An Overview          September 2011                           September 2011
Insights into IFRS: An overview | 1INSIGHTS INTO IFRS:AN OVERVIEWInsights into IFRS: An overview brings together all of th...
2 | Insights into IFRS: An overviewCONTENTS1. 	 Background	                                                               ...
Insights into IFRS: An overview | 3      4.4 	 Employee benefits	                                               52      4....
4 | Insights into IFRS: An overview1. 	 BACKGROUND1.1 	 Introduction	           (IFRS Foundation Constitution, Preface to ...
Insights into IFRS: An overview | 51.2	 The Conceptual Framework	       (IASB Conceptual Framework)Overview of currently e...
6 | Insights into IFRS: An overviewGeneral requirementsThe fair value of a non-financial asset is based on its highest and...
Insights into IFRS: An overview | 7•• Level 2. Fair values measured using inputs other than quoted prices included within ...
8 | Insights into IFRS: An overviewNon-performance riskNon-performance risk, including own credit risk, is considered in m...
Insights into IFRS: An overview | 92. 	 GENERAL ISSUES2.1 	 Form and components of financial statements	       (IAS 1, IAS...
10 | Insights into IFRS: An overview   those that would never be reclassified to profit or loss. Consequently an entity th...
Insights into IFRS: An overview | 112.2	 Changes in equity	       (IAS 1)Overview of currently effective requirements•• An...
12 | Insights into IFRS: An overview2.3	 Statement of cash flows	           (IAS 7)Overview of currently effective require...
Insights into IFRS: An overview | 132.4 	 Basis of accounting	       (IAS 1, IAS 21, IAS 29, IFRIC 7)Overview of currently...
14 | Insights into IFRS: An overview2.5	 Consolidation	           (IAS 27, SIC‑12)Overview of currently effective requirem...
Insights into IFRS: An overview | 15•• Losses in a subsidiary may create a deficit balance in NCI.•• NCI in the statement ...
16 | Insights into IFRS: An overview2.5A	Consolidation: IFRS 10	           (IFRS 10)Overview of forthcoming requirements••...
Insights into IFRS: An overview | 17•• To determine whether it is an agent, the decision maker considers substantive remov...
18 | Insights into IFRS: An overview2.6	 Business combinations	           (IFRS 3)Overview of currently effective requirem...
Insights into IFRS: An overview | 19•• The identifiable assets acquired and the liabilities assumed as part of a business ...
20 | Insights into IFRS: An overviewForthcoming requirementsRevised consolidation requirementsIFRS 10 supersedes IAS 27 in...
Insights into IFRS: An overview | 212.7 	 Foreign currency translation	       (IAS 21, IAS 29)Overview of currently effect...
22 | Insights into IFRS: An overview•• When financial statements are translated into a presentation currency other than th...
Insights into IFRS: An overview | 232.8	 Accounting policies, errors and estimates	       (IAS 1, IAS 8)Overview of curren...
24 | Insights into IFRS: An overview2.9	 Events after the reporting period	           (IAS 1, IAS 10)Overview of currently...
Insights into IFRS: An overview | 253. 	 SPECIFIC STATEMENT OF FINANCIAL     POSITION ITEMS3.1 	 General	       (IAS 1)Ove...
26 | Insights into IFRS: An overview3.2 	 Property, plant and equipment	           (IAS 16, IFRIC 1, IFRIC 18)Overview of ...
Insights into IFRS: An overview | 27Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value ...
28 | Insights into IFRS: An overview3.3 	 Intangible assets and goodwill	           (IFRS 3, IAS 38, SIC-32)Overview of cu...
Insights into IFRS: An overview | 29Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value ...
30 | Insights into IFRS: An overview3.4 	 Investment property	           (IAS 17, IAS 40)Overview of currently effective r...
Insights into IFRS: An overview | 31Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value ...
32 | Insights into IFRS: An overview3.5 	 Investments in associates and the equity method	           (IAS 28)Overview of c...
Insights into IFRS: An overview | 33•• In our view, when an entity contributes a controlling interest in a subsidiary in e...
34 | Insights into IFRS: An overviewChange in ownership interestIf an entity’s ownership interest in an equity-accounted i...
Insights into IFRS: An overview | 353.6	 Investments in joint ventures and proportionate     consolidation	       (IAS 31,...
36 | Insights into IFRS: An overviewForthcoming requirementsVenture capital organisations and similar entitiesIAS 28 (2011...
Insights into IFRS: An overview | 373.6A	Investments in joint arrangements	        (IFRS 11)Overview of forthcoming requir...
38 | Insights into IFRS: An overview3.8 	 Inventories	           (IAS 2)Overview of currently effective requirements•• Gen...
Insights into IFRS: An overview | 393.9	 Biological assets	       (IAS 41)Overview of currently effective requirements•• B...
40 | Insights into IFRS: An overview3.10 	Impairment of non-financial assets	           (IAS 36, IFRIC 10)Overview of curr...
Insights into IFRS: An overview | 41•• An impairment loss for a CGU is allocated first to any goodwill and then pro rata t...
42 | Insights into IFRS: An overviewFair value less costs of disposal of an associateIn determining the fair value less co...
Insights into IFRS: An overview | 433.12	 Provisions, contingent assets and liabilities	       (IAS 37, IFRIC 1, IFRIC 5, ...
44 | Insights into IFRS: An overview•• Details of contingent liabilities are disclosed in the notes to the financial state...
Insights into IFRS: An overview | 453.13	 Income taxes	        (IAS 12, SIC-21, SIC-25)Overview of currently effective req...
46 | Insights into IFRS: An overview•• Income tax related to items recognised outside profit or loss is itself recognised ...
Insights into IFRS: An overview | 474.	     SPECIFIC STATEMENT OF COMPREHENSIVE        INCOME ITEMS4.1	 General	       (IA...
48 | Insights into IFRS: An overviewForthcoming requirementsPresentation of other comprehensive incomePresentation of Othe...
Insights into IFRS: An overview | 494.2	 Revenue	       (Conceptual Framework, IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 1...
50 | Insights into IFRS: An overviewIFRS 13 also amends IFRIC 13 to specify that non-performance risk also is taken intoac...
Insights into IFRS: An overview | 514.3 	 Government grants	       (IAS 20, IAS 41, SIC-10)Overview of currently effective...
52 | Insights into IFRS: An overview4.4 	 Employee benefits	           (IAS 19, IFRIC 14)Overview of currently effective r...
Insights into IFRS: An overview | 53•• Actuarial gains and losses of defined benefit plans may be recognised in profit or ...
54 | Insights into IFRS: An overviewForthcoming requirementsRevised employee benefits requirementsIAS 19 (2011) changes th...
Insights into IFRS: An overview | 55Taxes payable by the planIAS 19 (2011) distinguishes between taxes payable by the plan...
56 | Insights into IFRS: An overviewassets are insufficient. These kinds of criteria are reflected in the measurement of t...
Insights into IFRS: An overview | 57All changes in the value of the defined benefit obligation, in the value of plan asset...
58 | Insights into IFRS: An overviewAs the approach taken by IAS 19 (2011) is to calculate and recognise the net interest ...
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IFRS An Overview 2011

  1. 1. An Overview September 2011 September 2011
  2. 2. Insights into IFRS: An overview | 1INSIGHTS INTO IFRS:AN OVERVIEWInsights into IFRS: An overview brings together all of theindividual overview sections from our publication Insightsinto IFRS, KPMG’s practical guide to International FinancialReporting Standards, 8th Edition 2011/12.The overview of the requirements of IFRSs and theinterpretative positions described in Insights into IFRSreflect the work of both current and former members ofthe KPMG International Standards Group and were madepossible by the invaluable input of many people workingin KPMG member firms worldwide. This overview shouldbe read in conjunction with Insights into IFRS in order tounderstand more fully the requirements of IFRSs. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  3. 3. 2 | Insights into IFRS: An overviewCONTENTS1. Background 4 1.1 Introduction 4 1.2 The Conceptual Framework 52. 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 243. 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 37 3.7 [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 454. Specific statement of comprehensive income items 47 4.1 General 47 4.2 Revenue 49 4.3 Government grants 51© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  4. 4. Insights into IFRS: An overview | 3 4.4 Employee benefits 52 4.5 Share-based payments 61 4.6 Borrowing costs 635. 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 837. 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 Recognition and derecognition .5 92 7 Measurement and gains and losses .6 94 7.7 Hedge accounting 99 7.8 Presentation and disclosure 100 7A Financial instruments: IFRS 9 103Appendix I: Currently effective requirements andforthcoming requirements 106Appendix II: Future developments 119About this publication 133 © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  5. 5. 4 | Insights into IFRS: An overview1. BACKGROUND1.1 Introduction (IFRS Foundation Constitution, Preface to IFRSs, IAS 1)Overview of currently effective requirements•• ‘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).© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  6. 6. Insights into IFRS: An overview | 51.2 The Conceptual Framework (IASB Conceptual Framework)Overview of currently effective requirements•• 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 value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.Forthcoming requirementsFair value measurementIFRS 13 provides a single source of guidance on how fair value is measured. This guidanceis applied when fair value is required or permitted by other IFRSs; IFRS 13 does notestablish requirements for when fair value is required or permitted.IFRS 13 provides a framework for determining fair value, i.e. it clarifies the factors to beconsidered in estimating fair value. While it includes descriptions of certain valuationapproaches and techniques, it does not establish valuation standards on how valuationsshould be performed.DefinitionUnder IFRS 13, fair value is the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participants at themeasurement date, i.e. an exit price. The transfer notion, referred to in the valuation of aliability, is different from the settlement notion that is included in the current definition offair value in IAS 39. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  7. 7. 6 | Insights into IFRS: An overviewGeneral requirementsThe fair value of a non-financial asset is based on its highest and best use from theperspective of market participants, which may be on a stand-alone basis or based on itsuse in combination with complementary assets or liabilities.IFRS 13 generally does not specify the unit of account for measurement. This isestablished instead under the specific IFRS that requires or permits the fair valuemeasurement or disclosure. For example, the unit of account in IAS 39 or IFRS 9 generallyis an individual financial instrument whereas the unit of account in IAS 36 often is a groupof 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 valuationtechnique to measure fair value that is appropriate in the circumstances, maximising theuse of relevant observable inputs and minimising the use of unobservable inputs. The bestevidence 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 notavailable and the liability is held by another entity as an asset, the liability is valued fromthe perspective of a market participant that holds the asset. Failing that, other valuationtechniques are used to value the liability from the perspective of a market participant thatowes the liability. A similar approach is also used when valuing an entity’s own equityinstruments.Inputs used in measuring fair value reflect the characteristics of the asset or liability that amarket participant would take into account and are not based on the entity’s specific useor plans. Such asset- or liability-specific characteristics include the condition and locationof an asset or restrictions on an asset’s sale or use that are a characteristic of the assetrather than of the entity’s holding.Fair value hierarchyInputs to valuation techniques used to measure fair value are prioritised in what is referredto as ‘the fair value hierarchy’. The concept of a fair value hierarchy was already includedin IFRS 7 and the definitions of the three levels have not changed from those currently inIFRS 7 .•• Level 1. Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  8. 8. Insights into IFRS: An overview | 7•• 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 theirentirety based on the lowest level input that is significant to the measurement. Assessingsignificance 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 marketAn entity values assets, liabilities and its own equity instruments assuming a transactionin the principal market for the asset or liability, i.e. the market with the highest volume andlevel of activity. In the absence of a principal market, it is assumed that the transactionwould occur in the most advantageous market. This is the market that would maximisethe 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. Ineither case, the entity must have access to the market on the measurement date. Inthe absence of evidence to the contrary, the market in which the entity would normallysell the asset or transfer the liability is assumed to be the principal market or mostadvantageous market.Transaction costsTransaction costs are not a component of a fair value measurement although they areconsidered in determining the most advantageous market.Premium or discountAlthough a premium or a discount may be an appropriate input to a valuation technique, itshould not be applied if it is inconsistent with the relevant unit of account. For example, acontrol premium is not applied if the unit of account is an individual share even if the entityhas a large holding. Blockage factors reflect size as a characteristic of an entity’s holdingrather than of the asset and therefore cannot be applied. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  9. 9. 8 | Insights into IFRS: An overviewNon-performance riskNon-performance risk, including own credit risk, is considered in measuring the fair valueof a liability, but separate inputs to reflect restrictions on the transfer of a liability or anentity’s own equity instruments are not applied.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  10. 10. Insights into IFRS: An overview | 92. GENERAL ISSUES2.1 Form and components of financial statements (IAS 1, IAS 27)Overview of currently effective requirements•• The following are presented: a statement of financial position; a statement of comprehensive 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.Forthcoming requirementsPresentation of other comprehensive incomePresentation of Other Comprehensive Income – Amendments to IAS 1 amends 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 © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  11. 11. 10 | Insights into IFRS: An overview 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  12. 12. Insights into IFRS: An overview | 112.2 Changes in equity (IAS 1)Overview of currently effective requirements•• 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  13. 13. 12 | Insights into IFRS: An overview2.3 Statement of cash flows (IAS 7)Overview of currently effective requirements•• 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 closing cash 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  14. 14. Insights into IFRS: An overview | 132.4 Basis of accounting (IAS 1, IAS 21, IAS 29, IFRIC 7)Overview of currently effective requirements•• Financial statements are prepared on a modified historical cost basis with a growing emphasis on fair value.•• When an entity’s functional currency is hyperinflationary, its financial statements should be adjusted to state all items in the measuring unit current at the reporting date.Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishes acomprehensive disclosure framework for fair value measurements. See 1.2 for furtherdetails.Revised consolidation requirementsUnder IFRS 10, the concept of a special purpose entity (SPE) no longer exists and theconsolidation conclusion is no longer based solely on a risks and rewards analysis for suchentities. The consolidation conclusion for entities currently SPEs in the scope of SIC-12may need to be reconsidered under IFRS 10. See 2.5A for further details. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  15. 15. 14 | Insights into IFRS: An overview2.5 Consolidation (IAS 27, SIC‑12)Overview of currently effective requirements•• 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 organisations and 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 NCI are present ownership interests that entitle their holders to a proportionate share of the entity’s 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  16. 16. Insights into IFRS: An overview | 15•• 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 any retained 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 parent’s 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.Forthcoming requirementsRevised consolidation requirementsSee 2.5A for an overview of the revised consolidation requirements under IFRS 10. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  17. 17. 16 | Insights into IFRS: An overview2.5A Consolidation: IFRS 10 (IFRS 10)Overview of forthcoming requirements•• 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 current ability 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 facto power.•• 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 investor has 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, the link between power and returns is absent and the decision maker’s delegated power is treated as if it were held by its principal(s).© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  18. 18. Insights into IFRS: An overview | 17•• 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 arm’s 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  19. 19. 18 | Insights into IFRS: An overview2.6 Business combinations (IFRS 3)Overview of currently effective requirements•• All business combinations are accounted for using the acquisition method, with limited exceptions.•• A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.•• A business is an integrated set of activities and assets that is capable of being conducted and managed to provide a return to investors (or other owners, members or participants) by way of dividends, lower costs or other economic benefits.•• The acquirer in a business combination is the combining entity that obtains control of the other combining business or businesses.•• In some cases the legal acquiree is identified as the acquirer for accounting purposes (a reverse acquisition).•• The acquisition date is the date on which the acquirer obtains control of the acquiree.•• Consideration transferred by the acquirer, which generally is measured at fair value at the acquisition date, may include assets transferred, liabilities incurred by the acquirer to the previous owners of the acquiree and equity interests issued by the acquirer.•• Contingent consideration transferred is recognised initially at fair value. Contingent consideration classified as a liability generally is remeasured to fair value each period until settlement, with changes recognised in profit or loss. Contingent consideration classified as equity is not remeasured.•• Any items that are not part of the business combination transaction are accounted for outside the acquisition accounting. Examples include: – the settlement of a pre-existing relationship between the acquirer and the acquiree; – remuneration to employees who are former owners of the acquiree; and – acquisition-related costs.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  20. 20. Insights into IFRS: An overview | 19•• The identifiable assets acquired and the liabilities assumed as part of a business combination are recognised separately from goodwill at the acquisition date if they meet the definition of assets and liabilities and are exchanged as part of the business combination.•• The identifiable assets acquired and liabilities assumed as part of a business combination are measured at the acquisition date at their fair values.•• There are limited exceptions to the recognition and/or measurement principles in respect of contingent liabilities, deferred tax assets and liabilities, indemnification assets, employee benefits, re-acquired rights, share-based payment awards and assets held for sale.•• Goodwill or a gain on a bargain purchase is measured as a residual and is recognised as an asset. A gain on a bargain purchase is recognised in profit or loss after re-assessing the values used in the acquisition accounting.•• Adjustments to the acquisition accounting during the ‘measurement period’ reflect additional information about facts and circumstances that existed at the acquisition date. The measurement period ends when the acquirer obtains all information that is necessary to complete the acquisition accounting, or learns that more information is not available, and cannot exceed one year from the acquisition date.•• 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 NCI are present ownership interests that entitle their holders to a proportionate share of the entity’s net assets in liquidation. Other NCI generally are measured at fair value.•• When a business combination is achieved in stages (step acquisition), the acquirer’s previously held non-controlling equity interest in the acquiree is remeasured to fair value at the acquisition date, with any resulting gain or loss recognised in profit or loss.•• In general, items recognised in the acquisition accounting are measured and accounted for in accordance with the relevant IFRS subsequent to the business combination. However, as an exception, IFRS 3 includes some specific guidance for certain items, e.g. in respect of contingent liabilities and indemnification assets. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  21. 21. 20 | Insights into IFRS: An overviewForthcoming requirementsRevised consolidation requirementsIFRS 10 supersedes IAS 27 in determining whether one entity controls another, andintroduces a number of changes from the control model in IAS 27 See 2.5A for further .details.Fair value measurementIFRS 13 sets out general principles to be applied when measuring fair value; previouslythere 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 forfurther details.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  22. 22. Insights into IFRS: An overview | 212.7 Foreign currency translation (IAS 21, IAS 29)Overview of currently effective requirements•• 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 entity’s functional currency are foreign currency 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 foreign operation 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 hyperinflationary economy, 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 functional currency (presentation currency). © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  23. 23. 22 | Insights into IFRS: An overview•• When financial statements are translated into a presentation currency other than the entity’s 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  24. 24. Insights into IFRS: An overview | 232.8 Accounting policies, errors and estimates (IAS 1, IAS 8)Overview of currently effective requirements•• Accounting policies are 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 financial statements. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  25. 25. 24 | Insights into IFRS: An overview2.9 Events after the reporting period (IAS 1, IAS 10)Overview of currently effective requirements•• 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 that arose 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  26. 26. Insights into IFRS: An overview | 253. SPECIFIC STATEMENT OF FINANCIAL POSITION ITEMS3.1 General (IAS 1)Overview of currently effective requirements•• 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 period but 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  27. 27. 26 | Insights into IFRS: An overview3.2 Property, plant and equipment (IAS 16, IFRIC 1, IFRIC 18)Overview of currently effective requirements•• 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 restoring the 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 to future 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  28. 28. Insights into IFRS: An overview | 27Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishes acomprehensive disclosure framework for fair value measurements. See 1.2 for furtherdetails.IFRS 13 also amends IAS 16 as regards its disclosure requirements for assets carried atrevalued amounts, with new additional requirements being included within IFRS 13 forsuch assets. See 1.2 for further details. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  29. 29. 28 | Insights into IFRS: An overview3.3 Intangible assets and goodwill (IFRS 3, IAS 38, SIC-32)Overview of currently effective requirements•• An intangible asset is an identifiable non-monetary asset without physical substance.•• An intangible asset is identifiable if 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  30. 30. Insights into IFRS: An overview | 29Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishes acomprehensive disclosure framework for fair value measurements.In particular, IFRS 13 deletes the definition of an active market in IAS 38; the definition inIFRS 13 is applied instead. An active market is a market in which transactions for the assetor liability take place with sufficient frequency and volume for pricing information to beprovided on an ongoing basis. See 1.2 for further details. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  31. 31. 30 | Insights into IFRS: An overview3.4 Investment property (IAS 17, IAS 40)Overview of currently effective requirements•• Investment property is property held to earn rentals or for capital appreciation, or both.•• Property held by a lessee under an operating lease may be classified as investment property if the rest of the definition of investment property is met and the lessee measures all its investment property at fair value.•• A portion of a dual-use property is classified as investment property only if the portion could be sold or leased out under a finance lease. Otherwise the entire property is classified as property, plant and equipment, unless the portion of the property used for own use is insignificant.•• When a lessor provides ancillary services, the property is classified as investment property if such services are a relatively insignificant component of the arrangement as a whole.•• Investment property is recognised initially at cost.•• Subsequent to initial recognition, all investment property is measured using either the fair value model (subject to limited exceptions) or the cost model. When the fair value model is chosen, changes in fair value are recognised in profit or loss.•• Disclosure of the fair value of all investment property is required, regardless of the measurement model used.•• Subsequent expenditure is capitalised only when it is probable that it will give rise to future economic benefits.•• Transfers to or from investment property can be made only when there has been a change in the use of the property.•• The intention to sell an investment property without redevelopment does not justify reclassification from investment property into inventory; the property continues to be classified as investment property until the time of disposal unless it is classified as held for sale.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  32. 32. Insights into IFRS: An overview | 31Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishes acomprehensive disclosure framework for fair value measurements.In particular, IFRS 13 deletes the guidance in paragraph 51 of IAS 40. As a result, an entitymay include future cash flows arising from planned improvements to the extent that theyreflect the assumptions of market participants.See 1.2 for further details. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  33. 33. 32 | Insights into IFRS: An overview3.5 Investments in associates and the equity method (IAS 28)Overview of currently effective requirements•• 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 its subsequent disposal if the criteria are met for classification as held for sale.•• In applying the equity method, an associate’s accounting policies should be consistent with those of the investor.•• The reporting date of an associate may not differ from the investor’s 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 investor’s interest 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 investor’s interest in the investee.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  34. 34. Insights into IFRS: An overview | 33•• 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 investor’s 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.Forthcoming requirementsVenture capital organisations and similar entitiesIAS 28 (2011) retains the exception for venture capital organisations, and certainsimilar entities, although it is now characterised as a measurement rather than a scopeexception. The exception also applies to a portion of an investment in an associate held bysuch entities. However, it does not apply to a portion of an investment in an IFRS 11 jointventure (currently jointly controlled entity).Classification as held for saleIAS 28 (2011) contains more specific provisions in respect of the application of IFRS 5 toinvestments in associates or joint ventures. IFRS 5 applies to an investment, or a portionof an investment, in an associate or a joint venture that meets the criteria for classificationas held for sale. For any retained portion of the investment that has not been classified asheld for sale, the entity applies the equity method until disposal of the portion classifiedas held for sale. After disposal, any retained interest in the investment is accounted for inaccordance with IAS 39 or by using the equity method if the retained interest continues tobe an associate or a joint venture.Measurement of investmentsOn the adoption of IFRS 9, all equity investments are measured at fair value, includingretrospectively 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 othercomprehensive income may be transferred within equity but will not be reclassified toprofit or loss. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  35. 35. 34 | Insights into IFRS: An overviewChange in ownership interestIf an entity’s ownership interest in an equity-accounted investee is reduced, but theequity method continues to be applied, then an entity reclassifies to profit or loss anyequity-accounted gain or loss previously recognised in other comprehensive income inproportion to the reduction in the ownership interest. IAS 28 (2011) makes clear that suchreclassification applies only if that gain or loss would be required to be reclassified to profitor loss on disposal of the related asset or liability. Cumulative translation adjustmentson foreign operations are an example of such a gain or loss that is now proportionatelyreclassified in such circumstances.Under IAS 28 (2011), if an investment in an associate becomes an investment in a jointventure, or vice versa, then the equity method continues to be applied and there is noremeasurement of the retained interest.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  36. 36. Insights into IFRS: An overview | 353.6 Investments in joint ventures and proportionate consolidation (IAS 31, SIC-13)Overview of currently effective requirements•• A joint venture is an entity, asset or operation that is subject to contractually established joint control.•• Jointly controlled entities may be accounted for either by proportionate consolidation or 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 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 investor’s 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 investor’s 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 investor’s 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, the liabilities and expenses it incurs and its share of the income from the joint operation. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  37. 37. 36 | Insights into IFRS: An overviewForthcoming requirementsVenture capital organisations and similar entitiesIAS 28 (2011) retains the exception for venture capital organisations, and certainsimilar entities, although it is now characterised as a measurement rather than a scopeexception. The exception also applies to a portion of an investment in an associate held bysuch entities. However, it does not apply to a portion of an investment in an IFRS 11 jointventure (currently jointly controlled entity).Classification as held for saleIAS 28 (2011) contains more specific provisions in respect of the application of IFRS 5 toinvestments in associates or joint ventures. IFRS 5 applies to an investment, or a portionof an investment, in an associate or a joint venture that meets the criteria for classificationas held for sale. For any retained portion of the investment that has not been classified asheld for sale, the entity applies the equity method until disposal of the portion classifiedas held for sale. After disposal, any retained interest in the investment is accounted for inaccordance with IAS 39 or by using the equity method if the retained interest continues tobe an associate or a joint venture.Non-monetary contributions by venturersSIC-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 notconsidered necessary, namely:•• the transfer of significant risks and rewards; and•• the reliable measurement of the gain or loss.Accounting for jointly controlled entitiesUnder IFRS 11, all joint ventures are accounted for using the equity method in accordancewith IAS 28 (2011), unless the entity is exempt from applying the equity method. Theoption to use proportionate consolidation has been eliminated by IFRS 11. See 3.6A forfurther details.Under IAS 28 (2011), if an investment in an associate becomes an investment in a jointventure, or vice versa, then the equity method continues to be applied and there is noremeasurement of the retained interest.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  38. 38. Insights into IFRS: An overview | 373.6A Investments in joint arrangements (IFRS 11)Overview of forthcoming requirements•• A joint arrangement is 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 a joint operation, the parties to the arrangement have rights to the assets and obligations for the liabilities related to the arrangement.•• In a joint 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 equity method 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  39. 39. 38 | Insights into IFRS: An overview3.8 Inventories (IAS 2)Overview of currently effective requirements•• 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) or weighted 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.Forthcoming requirementsFair value measurementIFRS 13 deletes the fair value measurement guidance currently included in paragraph 7of 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 establishesa comprehensive disclosure framework for fair value measurements. See 1.2 forfurther details.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  40. 40. Insights into IFRS: An overview | 393.9 Biological assets (IAS 41)Overview of currently effective requirements•• 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.Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishesa comprehensive disclosure framework for fair value measurements. See 1.2 forfurther details. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  41. 41. 40 | Insights into IFRS: An overview3.10 Impairment of non-financial assets (IAS 36, IFRIC 10)Overview of currently effective requirements•• 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 entity’s 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 goodwill arose 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 asset’s or CGU’s 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 market’s assessment of the risks specific to the asset or CGU, as well as the time value of money.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  42. 42. Insights into IFRS: An overview | 41•• An impairment loss for a CGU is allocated first to any goodwill and then pro rata to 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 to the 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.Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishesa comprehensive disclosure framework for fair value measurements. See 1.2 forfurther details.Regarding the use of depreciated replacement cost to determine fair value less costs ofdisposal, this method is not ruled out by IFRS 13 assuming that market participants wouldvalue the asset or CGU in this manner.At this early stage it is not clear whether the fair value less costs of disposal of alisted subsidiary that constitutes a CGU could be valued taking into account a controlpremium. On the one hand, the unit of account in accordance with IAS 36 is the CGU (thesubsidiary) as a whole, which implies that a control premium may be appropriate. But onthe other hand, IFRS 13 states that when a Level 1 input (i.e. fair values measured usingquoted prices (unadjusted) in active markets for identical assets or liabilities) is availablefor an asset or liability, it is used without adjustment except in specific circumstances thatdo not apply in this case. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  43. 43. 42 | Insights into IFRS: An overviewFair value less costs of disposal of an associateIn determining the fair value less costs of disposal of an associate, IFRS 13 allows apremium 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-accountedinvestee are publicly traded.Investments in joint venturesUnder IFRS 11, joint ventures (currently jointly controlled entities) are accounted for usingthe equity method and the option of using proportionate consolidation is eliminated. Ontransition, the guidance on impairment testing for associates applies to investments injoint ventures. See 3.6A for further details.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  44. 44. Insights into IFRS: An overview | 433.12 Provisions, contingent assets and liabilities (IAS 37, IFRIC 1, IFRIC 5, IFRIC 6)Overview of currently effective requirements•• 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. Probable in this context means more likely than not.•• A constructive obligation arises when an entity’s actions create valid expectations of third 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 to be derived.•• Contingent liabilities are 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  45. 45. 44 | Insights into IFRS: An overview•• Details of contingent liabilities are disclosed in the notes to the financial statements unless the probability of an outflow is remote.•• Contingent assets are possible assets whose existence is uncertain.•• Contingent assets are not recognised in the statement of financial position. If an inflow of economic benefits is probable, then details are disclosed in the notes.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  46. 46. Insights into IFRS: An overview | 453.13 Income taxes (IAS 12, SIC-21, SIC-25)Overview of currently effective requirements•• Income taxes are taxes based on taxable profits and taxes that are payable by a subsidiary, associate or joint venture on distribution to investors.•• The total income tax expense/(income) recognised in a period is the sum of current tax plus the change in deferred tax assets and liabilities during the period, excluding tax recognised outside profit or loss (i.e. either in other comprehensive income or directly in equity) or arising from a business combination.•• Current tax represents the amount of income taxes payable (recoverable) in respect of the taxable profit (loss) for a period.•• Deferred tax is recognised for the estimated future tax effects of temporary differences, unused tax losses carried forward and unused tax credits carried forward.•• A temporary difference is the difference between the tax base of an asset or liability and its carrying amount in the financial statements.•• A deferred tax liability is not recognised if it arises from the initial recognition of goodwill.•• A deferred tax liability (asset) is not recognised if it arises from the initial recognition of an asset or liability in a transaction that is not a business combination, and at the time of the transaction affects neither accounting profit nor taxable profit.•• Deferred tax is not recognised in respect of investments in subsidiaries, associates and joint ventures if certain conditions are met.•• A deferred tax asset is recognised to the extent that it is probable that it will be realised.•• Income tax is measured based on rates that are enacted or substantively enacted at the reporting date.•• Deferred tax is measured based on the expected manner of settlement (liability) or recovery (asset).•• Deferred tax is measured on an undiscounted basis.•• Deferred tax is classified as non-current in a classified statement of financial position. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  47. 47. 46 | Insights into IFRS: An overview•• Income tax related to items recognised outside profit or loss is itself recognised outside profit or loss.Forthcoming requirementsTax base of investment propertyDeferred Tax: Recovery of Underlying Assets – Amendments to IAS 12 introduces arebuttable presumption that the carrying amount of investment property measured atfair value will be recovered through sale. Therefore, deferred taxes arising from suchinvestment property are measured based on the tax consequences resulting fromrecovering the carrying amount of the investment property entirely through sale.The presumption is rebutted if the investment property is depreciable and held in abusiness model whose objective is to consume substantially all of the economic benefitsof the investment property through use.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  48. 48. Insights into IFRS: An overview | 474. SPECIFIC STATEMENT OF COMPREHENSIVE INCOME ITEMS4.1 General (IAS 1)Overview of currently effective requirements•• 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  49. 49. 48 | Insights into IFRS: An overviewForthcoming requirementsPresentation of other comprehensive incomePresentation of Other Comprehensive Income – Amendments to IAS 1 amends 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 othercomprehensive income and whether items presented in other comprehensive incomecan be reclassified to profit or loss.Separate presentation on face of statement of comprehensive incomeUnder IFRS 9, the following items are separately disclosed on the face of the statement ofcomprehensive 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 asset’s 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  50. 50. Insights into IFRS: An overview | 494.2 Revenue (Conceptual Framework, IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, SIC-27, SIC‑31)Overview of currently effective requirements•• 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 its own 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.Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishes acomprehensive disclosure framework for fair value measurements. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  51. 51. 50 | Insights into IFRS: An overviewIFRS 13 also amends IFRIC 13 to specify that non-performance risk also is taken intoaccount when measuring the value of the award credits.See 1.2 for further details.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  52. 52. Insights into IFRS: An overview | 514.3 Government grants (IAS 20, IAS 41, SIC-10)Overview of currently effective requirements•• 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 nominal amount paid.Forthcoming requirementsFair value measurementIFRS 13 replaces most of the fair value measurement guidance currently included inindividual IFRSs; the general valuation principles in IFRS 13 are applied instead. It providesa single definition of fair value and fair value application guidance, and establishesa comprehensive disclosure framework for fair value measurements. See 1.2 forfurther details. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  53. 53. 52 | Insights into IFRS: An overview4.4 Employee benefits (IAS 19, IFRIC 14)Overview of currently effective requirements•• 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 benefits are employee benefits that are payable after the completion of employment (before or during retirement).•• Short-term employee benefits are 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 benefits are 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 plan is 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 employer’s 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  54. 54. Insights into IFRS: An overview | 53•• 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 the contractual agreement is recognised.•• If there is a contractual agreement or stated policy for allocating a group’s 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  55. 55. 54 | Insights into IFRS: An overviewForthcoming requirementsRevised employee benefits requirementsIAS 19 (2011) changes the definition of both short-term and other long-term employeebenefits so that it is clear that the distinction between the two depends on when the entityexpects the benefit to be settled. Under the amended definitions:•• short-term employee benefits are 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 benefits are 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 reclassifybetween short-term and other long-term benefits. Reclassification of a short-termemployee benefit as long-term need not occur if the entity’s expectations of the timingof settlement change temporarily. However, the benefit will have to be reclassified if theentity’s 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 anaccumulating benefit. In this case, the entity will need to consider whether the benefit stillmeets the definition of a short-term employee benefit.Multi-employer plansIAS 19 (2011) sets out the accounting to be applied when participation in a multi-employerplan ceases. The new requirement is that an entity should apply IAS 37 when determiningwhen to recognise and how to measure a liability that arises from the wind-up of a multi-employer defined benefit plan, or the entity’s withdrawal from a multi-employer definedbenefit plan.Expected return on plan assetsIAS 19 (2011) changes the manner in which interest cost is calculated. The expected returnon plan assets will no longer be calculated and recognised as interest income.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  56. 56. Insights into IFRS: An overview | 55Taxes payable by the planIAS 19 (2011) distinguishes between taxes payable by the plan on contributions related toservice before the reporting date or on benefits resulting from that service and all othertaxes 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 benefitobligation. All other taxes payable by the plan are included in the return on plan assets.Plan administration costsUnder 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 areprovided. However, the Basis for Conclusions notes that the IASB decided that an entityshould recognise administration costs when the administration services are provided.Therefore, the currently permitted inclusion of such costs within the measurement of thedefined benefit obligation will cease to be allowed under IAS 19 (2011). Instead they will betreated as an expense within profit or loss.Risk-sharing features and contributions from employees or third partiesUnder IAS 19 (2011) the measurement of the defined benefit obligation takes intoconsideration risk-sharing features and contributions from employees or third parties thatare not reimbursement rights.IAS 19 (2011) distinguishes between discretionary contributions and contributions that areset 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 ofperformance 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 © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  57. 57. 56 | Insights into IFRS: An overviewassets are insufficient. These kinds of criteria are reflected in the measurement of thedefined benefit obligation, regardless of whether the changes in benefits resulting fromthe criteria either being or not being met are automatic or are subject to a decision by theentity, by the employee or by a third party such as the trustee or administrators of the plan.Optionality included in the planUnder IAS 19 (2011) actuarial assumptions include an assumption about the proportionof plan members who will select each form of settlement option available under the planterms. 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 willarise if the choice of settlement taken by the employee is not the one that the entity hasassumed will be taken.Other actuarial assumptionsIAS 19 (2011) includes some limited changes to other actuarial assumptions, which are notexpected 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 – RecognitionUnder IAS 19 (2011) the net defined benefit liability (asset) is recognised in the statementof 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.© 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  58. 58. Insights into IFRS: An overview | 57All changes in the value of the defined benefit obligation, in the value of plan assets and inthe 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 – PresentationUnder 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 duringthe 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 netdefined benefit liability (asset) is determined by applying the discount rate used to measurethe 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 definedbenefit 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. © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
  59. 59. 58 | Insights into IFRS: An overviewAs the approach taken by IAS 19 (2011) is to calculate and recognise the net interest on thenet defined benefit liability (asset) in profit or loss, the net interest income or expense willbe presented in one line item, as opposed to the currently available policy of including thegross amounts of interest cost and expected return on plan assets with interest and otherfinancial income respectively.RemeasurementsUnder IAS 19 (2011) remeasurements of a net defined benefit liability (asset) arerecognised in other comprehensive income and comprise:•• actuarial gains and losses on the defined benefit obligation;• 

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