tax related to each component of other comprehensive income are
disclosed in the statement of comprehensive income or in the notes.
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FORTHCOMINGREQUIREMENTS
PRESENTATIONOFOTHERCOMPREHENSIVEINCOME
Presentation of Other Comprehensive Income Amendments to IAS 1amends IAS 1 to:
require an entity to present separately the items of other comprehensive income that
would be reclassified to profit or loss in the future if certain conditions are met from
those that would never be reclassified to profit or loss. Consequently an entity that
presents items of other comprehensive income before related tax effects would also
have to allocate the aggregated tax amount between these sections; and
change the title of the statement of comprehensive income to the statement of profit
or loss and other comprehensive income. However, an entity is still allowed to use
other titles.
In addition, IFRS 9 impacts whether certain items can be presented in other
comprehensive income and whether items presented in other comprehensive income
can be reclassified to profit or loss.
SEPARATEPRESENTATIONONFACEOFSTATEMENTOFCOMPREHENSIVEINCOME
Under IFRS 9, the following items are separately disclosed on the face of the statement of
comprehensive income:
gains and losses arising from the derecognition of financial assets measured at
amortised cost; and
any gain or loss arising as a result of a difference between a financial assets previous
carrying amount and its fair value at the reclassification date (as defined in IFRS 9) if the
financial asset is reclassified so that it is measured at fair value.
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4.2 Revenue (Conceptual Framework, IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, SIC-27,SIC-31)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Revenue is recognised only if it is probable that future economic benefits will flow to
the entity and these benefits can be measured reliably.
Revenue includes the gross inflows of economic benefits received by an entity for itsown account. In an agency relationship, amounts collected on behalf of the principal are
not recognised as revenue by the agent.
When an arrangement includes more than one component, it may be necessary to
account for the revenue attributable to each component separately.
Revenue from the sale of goods is recognised when the entity has transferred the
significant risks and rewards of ownership to the buyer and it no longer retains control
or has managerial involvement in the goods.
Revenue from service contracts is recognised in the period during which the service is
rendered, generally using the percentage of completion method.
Construction contracts are accounted for using the percentage of completion method.
The completed contract method is not permitted.
Revenue recognition does not require cash consideration. However, when goods or
services exchanged are similar in nature and value, the transaction does not generate
revenue.
FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included in
individual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes a
comprehensive disclosure framework for fair value measurements.
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IFRS 13 also amends IFRIC 13 to specify that non-performance risk also is taken into
account when measuring the value of the award credits.
See 1.2 for further details.
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4.3 Government grants (IAS 20, IAS 41, SIC-10)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
Government grants that relate to the acquisition of an asset, other than a biological
asset measured at fair value less costs to sell, may be recognised either as a reduction
in the cost of the asset or as deferred income, and are amortised as the related asset is
depreciated or amortised.
Unconditional government grants related to biological assets measured at fair value
less costs to sell are recognised in profit or loss when they become receivable;
conditional grants for such assets are recognised in profit or loss when the required
conditions are met.
Other government grants are recognised in profit or loss when the entity recognises as
expenses the related costs that the grants are intended to compensate.
When a government grant is in the form of a non-monetary asset, both the asset and
grant are recognised at either the fair value of the non-monetary asset or the nominalamount paid.
FORTHCOMINGREQUIREMENTS
FAIRVALUEMEASUREMENT
IFRS 13 replaces most of the fair value measurement guidance currently included in
individual IFRSs; the general valuation principles in IFRS 13 are applied instead. It provides
a single definition of fair value and fair value application guidance, and establishes
a comprehensive disclosure framework for fair value measurements. See 1.2 for
further details.
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4.4 Employee benefits (IAS 19, IFRIC 14)
OVERVIEWOFCURRENTLYEFFECTIVEREQUIREMENTS
IFRSs specify accounting requirements for all types of employee benefits, and not
just pensions. IAS 19 deals with all employee benefits, except those to which IFRS 2
applies.
Post-employment benefitsare employee benefits that are payable after the completionof employment (before or during retirement).
Short-term employee benefitsare employee benefits that are due to be settled within
one year after the end of the period in which the services have been rendered.
Other long-term employee benefitsare employee benefits that are not due to be settled
within one year after the end of the period in which the services have been rendered.
Liabilities for employee benefits are recognised on the basis of a legal or constructive
obligation.
Liabilities and expenses for employee benefits generally are recognised in the period in
which the services are rendered.
Costs of providing employee benefits generally are expensed unless other IFRSs permit
or require capitalisation, e.g. IAS 2 or IAS 16.
A defined contribution planis a post-employment benefit plan under which the
employer pays fixed contributions into a separate entity and has no further obligations.
All other post-employment plans are defined benefit plans.
Contributions to a defined contribution plan are expensed as the obligation to make the
payments is incurred.
A liability is recognised for an employers obligation under a defined benefit plan. The
liability and expense are measured actuarially using the projected unit credit method.
Assets that meet the definition of plan assets, including qualifying insurance policies,
and the related liabilities are presented on a net basis in the statement of financial
position.
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Actuarial gains and losses of defined benefit plans may be recognised in profit or
loss, or immediately in other comprehensive income. Amounts recognised in other
comprehensive income are not reclassified to profit or loss.
If actuarial gains and losses of a defined benefit plan are recognised in profit or loss,
then as a minimum gains and losses that exceed a corridor are required to be
recognised over the average remaining working lives of employees in the plan. Faster
recognition (including immediate recognition) in profit or loss is permitted.
Liabilities and expenses for vested past service costs under a defined benefit plan are
recognised immediately. Liabilities and expenses for unvested past service costs under a defined benefit plan
are recognised over the vesting period.
If a defined benefit plan has assets in excess of the obligation, then the amount of
any net asset recognised is limited to available economic benefits from the plan in the
form of refunds from the plan or reductions in future contributions to the plan, and
unrecognised actuarial losses and past service costs.
Minimum funding requirements give rise to a liability if a surplus arising from the
additional contributions paid to fund an existing shortfall with respect to services
already received is not fully available as a refund or reduction in future contributions.
If insufficient information is available for a multi-employer defined benefit plan to be
accounted for as a defined benefit plan, then it is treated as a defined contribution plan
and additional disclosures are required.
If an entity applies defined contribution plan accounting to a multi-employer defined
benefit plan and there is an agreement that determines how a surplus in the plan would
be distributed or a deficit in the plan funded, then an asset or liability that arises from thecontractual agreement is recognised.
If there is a contractual agreement or stated policy for allocating a groups net defined
benefit cost, then participating group entities recognise the cost allocated to them. If
there is no agreement or policy in place, then the net defined benefit cost is recognised
by the entity that is the legal sponsor.
The expense for long-term employee benefits is accrued over the service period.
Redundancy costs are not recognised until the redundancy has been communicated to
the group of affected employees.
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FORTHCOMINGREQUIREMENTS
REVISEDEMPLOYEEBENEFITSREQUIREMENTS
IAS 19 (2011) changes the definition of both short-term and other long-term employee
benefits so that it is clear that the distinction between the two depends on when the entity
expects the benefit to be settled. Under the amended definitions:
short-term employee benefitsare those employee benefits (other than termination
benefits) that are expected to be settled wholly before 12 months after the end of the
annual reporting period in which the employees render the related service; and
other long-term employee benefitsare defined by default as being all employee benefits
other than short-term benefits, post-employment benefits and termination benefits.
IAS 19 (2011) also provides new guidance about the need or otherwise to reclassify
between short-term and other long-term benefits. Reclassification of a short-term
employee benefit as long-term need not occur if the entitys expectations of the timing
of settlement change temporarily. However, the benefit will have to be reclassified if the
entitys expectations of the timing of settlement change other than temporarily.
In addition, IAS 19 (2011) includes a requirement to consider the classification of a benefitif its characteristics change, giving the example of a change from a non-accumulating to an
accumulating benefit. In this case, the entity will need to consider whether the benefit still
meets the definition of a short-term employee benefit.
Multi-employer plans
IAS 19 (2011) sets out the accounting to be applied when participation in a multi-employer
plan ceases. The new requirement is that an entity should apply IAS 37 when determining
when to recognise and how to measure a liability that arises from the wind-up of a multi-employer defined benefit plan, or the entitys withdrawal from a multi-employer defined
benefit plan.
Expected return on plan assets
IAS 19 (2011) changes the manner in which interest cost is calculated. The expected return
on plan assets will no longer be calculated and recognised as interest income.
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Taxes payable by the plan
IAS 19 (2011) distinguishes between taxes payable by the plan on contributions related to
service before the reporting date or on benefits resulting from that service and all other
taxes payable by the plan. An actuarial assumption is made about the first type of taxes,
which are taken into account in measuring current service cost and the defined benefit
obligation. All other taxes payable by the plan are included in the return on plan assets.
Plan administration costs
Under IAS 19 (2011) the costs of managing plan assets reduce the return on plan assets.No specific requirements regarding the accounting for other administration costs are
provided. However, the Basis for Conclusions notes that the IASB decided that an entity
should recognise administration costs when the administration services are provided.
Therefore, the currently permitted inclusion of such costs within the measurement of the
defined benefit obligation will cease to be allowed under IAS 19 (2011). Instead they will be
treated as an expense within profit or loss.
Risk-sharing features and contributions from employees or third parties
Under IAS 19 (2011) the measurement of the defined benefit obligation takes into
consideration risk-sharing features and contributions from employees or third parties that
are not reimbursement rights.
IAS 19 (2011) distinguishes between discretionary contributions and contributions that are
set out in the formal terms of the plan, and provides guidance on accounting for both.
Discretionary contributions by employees or third parties reduce service costs on
payment of the contributions to the plan, i.e. the increase in plan assets is recognised
as a reduction of service costs.
Contributions that are set out in the formal terms of the plan either:
reduce service costs, if they are linked to service, by being attributed to periods of
service as a negative benefit (i.e. the net benefit is attributed to periods of service); or
reduce remeasurements of the net defined liability (asset), if the contributions are
required to reduce a deficit arising from losses on plan assets or actuarial losses.
Under IAS 19 (2011), actuarial assumptions include the best estimate of the effect of
performance targets or other criteria. For example, the terms of a plan may state that itwill pay reduced benefits or require additional contributions from employees if the plan
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assets are insufficient. These kinds of criteria are reflected in the measurement of the
defined benefit obligation, regardless of whether the changes in benefits resulting from
the criteria either being or not being met are automatic or are subject to a decision by the
entity, by the employee or by a third party such as the trustee or administrators of the plan.
Optionality included in the plan
Under IAS 19 (2011) actuarial assumptions include an assumption about the proportion
of plan members who will select each form of settlement option available under the plan
terms. Therefore, when the employees are able to choose the form of the benefit (e.g.
lump sum payment vs annual pension), the entity would make an actuarial assumptionabout what proportion would make each choice. As a result, an actuarial gain or loss will
arise if the choice of settlement taken by the employee is not the one that the entity has
assumed will be taken.
Other actuarial assumptions
IAS 19 (2011) includes some limited changes to other actuarial assumptions, which are not
expected to change current practice significantly, as follows:
an entity includes current estimates of expected changes in mortality assumptions;
various factors are set out that should be taken into account in estimating future
salary increases, such as inflation, promotion and supply and demand in the
employment market; and
any limits to the contributions that an entity is required to make are included in the
calculation of the ultimate cost of the benefit, over the shorter of the expected life of the
entity and the expected life of the plan.
Defined benefit plans Recognition
Under IAS 19 (2011) the net defined benefit liability (asset) is recognised in the statement
of financial position. This is:
(a) the present value of the defined benefit obligation; less
(b) the fair value of any plan assets (together, the deficit or surplus in a defined benefit
plan); adjusted for
(c) any effect of limiting a net defined benefit asset to the asset ceiling.
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All changes in the value of the defined benefit obligation, in the value of plan assets and in
the effect of the asset ceiling, are recognised immediately. Therefore IAS 19 (2011):
eliminates the corridor method, by requiring immediate recognition of actuarial gains
and losses; and
requires immediate recognition of all past service costs, including unvested amounts,
at the earlier of:
when the related restructuring costs are recognised if a plan amendment arises as
part of a restructuring;
when the related termination benefits are recognised if a plan amendment is linked
to termination benefits; and
when the plan amendment occurs.
Defined benefit plans Presentation
Under IAS 19 (2011) the cost of defined benefit plans includes the following components:
service cost recognised in profit or loss; net interest on net defined benefit liability (asset) recognised in profit or loss; and
remeasurements of the defined benefit liability (asset) recognised in other
comprehensive income.
Net interest on the net defined benefit liability (asset)
Under IAS 19 (2011) net interest on the net defined benefit liability (asset)is the change during
the period in the net defined benefit liability (asset) that arises from the passage of time.
Specifically, under the amended standard, the net interest income or expense on the net
defined benefit liability (asset) is determined by applying the discount rate used to measure
the defined benefit obligation at the start of the annual period to the net defined benefit liability
(asset) at the start of the annual period, taking into account any changes in the net defined
benefit liability (asset) during the period as a result of contribution and benefit payments.
The net interest on the net defined benefit liability (asset) can be disaggregated into:
interest cost on the defined benefit obligation;
interest income on plan assets; and
interest on the effect of the asset ceiling.
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As the approach taken by IAS 19 (2011) is to calculate and recognise the net interest on the
net defined benefit liability (asset) in profit or loss, the net interest income or expense will
be presented in one line item, as opposed to the currently available policy of including the
gross amounts of interest cost and expected return on plan assets with interest and other
financial income respectively.
Remeasurements
Under IAS 19 (2011) remeasurements of a net defined benefit liability (asset) are
recognised in other comprehensive income and comprise:
actuarial gains and losses on the defined benefit obligation;
the return on plan assets, excluding amounts included in the net interest on the net
defined benefit liability (asset); and
any change in the effect of the asset ceiling, excluding amounts included in the net
interest on the net defined benefit liability (asset).