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Second Wave Of International Financial Reporting Standards (IFRSs) 2009

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    Notes on slide 1

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    Date There are a number of approaches discussed by the FASB and others. Today we are going to mention four of these models that appear to be attracting most attention. Let’s first look at the ownership approach which is the preferred approach from the FASB. This takes a very narrow view of equity where basically common shares and maybe a few others such as instruments puttable at fair value are classified as equity. So instruments such as convertible bonds and warrants would be classified as equity. Our preliminary view is that this view of equity is too restrictive as instruments that we think of as equity, such as a warrant over own shares, are not included. There is also a measurement issue as many of these instruments would need to be fair valued with volatility taken to profit or loss account. The second model is known as “ownership settlement”. This is the approach that is the closest approximation to where we currently are with IAS 32.. However IAS 32 defines liabilities with the residual being equity whereas all these approaches define equity.. i.e. ownership/settlement typically gets to the same outcome as IAS 32 but through a different route. There would still be bifurcation as we are used to at the moment – however by defining equity, the issue of determining whether there is a contractual obligation is reduced. As an interim measure this is likely to be our firm’s preferred approach, solving some of the issues of IAS 32 whilst being the most similar to what we are used to. The next model is one that the German standard setters have developed under the EFRAG banner - the loss absorption method. Here the determinant of what is debt and equity is who absorbs the losses. This approach is largely based upon the legal form of an instrument, so we are not currently expecting to support this model. Lastly… and perhaps the most radical…. is the claims approach where you don’t make a cut off at all – but rather rank the claims on the entity in order of subordination – sometimes referred to as the “washing line approach”. In the current accounting environment it is perhaps easier said than done since it moves away from conventional balance sheet presentation and creates big measurement and presentation issues in the income statement. We think this approach has some merit but we think the Boards would need to progress their conceptual framework project and financial reporting model much further before they could decide whether this approach should be taken further. The puttables amendment helps to address an issue with the current standard but it is more of a bandaid than a conceptually valid amendment. The puttables amendment does not follow the same principles we have been discussing to date. If you think about the underlying principle of a cash settled financial instrument, the instrument is classified as a financial liability where there is a contractual obligation to deliver cash. The puttables amendment says that although there is a contractual obligation to deliver cash, there are certain circumstances where you could still classify an instrument as equity. So what are these? The amendment has a very limited scope: it only deals with certain puttable instruments and certain finite life entities. Before the amendment all puttable instruments would be classified as a liability as the put gives the holder the right to put the instrument back to the issuer and the issuer is required to deliver cash. In the same way instruments issued to finite life entities were also all liabilities as there was a contractual obligation to deliver cash at the end of the life of the entity, and as the entity had a finite life this is certain to occur. The reason there is an anomaly is that in all other respects these instruments feel like equity.

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    Date Selected Q&A from IFRS News Supplement July/August 2008 (Olivier Scherer) Can borrowing costs incurred to finance the production of inventories that has a long production period, like wine or cheese, be capitalised? Yes. IAS 23R does not mandate the capitalisation of borrowing costs for inventories that are manufactured in large quantities on a repetitive basis but allows it as long as the production cycle takes a ‘substantial period of time’, as with wine or cheese. The choice to capitalise borrowing costs on those inventories is an accounting policy choice; management discloses it when material. An entity has no borrowings and uses its own cash resources to finance the construction of property, plant and equipment. Cash being used to finance the construction could otherwise have been used to earn interest. Can management capitalise a ‘notional’ borrowing cost representing the opportunity cost of the cash employed in financing the asset’s construction? No. A ‘notional’ borrowing cost cannot be capitalised. IAS 23R limits the amount that can be capitalised to the actual borrowing costs incurred. The standard states that it does not address actual or imputed cost of equity. The entity uses general borrowings to finance its qualifying assets. However, cash flows from the operating activities would be sufficient to finance the capital expenditures incurred during the period. Can management claim that the general borrowings are used to finance working capital and other transactions (for example, merger and acquisition activity, finance leases) but not to finance the qualifying assets, in which case no borrowing costs would be capitalised? No. It is presumed that any general borrowings in the first instance are used to finance the qualifying assets (after any funds specific to a qualifying asset). This is the case even where the cash flows from operating activities are sufficient to finance the capital expenditures. It may be appropriate, in some limited circumstances, to exclude some general borrowings from the calculation of the borrowing rate to the extent it does not result in a capitalisation rate of nil. Is interest on a finance lease of a qualifying asset capitalised as borrowing costs? Yes. Interest incurred for a finance lease is specific to an asset. Interest is capitalised if the asset is a qualifying asset or is used solely for the construction of a qualifying asset. For example, a crane or a dockyard is leased for the purpose of constructing a ship. The ship is a qualifying asset. The interest on the finance lease of the crane or dockyard is capitalised as borrowing costs. Borrowing costs on the finance lease can only be capitalised up to the point when the construction of the qualifying asset is complete.

    Date Notes for engagement teams This page contains notes for engagement teams. All other pages contain speaker notes to aid delivery. Content This presentation covers the significant aspects only of two new accounting standards: IFRS 3R Business combinations and IAS 27R Consolidated and separate financial statements. It uses a theme of ‘impact on earnings’, demonstrating how the new standards will affect clients’ earnings, at the time of a business combination and afterwards. It does not detail all the changes in the new standards and only discusses one difference with the equivalent US standards, FASs 141 and 160. It should not be used as a substitute for reading the accounting standards. Narrative The presentation is structured to start with the bigger picture of how IFRS and US GAAP have come together and how business combination accounting in IFRS has developed. There is a single slide on the principles of IFRS 3R. This may be deleted if desired. It then goes on to examine specific aspects of the new standards on ‘your client’, showing how they will affect clients’ earnings. The main part of the presentation is split between four aspects – consideration (what has been paid), goodwill, assets and liabilities (what has been acquired) and changes in ownership interest. There is a slide that engagement teams can tailor to give an example of how the standards would have impacted a specific acquisition undertaken by a client to ensure tht the presentation remains relevant to the client. The final section is on business issues, to bring the client back to actions that they may wish to take, and application. Views on the standard This presentation does not give any views on whether provisions of the standard are good or bad and nor does it comment on the IASB’s due process or any other aspects of the standard setting process. The presentation is a based on the standard having arrived and PwC helping its clients to implement it. If asked, PwC is on public record through the comment letter process as having objected to significant parts of the proposals. Outcome By the end of the presentation the client should be appraised of the main aspects of the standards and should have an understanding of how they will affect future business combinations and transactions with minority interests. Other tailoring required Client name on first slide Client name on slides 2, 3, 8, 21 Client name on header of slides 9-20 If delivered after November 2007 amend first slide and footer on master slide

    Date How did we get to where we are today? The new standards are key part of the convergence plan between US GAAP and IFRS, the ‘roadmap’. There is a view that convergence is all one way – for business combinations, at least, this is not correct. When IFRS 3 was issued in March 2004 it was a significant change from IAS 22 and was based on the US standard, FAS 141. We might have expected a converged standard to look at existing FAS 141 and IFRS 3 and to eliminate the differences. However, the FASB and the IASB were more ambitious: they have tried to achieve a whole new coherent and principles-based model for business combinations and accounting for transactions with minorities. Indeed, IFRS 3R, and FAS 141R, is actually a bigger change for US users than it is for the IFRS world. US GAAP has seen significant change to, among other things, accounting for step acquisitions, measurement of intangible assets, recognition of goodwill, classification of minority interest, as well as all the changes that IFRS users are dealing with. Perhaps one of the reasons why the exposure drafts were controversial on both sides of the Atlantic was because they proposed significant changes for both US GAAP and IFRS users who were getting used to applying relatively new standards. In any case, the Boards issued the exposure drafts in July 2005 and more than two years of discussion amongst constituents and the Boards later, we now have to implement the new standards. One other point to note – you will see from the diagram that the IFRS 3R and FAS 141R are not quite touching – although they are converged in almost all the principles and words, there are still some differences. Most of these are there because of the other standards in IFRS and US GAAP that are related to business combinations, such as those on provisions and impairment. I’m not going to cover the differences here but we have outlined them in our publication ‘IFRS 3R: impact on earnings’ which I can give you a copy of.

    Date The previous slide showed how IFRS and US GAAP have moved closer together. What about IFRS itself? IAS 22 was issued quite some years ago. Like many of the old IASs it contained quite a lot of choice. It allowed two methods of accounting for business combinations – either the pooling or predecessor method or the purchase method. Pooling was only allowed in certain defined circumstances, where there was a merger, but its use was not uncommon. There were two permitted ways of initially measuring minority interests – they could be recorded at their share of the fair value of net assets or at book value. Minority interest is now called non-controlling interest in IAS 27, NCI. Intangible assets were rarely recognised. Goodwill was recognised at the parent’s share of the fair value of net assets and it was amortised, generally over 20 years. Transaction costs were capitalised as part of the cost of a combination and earn-outs, contingent consideration, adjusted goodwill. IFRS 3 was issued in 2004 and significantly reduced the options in IAS 22. As I noted, it was a big move towards the US standard, FAS 141. Pooling of interests was banned and IFRS 3 allowed only the purchase method – it said that the cost of a business combination should be allocated to the fair values of identifiable assets, liabilities and contingent liabilities. IFRS 3 introduced the idea of recognising intangible assets and has led to significantly more intangibles and a lower amount of goodwill being recognised. Goodwill was then a smaller residual. It was still recognised at the parent’s share – being the cost of the combination less the parent’s share of net assets. Goodwill stopped being amortised and was tested for impairment. IFRS 3 was a cost allocation model and transaction costs were capitalised as part of the cost of the combination. In addition, contingent consideration was seen as additional cost of the combination and was also added to goodwill. The new standard refines the model further. We are no longer in a cost allocation model. The standard is focused on recognising the different components of a business combination at fair value. The acquisition method is still the only method allowed under the standard and net assets must still be recognised at fair value, including intangible assets. Goodwill in the IFRS standard can be recognised either at the parent company’s share of net assets, or it can be recognised including the minority interest’s (now called non-controlling interest's) share of net assets. This is one of the few areas where a new standard has introduced choice. Overall, we have moved to a standard with a significant degree of choice, and therefore lack of comparability, to one that has less choice and has more rigorous principles. The main principles of the new standard are covered in the next slide.

    Date What hasn’t changed Before we go into the principles of the standards, and look at the implications for you, let me tell you what has not changed from the previous IFRS 3 and IAS 27. No pooling of interests accounting – only the acquisition method is allowed Date of combination is when control passes In all combinations we must identify an acquirer Common control combinations are scoped out (though the new standard now scopes in combinations by contract – dual listed companies or staplings – and combinations of mutuals) Recognition of net assets at fair value – the standard still requires assets (including intangibles), liabilities and contingent liabilities at fair values. No restructuring provisions – these can only be recognised where there is an IAS 37 liability in the acquiree at the date of acquisition, which is very rare). There is still a 12 month period in which to finalise the business combination accounting. Principles of the new standard The new standard focuses on measuring the fair value of all of the components of a business combination. Components measured at fair value means we are no longer allocating cost and this is not a cost accumulation model. What also follows from this approach is that the standard deals with what is part of the business combination and what is outside the business combination. So, for example, transaction costs are not part of what has been transferred to the seller of a business in return for acquiring that business, and so they are not included in the business combination accounting – they are expensed. On the left hand side of the diagram we have the components of what has been transferred for the business combination. These are all recognised at fair value. Note that this includes ‘previous interest’ – for example an interest in an associate. If we have an associate and then acquire the rest of that entity we retain the original associate interest but in IFRS 3 terms it is exchanged for gaining control. The other point to note on the left hand column is that it includes minority interest, or non-controlling interest – in order to gain control of the business we in effect give up part of the interest in the acquiree if it is only partially owned. You might say that it is like the acquirer paying for the business with cash and with the shares owned by the non-controlling interest. This reflects an economic entity view of the reporting entity, which we will come on to later. There is also an exception to the fair value principle here, for NCI, and we will also cover that later. The total of this left hand column is called the acquirer’s interest in the acquiree. So, we value everything on the left hand column, and this is the area where there are most changes from the previous standard. After valuing what has been transferred we look to what has been acquired. Just as in the previous standard we fair value assets liabilities and contingent liabilities. Goodwill remains a residual – what is left over after recognising the interest in the acquiree and deducting the fair value of the net assets and contingent liabilities. We’ll cover these areas in more detail, when we look at the effect the new standards are likely to have on your earnings. So what are the main effects on your earnings?

    Date All these things will affect earnings differently from the previous standard Note to engagement team – click on the slide and all of the shapes will appear. The arrows indicate how earnings will be affected. Down – earnings will decrease Up and down – earnings may increase or decrease Left and right – neutral effect on earnings (or reduces volatility) Up – earnings likely to increase

    Date [Note to team – the issues on this slide are covered in detail in the following slides. Do not go into much detail on this summary slide.] First let’s look at the area where there are the largest number of changes that will affect your earnings: consideration – what you have paid or transferred to buy the acquired business. Consideration is recognised and measured at fair value at the date of the business combination – the date when control passes. The aqcuirer’s interest includes any previously held interest such as an associate interest or an available for sale financial asset. All elements of consideration are recognised at the date of the business combination Subsequent changes in the value of that consideration are post-combination events – they do not adjust goodwill; rather they adjust the income statement. Let’s look at individual issues in more detail.

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    Date [Note to team – the issues on this slide are covered in detail in the following slides. Do not go into much detail on this summary slide.] First let’s look at the area where there are the largest number of changes that will affect your earnings: consideration – what you have paid or transferred to buy the acquired business. Consideration is recognised and measured at fair value at the date of the business combination – the date when control passes. The aqcuirer’s interest includes any previously held interest such as an associate interest or an available for sale financial asset. All elements of consideration are recognised at the date of the business combination Subsequent changes in the value of that consideration are post-combination events – they do not adjust goodwill; rather they adjust the income statement. Let’s look at individual issues in more detail.

    Date Acquirer’s interest previously held in an acquiree It is not uncommon to build up stakes in a subsidiary over time – you might start with a financial asset, gain significant influence and only after that gain control. Under the old standard accounting for step acquisitions was rather complicated and sometimes led to some odd results. The new standard gives what many consider to be a surprising result, but is at least much simpler. Any existing interest is remeasured to fair value, if it hasn’t been done so already, and any gain or loss (generally a gain; otherwise there would probably have been an impairment) is recognised in the income statement at the date of the business combination. The associate or AFS is seen as being given up to acquire the subsidiary – it is measured at fair value and a gain on giving it up is recognised (or recycled to income in the case of an AFS). You will need to be able to first of all calculate the fair value of your associate interest and then explain the gain that arises when you carry out an acquisition. Options given to selling shareholders You may wish selling shareholders to remain in the business as employees. Their knowledge and contacts can ensure that the acquired business performs well. The terms of the options and employment conditions could impact the amount of purchase consideration and also the income statement after the business combination. Share options have a value. The relevant accounting question is whether this value should be recorded as part of the purchase consideration or as compensation for post-acquisition services provided by employees or some combination of the two. Are you paying shareholders in their capacity as shareholders or in their capacity as employees for services subsequent to the business combination? There was no guidance on this area in IFRS 3. The new standard has included some that was previously in US GAAP. How share options are accounted for depends on the conditions attached to the award and also whether or not the options are replacing existing options held by the employee in the acquired business. Options are likely to be consideration for post-acquisition service where some of the payment is conditional on the shareholders remaining in employment after the transaction. In such circumstances, there would be a charge recorded in post acquisition earnings for employee services. These awards are made to secure and reward future services of employees rather than to acquire the existing business.

    Date Earn-outs and contingent consideration Buyers and sellers of businesses often want to share risks – there may not be exact agreement on what a business will do in the future and what its value is today. The buyer and seller will often agree that instead of there being a fixed price today for the business being acquired that an element of the price will be paid in the future and will depend on future events – it might be that an amount is payable only if certain events occur (such as a key drug getting FDA approval) or it could be that X% of future profits of the acquired business will be paid. Under the previous standard such amounts were only recognised if payment was probable at the acquisition date. Any changes thereafter, including initial recognition, adjusted goodwill – adding to the cost of the combination. Under the new standard contingent consideration is recognised at fair value at the acquisition date and this happens whether it is likely to be paid or not. There are two forms of contingent consideration, and this is something you might think about when structuring your next acquisition. If the consideration is payable in what is known as ‘equity’, broadly being a fixed number of shares that could vary in value, then it is recognised on day one as part of the combination and is not measured thereafter. If the consideration is payable in liability form, being either cash or in a variable number of shares to a fixed value, then it will get remeasured – changes in estimates of the expected cash flows will be recognised in the income statement (under IAS 39.AG8). Goodwill is not adjusted. This may lead to significant volatility over a number of years after the acquisition. Although it may be seen as a consequence of ‘sharing’ post-acquisition earnings between the acquirer and the seller, it may seem odd to have debits in the income statement the better an acquiree is performing. Transaction costs As I said before, what is transferred and what is acquired are fair valued. One of the consequences is that anything that is not part of the combination is not included. We have already seen that shares paid to previous owners who stay on as employees may not be part of the consideration and could hit the income statement. Similarly, the standard considers that the transaction costs associated with a business combination are not part of what is transferred to the seller in order to acquire the business. Therefore, they are expensed in the income statement. Share and debt issue costs It is also worth noting that there has been no change to the treatment of debt and share issue costs – these continue to be accounted for under the financial instruments standards and are not part of the business combination accounting. Also note that share and debt issue costs are not added to goodwill – they are treated in the same way as under the old standard, deducted from equity or the CV of debt. The debt costs will come through P&L as part of effective interest rate.

    Date What hasn’t changed Before we go into the principles of the standards, and look at the implications for you, let me tell you what has not changed from the previous IFRS 3 and IAS 27. No pooling of interests accounting – only the acquisition method is allowed Date of combination is when control passes In all combinations we must identify an acquirer Common control combinations are scoped out (though the new standard now scopes in combinations by contract – dual listed companies or staplings – and combinations of mutuals) Recognition of net assets at fair value – the standard still requires assets (including intangibles), liabilities and contingent liabilities at fair values. No restructuring provisions – these can only be recognised where there is an IAS 37 liability in the acquiree at the date of acquisition, which is very rare). There is still a 12 month period in which to finalise the business combination accounting. Principles of the new standard The new standard focuses on measuring the fair value of all of the components of a business combination. Components measured at fair value means we are no longer allocating cost and this is not a cost accumulation model. What also follows from this approach is that the standard deals with what is part of the business combination and what is outside the business combination. So, for example, transaction costs are not part of what has been transferred to the seller of a business in return for acquiring that business, and so they are not included in the business combination accounting – they are expensed. On the left hand side of the diagram we have the components of what has been transferred for the business combination. These are all recognised at fair value. Note that this includes ‘previous interest’ – for example an interest in an associate. If we have an associate and then acquire the rest of that entity we retain the original associate interest but in IFRS 3 terms it is exchanged for gaining control. The other point to note on the left hand column is that it includes minority interest, or non-controlling interest – in order to gain control of the business we in effect give up part of the interest in the acquiree if it is only partially owned. You might say that it is like the acquirer paying for the business with cash and with the shares owned by the non-controlling interest. This reflects an economic entity view of the reporting entity, which we will come on to later. There is also an exception to the fair value principle here, for NCI, and we will also cover that later. The total of this left hand column is called the acquirer’s interest in the acquiree. So, we value everything on the left hand column, and this is the area where there are most changes from the previous standard. After valuing what has been transferred we look to what has been acquired. Just as in the previous standard we fair value assets liabilities and contingent liabilities. Goodwill remains a residual – what is left over after recognising the interest in the acquiree and deducting the fair value of the net assets and contingent liabilities. We’ll cover these areas in more detail, when we look at the effect the new standards are likely to have on your earnings. So what are the main effects on your earnings?

    Date As I’ve said, non-controlling interest, or NCI, is the new name for minority interest. It is the shares in a subsidiary that are not held by the acquiring group. What are the implications of the policy choice of recording NCI (and goodwill) at fair value compared to recording NCI at share of net assets (with resulting partial goodwill)? Companies from an IFRS 3 background, and who have applied a previous GAAP that recognises partial goodwill, might be tempted to assume that partial goodwill should be recorded. Some issues to think about – If full goodwill is recorded this will increase reported net assets and equity, strengthening the balance sheet. On the other hand, if there is a future impairment then it will be greater because there is more goodwill to write off. Two important, but subtle, points to note – first, there is no greater likelihood of an impairment. When partial goodwill is recorded IFRS 3 requires it to be grossed up so that we compare 100% of the cash flows to 100% of the net assets (including goodwill). Second, although the impairment charge will be bigger there will be no more impairment charge allocated to the parent company shareholders – the increase will only be allocated to the NCI. The other important point is something I’ll cover later – if full goodwill is recognised there will be less impact if the NCI is purchased in the future. The opposite is true if partial goodwill is recognised – lower net assets and equity, a lower future impairment charge (but again no change in the likelihood of impairment) but a greater effect from a future purchase of NCI.

    Date The third area I want to look at is on the right hand side of the diagram showing the IFRS 3R principles: what we are buying. This is the area where there is least change in the new standard, though there is some helpful additional guidance. Most assets, liabilities and contingent liabilities are recognised and measured at fair value. There are limited exceptions for pensions (measured in line with IAS 19), deferred tax (under IAS 12), indemnification assets (measured in line with indemnified liabilities), share-based payments (under IFRS 2), reacquired rights (special rules) and assets held for sale (under IFRS 5 at fair value less costs to sell). Where there is more guidance is in assessment of contracts at the date of the acquisition. We’ll quickly look at assessment of contracts and indemnities, two new areas in IFRS 3R and at deferred tax, which has changed.

    Date Indemnities An indemnity is a promise by the seller to reimburse the buyer of a business for liabilities of uncertain amount or likelihood. The indemnity is recognized as an asset of the acquiring business. It does not affect goodwill. It is measured according to the terms of the contract and it is limited to the amount of the indemnified liability. This applies to all indemnities for specific contingencies or liabilities. This is a helpful addition to the new standard – there was previously no guidance and it was not clear that a matched treatment for recognition and measurement of the liability and the related indemnification asset could be achieved. IFRS 3R confirms that both are measured together, with income statement gains on one offsetting losses on the other. This is likely to reduce the effect on the income statement compared to IFRS 3. Assessment of contracts We are talking here about items such as hedging, embedded derivatives, leases, insurance where the accounting depends on contractual terms or documentation. We are not referring to contractual-based intangible assets. There was previously no guidance in IFRS 3 and practice was mixed. The new standard says that they should be reassessed at the acquisition date based on conditions at that date. For example, contracts need to be assessed to see if they contain embedded derivatives. The acquiree’s hedging will need to be reassessed to see if it is highly effective going forward. There are two exceptions to the principle of reassessment – leases and insurance contracts are classified based on the original contracts, unless they have changed since being incepted.

    Date Deferred tax accounting Under IFRS 3 any adjustments to deferred tax assets of the acquired business after the acquisition date affected goodwill, no matter when those adjustments were recorded. The new standard follows the same principles for deferred tax as for other components – deferred tax is recognised at the acquisition date and any adjustments made after that date are made as normal in accordance with IAS 12 – they will be recorded in the income statement or in equity, depending on where the item giving rise to the tax is recorded. So if, for example, some of the acquiree’s losses become recoverable for tax purposes after the acquisition date, you will recognise a deferred tax asset and a credit to the income statement. Adjustments made during the 12 months after the acquisition date that are a result of conditions that existed at the acquisition date will affect goodwill.

    Date Let’s now look at the final area of the new standards – changes in ownership interest. This covers the changes made to IAS 27 on consolidated and separate financial statements. The changes to IAS 27 cement the ‘economic entity’ view of the reporting entity. Under such a view the net assets in the balance sheet are controlled by the reporting entity. The equity providers of capital to that economic entity, who have a claim on those net assets, include the parent company’s shareholders and any non-controlling interest. The previous version of IAS 27 moved us some way towards this view – minority interest was recognised in equity. Profit for the period was allocated between parent and minority interest, unlike previous practice of deducting the profit due to the minority to leave the profit due to the parent. Now transactions with equity result on no goodwill and no gains. In addition, loss of control will lead to a bigger gain than was recognised under the previous standard. What are the implications of these changes?

    Date These are changes that will reduce the effect of transactions on the income statement. Practice on purchases and sales of minority interest was mixed but many entities treated the purchase of a minority interest as giving rise to additional goodwill. Many treated the sale of a minority as giving rise to gains and losses. Under the new standards the difference between the cash paid to buy NCI and the carrying amount of that NCI will be recorded in equity, generally as a debit because fair value will be greater than book value. This is because the NCI is an equity provider to the group (ie a shareholder) and the transaction with a shareholder is like a treasury share transaction – there is no goodwill on a purchase and no gain on a sale. The effects are recorded in equity. This is where the choice on goodwill becomes relevant – if you make a partial acquisition, where you gain control but buy less than 100%, you may want to consider whether you are likely to buy the NCI in the future when you decide how to record goodwill. The debit in equity that will be recorded when NCI is purchased in the future will be less where NCI was recorded at fair value (full goodwill). In other words, there will be a lesser reduction in net assets when NCI is purchased in the future if it was recorded at fair value when the business was acquired. Similarly, when you sell shares to an NCI in the future, the difference between the cash received and the amount of NCI recognise will be recorded in equity and will not result in a gain. The treatment under previous IAS 27, when a parent company model was applied, was to recognise goodwill for the purchase of a minority interest where the consideration paid was more than the minority interest and to recognise a gain or loss on the sale to a minority interest where the consideration received is different to the carrying value of the minority.

    Date It may be that you make a partial sale of a subsidiary – you lose control but retain an interest through an associate or an available for sale asset. Under the previous standard the remaining portion was generally recognised initially at its share of the book value of the subsidiary, on the basis that it was held by the group and continues to be held by the group after the disposal. IAS 27R has been changed to say that the interest held after control is lost should be initially recognised at fair value. Any gain or loss on remeasurement from book value to fair value should be recognised in the income statement. In this was the (holding) change in value of that interest that the group retains after losing control from when it was initially purchased gets recognised in the income statement. This component of a gain or loss on disposal of a subsidiary will need to be explained.

    Date You will have seen from the previous slides that there is quite a number of changes brought about by the new standards, and many of these will have an effect on the income statement, either at the date of the acquisition or subsequently. One of the key challenges will be that if you are planning an acquisition you will need to be able to explain it to your investors. There will be an expense in the period of acquisition for the transaction costs. There will be a gain or loss in the income statement if you previously held an AFS asset or associate interest. The way that you pay for the business to be acquired can have a significant effect on the income statement after the combination. At the date of the acquisition it will make no difference – everything gets recognised at fair value – but depending on whether you have earn-outs and whether they are debt or equity this will impact post-acquisition income. You should also remember that you need to split out any payments that are for post-combination employee services – these are not part of the consideration and will be an expense in post-combination income. As with the current standard, now that we recognise more assets and liabilities, particularly intangible assets, these will affect profit or loss in periods after the business combination as they are amortised. You will also have noticed that more aspects of a business combination are measured at fair value. And more parts are measured at fair value and then affect profit or loss later (like contingent consideration). Do you have enough in-house valuations expertise? Do we need to get valuers involved earlier to make sure that the valuations are right first time? Some have commented that the new standards provide a full-employment act for valuers!

    Date After the acquisition there will be more monitoring and remasurement – Remeasuring contingent consideration based on the expected cash flows at each balance sheet date (which may be significant and will have to be explained to investors) There is the one year period in which to finalise the fair values and business combinations accounting Any indemnified liabilities are measured in line with IAS 37 and the related assets need to be measured based on the same assumptions.

    Date Summarise with the points on the slide and make relevant to your client’s business and to the effect the standards may have

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    Date Instructor note: Ask the audience quickly about the different types of customer loyalty programs that exist (single entity, multiple entity with third party provider, etc.) as well as the industries that are impacted by these types of programs (airlines, hotels, financial service institutions, retailers, etc.). Then click to reveal the types of arrangements. IFRIC 13 was issued in June 2007. The IFRIC needed to put this interpretation out because there was little clarity around how to treat situations where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products). The EITF tried to address this issue as part of EIFT 00-22, and considered several models. Ultimately they never reached a consensus and therefore have not taken a position. The main issue addressed in this interpretation is the recognition and measurement of an entity’s obligations to provide customers with either free or discounted goods or services associated with award credits issued in connection with a loyalty scheme. IFRIC 13 clarifies that customer loyalty programmes should be accounted for as multiple element transactions as discussed in IAS 18, Revenue . IAS 18.13 specifies that the Standard’s revenue recognition criteria should be applied to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. So IFRIC 13 states that: Incentive awards provided to customers should be accounted for as separately identifiable components of a single transaction (either sale of goods or provision of services); The fair value of consideration received should be allocated to each component of the transaction at the fair value; and Revenue should be recognised based on the pattern in which goods or services are delivered. Thus an element of revenue received on the sale of goods/services with an award credit (e.g. voucher, loyalty points etc..) needs to be deferred until the award credit is redeemed in the future. Estimates will also need to be made (and reassessed) in terms of the number of vouchers likely to be redeemed/forfeited. The value attributable to each component in the transaction is based on a number of factors, including the fair value of each of the components and the estimated forfeitures of award credits. Important Note: There could be a question of how a change in the estimated forfeiture rate should be accounted for. Some may argue that this should be reflected in revenue – that is revenue should be trued up for the actual forfeiture rates. However the IFRIC stated that the revenue should be fixed at the date of issue of the related loyalty arrangement, and only adjustments should be to the rate of recognition, not the amount initially allocated.

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    Second Wave Of International Financial Reporting Standards (IFRSs) 2009 - Presentation Transcript

    1. January 2009 Second Wave of IFRS A. F. F ERGUSON & C O . Chartered Accountants A member firm of  
      • Revisions/New standards
        • IAS 1 (revised), Presentation of Financial Statements
        • IAS 23 (revised), Borrowing Costs
        • Consolidation − IFRS 3 (revised), IAS 27 (revised)
        • Segment reporting − IFRS 8
        • Cost of investment − IAS 27 and IFRS 1 amendment
        • Financial instruments
        • Share-based payment − IFRS 2
      • ‘ Credit crunch’ Amendment
        • Reclassification of financial assets -IAS 39 & IFRS 7
      • IFRIC update
        • Customer Loyalty Programmes – IFRIC 13
        • Limit on defined benefit asset – IFRIC 14
        • Construction contracts − IFRIC 15
        • Hedges of a Net Investment in a Foreign Operation – IFRIC 16
        • Distributions of non-cash assets to owners – IFRIC 17
      • 2008 Improvements
      • 2009 Improvements (EDs)
      • Third wave of IFRS – major ongoing projects
      Agenda Slide
    3. IAS 1 (revised), Presentation of Financial Statements Slide
        • Effective for annual periods beginning on or after January 2009
        • Consequential amendments to other IASs and IFRSs
        • Part of a larger joint project of the IASB and the FASB
        • Phase “A” similar to the requirements of FASB Statement 130
          • - IAS 1 clarifies the presentation of transactions with owners and the performance of the entity.
        • Phase “B” discussion paper issued in 4Q 2008
        • Under phase “B”, B/S, P/L & CF would be divided into 5 sections i.e Business, Financing, Income taxes, Discontinued operations and Equity. Business would comprise of Operating and investing activities.
        • Expected date of issuance of phase B : 2011
      General requirements Slide IAS 1 (revised), Presentation of Financial Statements
      • Balance sheet renamed as the ‘Statement of financial position’
      • Cash flow statement is renamed as the ‘Statement of cash flows’
      • P&L is renamed as ‘Statement of Comprehensive Income’ to be presented in a
        • Single statement (a statement of comprehensive income)
        • Two statements (an income statement & a statement of other comprehensive statement), separately from owner changes in equity
      • The statement of other comprehensive income under the ‘two-statement’ approach is the same as the ‘statement of recognised income and expense (SORIE)’.
      IAS 1 (revised), Presentation of Financial Statements Slide Components of Financial Statements
        • Gain/loss recognised directly in equity (net of tax)
            • Gain on revaluation of land and building
            • Unrealised gain/loss on AFS financial assets
            • Actuarial gain/loss on retirement benefit plans
            • Currency translation differences
            • Gain/loss on cash flow hedges
      Statement of Other Comprehensive Income-What is included? Slide IAS 1 (revised), Presentation of Financial Statements
        • All changes in equity arising from transactions with owners and associated tax impact in Statement Of Changes In Equity (SOCIE)
        • Components of income and expense and associated tax impact out of SOCIE
        • Dividends per share to be presented in SOCIE or in notes
      Reporting owner changes Slide IAS 1 (revised), Presentation of Financial Statements
        • Retrospective application of adjustments (IAS 8)
        • Three balance sheets are now required including the beginning of the comparative period
        • Other
        • “ Reclassification adjustments”- e.g. recycling AFS reserve at disposal should be disclosed with the related income tax
      Other matters Slide IAS 1 (revised), Presentation of Financial Statements
    9. Slide Statement of Comprehensive Income
    10. Slide Statement of Comprehensive Income
    11. Slide Statement of Comprehensive Income
    12. Slide Reclassification of items included in Statement of Other Comprehensive Income
    13. IAS 23 (revised), Borrowing Costs Slide
      • Issued in March 2007
      • Part of IASB/FASB short-term convergence project
      • Revisions primarily concerned with eliminating the option to expense borrowing costs
      • Enhances comparability and overall improvement in financial reporting
      • Effective for annual periods beginning on or after January 1, 2009
      • Earlier application is permitted
      Overview Slide IAS 23 (revised), Borrowing Costs
    15. Highlights :
      • Removal of allowed alternative treatment for immediate recognition of borrowing cost expense relating to qualifying asset.
      • Capitalization of Borrowing Cost as a compulsory treatment.
      • The cost of an asset will in future include all costs incurred in getting the asset ready for use or sale.
      Slide IAS 23 (revised), Borrowing Costs
      • Capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset
        • directly attributable
        • borrowing costs that could have been avoided if expenditures on the qualifying assets had not been made
        • costs of general borrowings used to obtain qualifying assets by applying capitalisation rate to the expenditures on the asset
        • capitalisation rate
        • weighted average borrowing costs, other than cost of specific borrowings
        • qualifying asset
        • asset that takes substantial* period of time to get ready for intended use
        • * Not a defined period - use consistently applied management judgment
      General requirements Slide IAS 23 (revised), Borrowing Costs
        • Capitalise when…
          • borrowing costs are being incurred; and
          • asset preparations are in progress
        • Suspend capitalisation when…
          • active development interrupted for extended periods
        • Cease capitalisation when…
          • activities to prepare the asset to be used are complete
      General requirements, continued Slide IAS 23 (revised), Borrowing Costs
        • Income from temporarily invested proceeds from borrowings
          • Required to offset borrowing costs
        • Financing of long production period of inventories, e.g. wine
          • Management can choose to capitalise borrowing costs
        • ‘ Notional’ borrowing costs
          • Cannot be capitalised; limited to actual borrowing costs incurred
        • Operating cash flows sufficient to finance capital expenditures
          • General borrowings are assumed to be used first for qualifying assets, therefore borrowing costs should be capitalised
        • Finance lease interest cost
          • Is an element of borrowing costs to be capitalised
      Other application points Slide IAS 23 (revised), Borrowing Costs
    19. Quick guide to applying IAS 23 revised Slide Handout 1
    20.  Business Combination and Consolidation IFRS 3 & IAS 27
    21. Convergence of IFRS and US GAAP APB 16 FAS 10 IFRS 3R IAS 27R FAS 141R FAS 160 FAS 141 IAS 22 IFRS 3
    22. The IFRS journey IAS 22 Pooling method MI share of net assets at book value Goodwill parent share Earn-out adjusts goodwill IFRS 3 Purchase method Net assets at fair value Goodwill parent share Earn-out adjusts cost of BC IFRS 3 (Revised) Acquisition method Net assets at fair value Purchase method MI share of net assets at fair value Transaction costs capitalised Goodwill amortised Transaction costs capitalised in BC Goodwill parent share Goodwill includes NCI share
    23. Principles – IFRS 3 (Revised) Slide All combinations apply the acquisition method Components of a business combination are measured at fair value. Accounting for only what we have gained control of and what has been transferred for that control. Amount paid Previous interest Non-controlling interest Assets, liabilities, contingent liabilities Goodwill
    24. The effect on earnings Slide Share options given to seller Earn-out Indemnity from seller Transaction costs Existing interest held in target Full goodwill Pre-existing relationships Purchase or sale of minority
    25. Consolidation – IFRS 3 (revised) and IAS 27 (revised) Slide
      • Scope and applicability
      • Method of accounting
      • 3. Consideration
      • 4. Goodwill and non-controlling interests (NCI)
      • 5. Asset and liability recognition
      • 6. Other issues
    26. Scope and applicability Slide
      • Scope
      • It now includes combinations of mutual entities and combinations without considerations
      • Definition
      • Definition of a business has been amended slightly. It now states that the elements are ‘capable of being conducted’ rather than ‘are conducted and managed’. Bring more transactions into acquisition accounting.
      • Common Control Transactions
      • Common control transactions (JVs, businesses under common control) remain outside the scope of the new standard.
      • Applicability
      • Standards applicable from years beginning on or after 1 July 2009
        • Early application permitted
        • Both standards should be applied together
        • Prospective – previous accounting largely unchanged
    27. Method of accounting – only acquisition method (formerly purchase method)
      • Steps in applying the acquisition method are:
      • Identification of the ‘acquirer’- the combining entity that obtains the control of the acquiree
      • Determination of the acquisition date- the date on which the acquirer obtains control
      • Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly MI) in the acquiree
      • Recognition and measurement of goodwill or a gain from the bargain purchase
      Slide
    28. Consideration – components Slide Equity instruments, options, warrants (at fv) Contingent consideration (at fv) Cash, other assets, businesses etc (at fv) Replacement share award (under IFRS 2)
    29. Consideration – what has been transferred for the business acquired
        • Consideration measured at fair value at the date of the combination
        • Acquirer’s interest includes previous holdings
        • All elements recognised at combination date
        • Subsequent changes will affect income
        • Excluded items that are not consideration will be charged to P&L eg transaction costs, settlement of pre-existing relationships, remuneration for future employee services, reimbursements for paying the acquirer’s acquisition costs, payment for indemnification assets
      Slide
    30. Consideration – what has been transferred for the business acquired Slide Issue Acquirer previously held an interest in acquiree Implication
      • Remeasured to fair value
      • Gain on remeasurement recognised in earnings at date of acquisition
      • Recycle items of other comprehensive income
      Issue Options given to selling shareholders Implication
      • Payments for ownership interest (part of consideration) or for post-combination employment?
      • Payments for employment expensed in income statement
    31. Consideration – what has been transferred for the business acquired Slide Issue Earn-outs and contingent consideration Implication
      • Contingent consideration recognised whether probable or not
      • Liabilities remeasured through income statement
      • Equity not remeasured (see next slide)
      Issue Transaction costs Implication
      • Transaction costs not transferred to seller for the acquired business
      • Expense through income statement as incurred
      • Earn-out payable in cash : Cash being financial liability hence re-measured at fair value at every balance sheet date
      • Earn-out payable in ordinary shares : May not require re-measurement through the income statement.
        • Where the number of shares varies to give the recipient of the shares a fixed value (would meet the definition of a financial liability). As a result, the liability will need to be fair valued through income.
        • Where a fixed number of shares either will or will not be issued depending on performance, regardless of the fair value of those shares, the earn-out meets the definition of equity and so is not re-measured through the income statement.
      Consideration …. contd. Slide
    33. Goodwill Slide Amount paid (Consideration) Previous interest Non-controlling interest Assets, liabilities, contingent liabilities Goodwill
        • Concept-Goodwill amount frozen on Combination
        • Measure NCI at fair value – ‘full goodwill’ including NCI share
        • Measure NCI at share of net assets – ‘partial goodwill’ not including NCI share
    34. Goodwill Slide Frequency of impairment does not change – only amount. Issue Policy choice – NCI at fair value or share of net assets Implication
      • Full goodwill
      • Increased net assets/ equity
      • Increased future impairment charge
      • Less effect on net assets/ equity from future purchase of NCI
      • Partial goodwill
      • Greater effect on net assets/ equity from future purchase of NCI
    35. Impairment of Goodwill testing when fair value (full value) method is chosen Slide Handout 2
    36. Slide Impairment of Goodwill testing when proportionate method is chosen Handout 3
    37. Assets and liabilities recognised – what has been acquired
      • Almost all assets, liabilities, contingent liabilities recognised and measured at fair value with exceptions for certain items eg deferred tax and pension liability
      • No major changes to current IFRS 3
      • More guidance on assessing contracts
      • Intangible assets must always be recognised and measured. There is no ‘reliable measurement’ exception
      Slide
      • Provisional Accounting - maximum period of adjustment
      • An adjustment period for the finalization of acquisition accounting ends on the earlier of:
        • twelve months or
        • acquirer has gathered all the necessary information
      • There is no exemption from the 12-month rule for deferred tax assets or changes in the amount of contingent consideration.
      • Accounting for indemnity given by the seller
        • The indemnity is recognised as an asset of the acquiring business.
        • It is measured in the same way as the indemnified liability, and it is limited to the amount of the indemnified liability.
      Slide Asset and liability recognition...contd.
    39. Assets and liabilities recognised – what has been acquired Slide Issue Indemnities given by seller Implication
      • Indemnified (contingent) liability at fair value
      • Indemnification asset recognised on same basis at acquisition date and subsequently
      • May reduce income statement volatility
      Issue Assessment of contracts Implication
      • Hedging, embedded derivatives etc should be assessed at acquisition date and re-classified, if required
      • Only exceptions are leases and insurance contracts – classify based on conditions when incepted
    40. Assets and liabilities recognised – what has been acquired Slide Issue Deferred tax accounting Implication
      • Deferred tax asset may be recognised on Combination if it gives rise to timing differences. The asset would be adjusted against Goodwill.
      • Deferred tax liability is prohibited to be recognised against Goodwill. Resultant subsequent impairment shall also not affect deferred tax balances.
      • Changes to deferred tax balances after acquisition date affect income or equity as normal under IAS 12
    41. Changes in ownership interest
        • Non-controlling interest (NCI) is equity contributor to entity
        • Recognised in equity (no change)
        • Purchases from NCI in equity – no goodwill
        • Sales to NCI in equity – no gain
        • Loss of control is remeasurement event (gain!)
      Slide
    42. Changes in ownership interest – No loss of control Slide Issue Purchase of or sale to NCI after a business combination Implication
      • Purchase – difference between cash paid and NCI recorded in equity
      • Debit greater where partial goodwill recorded
      • Sale of shares to NCI – difference between cash received and NCI recorded in equity
    43. Changes in ownership interest – Loss of control Slide Issue Sale of controlling interest in subsidiary. Interest in associate or financial asset retained Implication
      • Retained interest recognised at fair value
      • Gain on sale includes gain on remeasuring retained interest
    44. Other issues
      • Before the acquisition
        • Explaining the acquisition to investors – the financial statements will look different
          • Effect on income statement in period of acquisition
          • How payment structure will affect income statement subsequently
          • How assets and liabilities recognised will affect income statement subsequently
        • Valuations expertise
      Slide
    45. Other issues
        • After the acquisition
        • Monitoring and measurement
          • Contingent consideration
          • Finalising fair values
          • Indemnified liabilities
      Slide
    46. Summary
        • First IFRS and US GAAP converged standard
        • More fair value measurement
        • More income statement volatility
          • At date of acquisition
          • After an acquisition
        • Economic entity model now embedded
        • Financial statements will look different – be ready to explain
      Slide
    47. Slide Principles of business combinations Handout 4 A
    48. Slide A Principles of business combinations …contd. Handout 4
    49. Slide Principles of business combinations …contd. Handout 4
    50. Slide Step acquisitions and disposals B Handout 5
    51. Slide B Handout 5
    52.  Moving to IFRS 8
    53. Agenda
        • IFRS 8 basics
        • The Road to IFRS 8 – 4 simple steps
          • Identification of the CODM
          • Identification of operating segments
          • Determining the reportable segments
          • Disclosures
        • Other considerations
        • How this will affect companies?
        • Summary
      Slide
    54. IFRS 8 – Background & problems
        • New concept (innovative idea)
        • Strong & reliable MIS (A must)
        • Varied results (no consistency or comparability)
        • Interpretational issues (open to the judgement of management)
        • Practical issues in Pakistan context
          • How performance is measured – difference in perceptions (cash flows Vs book profits Vs book profits plus other tax free income)
          • Lack of reliable MIS
          • MIS parameters different
      Slide
    55. Moving to IFRS 8 Slide Why is it important today? What is the key learning point? 5 4 3 2 1 January 1 2009 (annual reports beginning on or after)
    56. Why IFRS 8 (is this only about convergence with US GAAP?) Slide More meaningful information for users Consistency with the management reports Less time and cost of obtaining the information
    57. Core principle Slide IFRS 8 An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates
    58. Core principle – simple English
      • To : Public company - Reporting entity
      • From: IASB / IFRS 8 Staff
      • RE: Useful information to Users
            • Please provide Mr. John Q Public with useful information that will help him get a grip of what your main activities are, where are they located and how well they do.
          • Yours sincerely,
            • PS – this should be very much based on the information used by management to accomplish the same goal.
      Slide IFRS 8
    59. IFRS 8 Key features Slide IFRS 8 Financial information management uses Segments through the eyes of management
    60. The Road to IFRS 8 – 4 simples stages: Slide Identify the CODM Identify the operating segments Present the required information (and reconcile to primary statements) Determine the reportable segments 1 3 2 4
    61. Chief Operating Decision Maker (CODM) Slide Allocates resources Assesses performance Function not a title 1
    62. Find CODM Slide 1
      • Excerpts from recent Committee Meeting minutes:
      • HR Committee – Approved compensation terms for Mr A Hussain, newly hired Controller . . . (1 April 2008)
      • Investment Committee – . . . recommended additional investment for ongoing research project . . . (12 July 2008)
      • Executive Committee – Reviewed five year forecasts for Sri Lanka operations . . . Approved closure of two manufacturing plants in Africa . . . (20 June 2008)
      Slide 1
    64. The CODM is - Slide The Executive Committee Thanks to Rene Magritte and Picasso for doing these wonderful portraits for us 1
    65. The Road to IFRS 8 – 4 simples stages: Slide Identify the CODM Identify the operating segments Present the required information (and reconcile to primary statements) Determine the reportable segments 1 3 2 4
    66. What are the key features of an operating segment?
        • Engages in business activities
        • Operating results are regularly reviewed by CODM to assess performance and make decisions
        • Discrete financial information available
      Slide 2
    67. Operating segment : – a component that has all the following features: Slide Engages in business activities Start up activities ? R&D operation ? Vertically integrated business ? Functional department? 2
    68. Operating segment : – a component that has all the following features: Slide Its operating results are regularly reviewed by CODM to assess performance and make decisions Several sets of financial information (components)? Matrix operation?
        • An operating segment would regularly have a segment manager who is directly accountable to and maintains regular contact with the CODM
      2 Use the one which is most consistent with financial statements Use products & services to identify segment
    69. Operating segment : – a component that has all the following features: Slide Has discrete financial information available
      • Reliable ie verifiable
      • Consistent with CODM approach to operate business
      • Used by CODM
      2
    70. The Road to IFRS 8 – 4 simples stages: Slide Identify the CODM Identify the operating segments Present the required information (and reconcile to primary statements) Determine the reportable segments 1 3 2 4
    71. Determining reportable segments Slide Optional Optional Identify each operating segment that exceeds 10% threshold Aggregate any operating segments that meet all aggregation criteria For the remaining operating segments below 10% threshold, aggregate with each other if majority of aggregation criteria met If reportable segments are less than 75% of revenue add more reportable segments 3
      • Aggregation criteria:
      Determining reportable segments Slide Segments similar on each of five specified criteria*** Segments have similar economic characteristics Aggregation is consistent with core principle *** When aggregating two immaterial segments, only a majority of the five specified criteria need to be met 3
    73. Determining reportable segments – The five specified criteria
        • Nature of products and services
        • Nature of production process
        • Type or class of customer
        • Method of distribution
        • Nature of regulatory environment
        • Maximum limit of reportable segments: 10
      Slide 3
    74. The Road to IFRS 8 – 4 simples stages: Slide Identify the CODM Identify the operating segments Present the required information (and reconcile to primary statements) Determine the reportable segments 1 3 2 4
    75. Disclosure considerations
        • Disclosure of certain minimal information
      Slide Measure of assets ** Measure of profit Reconciliation of totals to primary financial statements Segment assets Segment liabilities Significant items like depreciation, interest, revenue Associates and capex Disclose if provided in some manner to CODM Must disclose 4 Non-GAAP Measures **2009 Improvement
    76. Disclosure considerations
        • Disclosure of certain minimal information - must disclose
      Slide 4
        • General information-factors used to identify segments (which of 5 basis used?)
        • Types of products and services of each segment
        • Measurement basis for intra-segment transactions (transfer pricing)
        • Nature of difference in
            • Profit & loss
            • Assets
            • Liabilities
            • Changes in policies from last year
        • Nature and effect of any asymmetrical allocations to segments
      • Applies to all entities subject to standard (including entities with just one reportable segment)
      • Information about products and services
      • Geographical areas
          • Domicile and foreign revenues
          • Domicile and foreign non-current assets
      • Major customers
      • The above is not required if given at segment level.
      Disclosure considerations Entity wide disclosures Slide 4
    78. Disclosure considerations
        • Retrospective application in all the following:
          • When adopted
          • When segment is initially identified as reportable
          • Changes in organization structure
      Slide 4
    79. 4 simples stages - recap: Slide Identify the CODM Identify the operating segments Present the required information (and reconcile to primary statements) Determine the reportable segments
    80. IFRS 8 – Other considerations – Issues??
        • Verifiability of information (Documentation of analysis and conclusions)
        • Consistency of conclusions and information
        • Segment reporting used basis inconsistent with IFRS (eg LIFO method used for inventories, employee benefit plan accounting)
        • Transfer pricing (market based or not)
      Slide
        • Consequential amendment to IAS 36
          • Reallocation of goodwill to operating segments
          • Potential impairment
      Slide IFRS 8 – How this will affect companies Note - this has wide IFRS implications – not just for companies that are required to apply IFRS 8 Reportable Segment Operating Segment Operating Segment Component Component Component Component
    82. IFRS 8 – How this will affect companies ?
        • Management reporting may require substantial improvement
        • Documentation of analysis and conclusions required to make information reliable
        • Inconsistencies in basis within segments be removed
        • Previous segment reporting may no longer be acceptable
        • Potentially more segments
        • May affect goodwill allocation and impairment
        • Regulators expect consistency
        • Education of investors may be required
        • Can be different from competitors
      Slide
    83. Moving to IFRS 8 Slide “ Things we see from here are different from things we see from there….” Anonymous traveler
    84. Slide Handout 6
      • The cost of a subsidiary, jointly controlled entity or associate in a parent’s separate financial statements, on transition to IFRS, is determined under IAS 27 or as a deemed cost. Deemed cost is either fair value or the carrying amount under the previous accounting practice
      • Dividends from a subsidiary, jointly controlled entity or associate are recognized as income. There is no longer a distinction between pre-acquisition and post-acquisition dividends
      • The cost of the investment of a new parent in a group (in a reorganization meeting certain criteria) is measured at the carrying amount of its share of equity as shown in the separate financial statements of the previous parent
      • Effective from periods beginning on or after January 1, 2009
      • No likely impact in Pakistan environment.
      Slide Cost of investment − amendments to IFRS 1 and IAS 27
      • The amendment prohibits:
        • designating inflation as a hedgeable component of a fixed rate debt
        • In a Hedge of one-sided risk with options, it prohibits including time value in the hedged risk
      • Effective from periods on or after July 1, 2009, should be applied retrospectively
      • No likely impact in Pakistan environment.
      Slide Hedging of portions of financial instruments – IAS 39 amendment
      • The amendment applies to certain financial instruments issued by an entity that give the investor the right to get its capital back from the issuing entity for cash or another financial asset:
        • at the investor’s option
        • automatically on the occurrence of a specified event,
        • on liquidation of a limited life entity or when liquidation is at the option of the investor.
      Slide Puttable financial instruments and obligations arising on liquidation – amendments to IAS 32 and IAS 1
      • The amendment applies to certain financial instruments issued by an entity that give the investor the right to get its capital back from the issuing entity for cash or another financial asset:
        • To be classified as equity, such instruments must meet the strict criteria set out in the amendment. For example, one requirement is that the instrument holder is entitled to a pro rata share of net assets on liquidation, which could be indicative of an equity like return.
        • A puttable minority interest that is classified as equity in the subsidiary is always treated as a liability.
        • Effective from periods on or after January 1, 2009, should be applied retrospectively
      • No likely impact in Pakistan environment.
      Slide Puttable financial instruments and obligations arising on liquidation – amendments to IAS 32 and IAS 1
      • The amendment narrows the definition of vesting conditions only to service and performance conditions.
      • Previous definition implied that other conditions (other than service and performance) could also become vesting conditions.
      • This might seem to be a very minor amendment, but it can have some significant consequences.
      • It mainly clarifies the accounting for SAYE (Save as You Earn ) Scheme prevalent in UK.
      • The requirement to save is not a vesting condition; the failure to save now results in a cancellation and an acceleration of the charge.
      • Retrospectively effective for periods beginning on or after 1 January 2009
      Slide Share-based payment – IFRS 2 (Amendment) vesting conditions & cancellation
        • IASB issued an amendment to IAS 39 on 13 October 2008 (& November 2008)
        • Trustees suspended normal due process procedures in issuing amendment
        • Amendment allows to transfer assets from held for trading and AFS categories to loans and receivables category that would have met the definition of L&R and the entity has intention and ability to hold that financial asset for the foreseeable future
        • Also allows limited flexibility in reclassification of financial assets out of ‘held for trading’ category in ‘rare circumstances’ (for assets other than those which qualify as L&R)
      Reclassification of Financial Assets (IAS-39 & IFRS-7) Slide ‘ Credit crunch’ amendment
        • Entities continue to be prohibited from reclassifying derivative financial instruments, non-derivative financial liabilities and financial instruments designated on initial recognition as at fair value through profit or loss out of the fair value through profit or loss category. Any reclassification into the fair value through profit or loss category after initial recognition remains prohibited.
        • The fair value at the date of reclassification shall become the new cost or amortised cost. Any future increase/decrease in cash receipts shall adjust the effective interest rate
        • IFRS 7 also amended to give extensive disclosure for such reclassified assets
        • Intends to level the playing field between IFRS and US GAAP filers
        • Effective on or after 1 July 2008
      Reclassification of Financial Assets (IAS-39 & IFRS-7) Slide ‘ Credit crunch’ amendment
    92. Flowchart –when reclassification is possible Slide Handout 7
    93. Interpretations (IFRIC) update Slide
    94. IFRIC 13 – Customer Loyalty Programmes
        • Multi-element transaction
        • Analysed from the perspective of the customer
        • Allocation of consideration issues
          • Fair value
          • Forfeitures
          • Change in estimates
        • Variety of programmes
        • Variety of awards
        • Effective for annual periods beginning on or after 1 July 2008
      Slide Frequent flyer miles Miles credit cards Airline miles Hotel points programmes Interpretations (IFRIC) update
      • It further clarifies the asset recognition criteria under para 58 of IAS 19
      • “ Present value of economic benefits” may be difficult to estimate. It could either be a:
        • refund; or
        • reduction in future contributions
      • A refund would be recognised if:
        • the refund is permitted under the terms of the plan
        • is realisable during the life of plan or on settlement
        • will be recognised net of any associated costs (eg taxes, fee)
        • no discounting of refund amount permitted
      IFRIC 14 – Limit on Defined Benefit Asset Slide Interpretations (IFRIC) update
        • A reduction in future contributions would be recognised if:
          • there are no minimum funding requirements
          • the asset would be restricted to the PV of future service cost
        • In case of minimum funding requirements in respect of future service cost, the reduction in future contributions would be restricted to the excess of economic benefit amount over the minimum funding requirement
        • In case of minimum funding requirements in respect of past service cost, the reduction in future contributions would be considered after the amounts have been paid into the fund
        • Effective for annual periods beginning on or after 1 January 2008
      IFRIC 14 – Limit on Defined Benefit Asset Slide Interpretations (IFRIC) update
      • The interpretation provides guidance on determining whether an agreement is within the scope of IAS 11, ‘Construction contracts’, or is for the sale of goods under IAS 18, ‘Revenue’ (relevant in Pakistan context).
        • Determine whether arrangement contains multiple elements
        • Allocate fair value to each component
        • Determine if IAS 11 or IAS 18 applies to each component
            • Buyer is able to specify major structural design before construction (IAS 11) Vs buyer’s limited ability to influence the design (IAS 18)
        • Analyse transfer of risks and rewards
          • Rendering of services (% of completion method); or
          • Sale of goods (recognise revenue when significant risks and rewards transferred and no continuing managerial involvement + other conditions)
        • Effective for periods beginning on or after 1 January 2009
      IFRIC 15 – Agreements for the Construction of Real Estate Slide Interpretations (IFRIC) update
    98. Slide Analysis of a single agreement for the construction of real state Handout 8
      • IFRIC 16 applies to an entity that hedges the foreign currency risk arising from its net investments in foreign operations and wishes to qualify for hedge accounting in accordance with IAS 39.
      • IFRIC 16 provides guidance on:
          • The risk being hedged should relate to difference in functional currencies between any parent (including an intermediate parent) and its subsidiary. The hedged risk cannot relate to the group’s presentation currency.
          • Hedging instruments may be held anywhere in the group (apart from the subsidiary that itself is being hedged).
        • Most hedging strategies used in practice will continue to be permitted by the interpretation. Most entities will not, therefore, face any changes from applying it.
      • No likely impact in Pakistan environment.
      • Effective for periods beginning on or after 1 October 2008
      IFRIC 16 – Hedges of a Net Investment in a Foreign Operation Slide Interpretations (IFRIC) update
      • IFRIC 17 clarifies that:
        • a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity
        • where an owner has a choice of a dividend of a non-cash asset or cash, the dividend payable is estimated considering both the fair value and probability of the owners selecting each option.
        • an entity should measure the dividend payable at the fair value of the net assets to be distributed
        • an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss.
      • The Interpretation also requires an entity to provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation.
      • Effective for annual periods beginning on or after 1 July 2009
      IFRIC 17 – Distributions of Non-cash Assets to Owners Slide Interpretations (IFRIC) update
    101. Improvements Slide
    102. Annual Improvement Project 2008 Slide Handout 9
    103. Annual Improvement Project 2008…contd. Slide Handout 9
    104. Annual Improvement Project 2008…contd. Slide Handout 9
    105. Annual Improvement Project 2008…contd. Slide Handout 9
    106. Annual Improvement Project 2008…contd. Slide Handout 9
    107. Annual Improvement Project 2008…contd. Slide Handout 9
    108. Annual Improvement Project 2008…contd. Slide Handout 9
    109. Annual Improvement Project 2008…contd. Slide Handout 9
    110. Annual Improvement Project 2008…contd. Slide Handout 9
      • IAS 39 Financial Instruments: Recognition and Measurement
          • Scope exemption for business combination contracts (applies to forward contracts to acquire control-a clarification)
          • Application of the fair value option (only for financial instruments covered in IAS 39 and not for non-financial contracts - a clarification)
          • Cash flow hedge and reclassification of gains/losses (clarification that the hedging gains/losses would be reclassified when the hedged transaction takes place)
          • Bifurcation of an embedded foreign currency derivative not required (a clarification)
        • IFRS 2 and IFRS 3R
          • Confirmation that acquisition of goods under combination of business on formation of JV and common control transactions are not within scope of IFRS 2 even if they do not meet the definition of business combination
        • IAS 36 and IFRS 8
          • Clarification that the largest unit permitted for the impairment testing of goodwill is operating segment before aggregation
      2009 Annual improvements – exposure draft Slide
      • IFRS 8
          • Disclosures – only require the asset disclosures if they are provided in the CODM package
        • IAS 7
          • Clarification that expenditure is classified as investing only when it is an asset recognised on the balance sheet – relevant to extractive industries and advertising and promotion as well as R&D activities
        • IAS 18
          • Additional guidance on identification of principal and agent
      2009 Annual improvements – exposure draft, continued Slide
    113. Third Wave of IFRS – major ongoing projects Slide Project Expected time of issuance of IFRS Consolidation 2009 JVs IAS 31 2009 SME standard 2009 Provisions IAS 37 2009 Fair value measurement (guidance) 2010 Income tax IAS 12 2010 Leases IAS 17 2011 Revenue recognition IAS 18 2011 Retirement benefit plans IAS 19 2011 Insurance contracts IFRS 4 2011
    114. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2009 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. 

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