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A practical guide_to_new_ifr_ss_2011

  1. 1. www.pwc.com/ifrs A practical guide to new IFRSs for 2011March 2011
  2. 2. PwC’s IFRS and corporate governance publications and tools 2011IFRS technical publications Manual of accounting – IFRS 2011 IFRS pocket guide 2010 Global guide to IFRS providing comprehensive practical guidance Provides a summary of the IFRS recognition and measurement on how to prepare financial statements in accordance with requirements. Including currencies, assets, liabilities, equity, IFRS. Includes hundreds of worked examples and extracts from income, expenses, business combinations and interim company accounts. The Manual is a three-volume set comprising: financial statements. • Manual of accounting – IFRS 2011 • Manual of accounting – Financial instruments 2011 • Illustrative IFRS corporate consolidated financial statements for 2010 year ends IFRS student manual 2010 Designed as a practical guide to IFRS for researchers, teachers, students and those studying for professional exams. A practical guide to capitalisation of borrowing costs Includes worked examples and illustrations from real IFRS Guidance in question and answer format addressing the challenges financial statements. of applying IAS 23R, including how to treat specific versus general borrowings, when to start capitalisation and whether the scope exemptions are mandatory or optional. Illustrative interim financial information 2011 Illustrative information, prepared in accordance with IAS 34, reflecting standards issued up to March 2011. Includes a disclosure A practical guide to new IFRSs for 2011 checklist, IAS 34 application guidance and an appendix for first- A 24-page guide providing high-level outline of the key time adopters. requirements of new IFRSs effective in 2011, in question and answer format. Illustrative IFRS corporate consolidated financial statements for 2010 year ends A practical guide to segment reporting Illustrative set of consolidated financial statements for an existing Provides an overview of the key requirements of IFRS 8, ‘Operating preparer of IFRS. Includes appendices with disclosures for first-time segments’, and some points to consider as entities prepare for the adopters, and for IFRS 9. Included with ‘Manual of accounting – application of this standard for the first time. IFRS 2011’; also available separately. Illustrative consolidated financial statements • Investment property, 2009 • Private equity, 2009 A practical guide to share-based payments • Banking, 2009 • Insurance, 2009 Answers the questions we have been asked by entities • Investment funds, 2009 and includes practical examples to help management draw Realistic sets of financial statements – for existing IFRS similarities between the requirements in the standard and their own preparers in the above sectors – illustrating the required disclosure share-based payment arrangements. Updated in February 2011. and presentation. Available in PDF format only. Impairment guidance Guidance includes: Executive guide to IFRS – Topic summaries 2010 Key information on the major accounting topic areas. Each summary includes an explanation of current requirements along with a resources table showing external source material as well as PwC e • Questions and answers on impairment of nonfinancial assets in the current crisis • Top 10 tips for impairment testing. guidance and publications that relate to the topic. Manual of accounting – Financial instruments 2011 Comprehensive guidance on all aspects of the requirements Financial instruments under IFRS – A guide through for financial instruments accounting. Detailed explanations the maze illustrated through worked examples and extracts from company High-level summary of IAS 32, IAS 39 and IFRS 7, updated in June accounts. Included with ‘Manual of accounting – IFRS 2011’; also 2009. For existing IFRS preparers and first-time adopters. available separately. Preparing your first IFRS financial statements:  IAS 39 – Achieving hedge accounting in practice Adopting IFRS Covers in detail the practical issues in achieving hedge Outlines how companies should address the process of selecting accounting under IAS 39. It provides answers to frequently asked their new IFRS accounting policies and applying the guidance in questions and step-by-step illustrations of how to apply common IFRS 1. Provides specific considerations for US market. hedging strategies. IFRS and US GAAP: similarities and differences A 240 –page comparison of the similarities and differences between IAS 39 – Derecognition of financial assets in practice the reporting methods and the subsequent impact on entities. Order Explains the requirements of IAS 39, providing answers to hard copies from kerstine.stephenson@us.pwc.com. frequently asked questions and detailed illustrations of how to apply the requirements to traditional and innovative structures. IFRS 3R: Impact on earnings – the crucial Q&A for Keeping up to date decision-makers Stay informed about key IFRS developments via free email alerts. Guide aimed at finance directors, financial controllers and deal- IFRS mail-shot makers, providing background to the standard, impact on the Twice-monthly email summarising new items added to pwc.com/ifrs, financial statements and controls, and summary differences with including breaking news from the IASB on new standards, exposure drafts and US GAAP. interpretations; PwC IFRS publications and quarterly updates; IFRS blog posts; PwC webcasts; and more. IFRS news IFRS disclosure checklist 2010 Monthly newsletter focusing on the business implications of the IASB’s proposals Outlines the disclosures required for 31 December 2010 year ends. and new standards. To subscribe, email corporatereporting@uk.pwc.com Only available in electronic format. To download visit ‘Publications’ page at www.pwc.com/ifrs
  3. 3. Contents PageIntroduction 21. New and amended standards Financial instruments: • Classification of rights issues – IAS 32 amendment 4 • Disclosures on transfers of financial assets – IFRS 7 amendment 5 • Classification and measurement of financial assets − IFRS 9 6 • Classification and measurement of financial liabilities – IFRS 9 8 Deferred tax accounting for investment property at fair value – IAS 12 amendment 11 Related-party disclosures – IAS 24 amendment 13 First-time adoption: • Financial instrument disclosures – IFRS 1 amendment 15 • Severe hyperinflation and effective dates – IFRS 1 amendments 162. New and amended interpretations Pre-payments of a minimum funding requirement − IFRIC 14 amendment 18 Extinguishing financial liabilities with equity instruments – IFRIC 19 193. Annual improvements project 2010 21 PwC – A practical guide to new IFRSs for 2011 1
  4. 4. Introduction This publication is a practical guide to the – comes into effect in 2011. It clarifies the new IFRS standards and interpretations that accounting when an entity renegotiates come into effect in 2011. Significant changes the terms of its debt when the liability is to IFRS are due to be published in 2011, but extinguished by the debtor issuing its own there is a relatively small number of changes equity. It applies from 1 July 2010. that come into effect for 2011 year ends: a Two further amendments that have effective new financial instrument standard, an IFRIC, dates in 2010 will impact 2011 year a number of amendments to standards and ends. Amendments to IAS 32, ‘Financial the annual improvements project. instruments: Presentation’, on classification IFRS 9, ‘Financial instruments’, was of rights issues and amendment to IFRS 1, reissued in 2010 to include guidance on ‘First-time adoption of IFRS’, on financial financial liabilities and derecognition instrument disclosures. Amendments of financial instruments. This material that apply from 1 January 2011 include was relocated from IAS 39, ‘Financial an amendment to IAS 24, ‘Related party instruments: Recognition and disclosures’, and an amendment to measurement’, without change, except for IFRIC 14, ‘IAS 19 – The limit on a financial liabilities that are designated at defined benefit asset, minimum funding fair value through profit or loss. The rules requirements and their interaction’. on the classification and measurement of The IASB’s 2010 annual improvements financial assets were previously published in project have affected a number of standards. the earlier version of IFRS 9. The standard Some of the changes address inconsistency is being added to as the IASB endorses in terminology between the standards; different phases of the project to replace others will impact certain entities and IAS 39. The reissued IFRS 9 applies therefore need careful consideration. to 2013 year ends but can be adopted with immediate effect (subject to EU The table on p3 summarises the endorsement for European entities). implementation dates for the new and amended IFRSs that are considered in Only one IFRIC – IFRIC 19, ‘Extinguishing more detail in the pages that follow. financial liabilities with equity instruments’2 PwC – A practical guide to new IFRSs for 2011
  5. 5. AdoptedStandard by EU Early-adoption status PageChanges that apply from 1 February 2010Amendments to IAS 32, ‘Financial instruments: 4 N/A 4Presentation’, on classification of rights issuesChanges that apply from 1 July 2010Amendment to IFRS 1, ‘First-time adoption’, on financial 4 N/A 15instrument disclosuresIFRIC 19, ‘Extinguishing financial liabilities with equity 4 N/A 19instruments’Annual improvements 2010Amendment to IAS 27, ‘Consolidated and separate 4 N/A 21financial statements’*Amendment to IFRS 3, ‘Business combinations’ – 4 N/A 23contingent considerationAmendment to IFRS 3, ‘Business combinations’ – share- 4 N/A 24based payment transactionsAmendment to IFRS 3, ‘Business combinations’ – 4 N/A 23non-controlling interestsChanges that apply from 1 January 2011Amendment to IAS 24, ‘Related party disclosures’ 4 Early adoption is permitted 13Amendment to IFRIC 14, ‘IAS 19 – The limit on a defined 4 Early adoption is permitted 18benefit asset, minimum funding requirements and theirinteraction’Annual improvements 2010Amendment to IAS 1, ‘Presentation of financial 4 Early adoption is permitted 21statements’Amendment to IAS 34, ‘Interim financial reporting’ 4 Early adoption is permitted 21Amendment to IFRS 1, ‘First-time adoption’ – interim 4 Early adoption is permitted 22informationAmendment to IFRS 1, ‘First-time adoption’ – deemed 4 Early adoption is permitted 22cost exemptionAmendment to IFRS 1, ‘First-time adoption’ – 4 Early adoption is permitted 23rate-regulated entitiesAmendment to IFRS 7, Financial instruments: 4 Early adoption is permitted 24Disclosures’ – nature and extent of risks arising fromfinancial instrumentsAmendment to IFRIC 13, ‘Customer loyalty programmes’ 4 Early adoption is permitted 24– fair valueChanges that apply from 1 July 2011Amendment to IFRS 1, ‘First-time adoption’ – exemption Early adoption is permitted 16for severe hyperinflation and removal of fixed datesAmendment to IFRS 7, ‘Financial instruments: Early adoption is permitted 5Disclosures’ – disclosures on transfers of financial assetsChanges that apply from 1 January 2012Amendment to IAS 12, ‘Income taxes’ – deferred tax Early adoption is permitted 11accounting for investment propertiesChanges that apply from 1 January 2013IFRS 9, ‘Financial instruments’ – classification of financial Early adoption is permitted 6assets and financial liabilities*Effective date: Annual periods starting 1 July 2009 PwC – A practical guide to new IFRSs for 2011 3
  6. 6. Financial instruments Classification of rights issues – IAS 32 amendment ‘Classification of rights issues – an with the substance of the transaction, which amendment to IAS 32’ was published on represents a transaction with owners acting 8 October 2009. The amendment recognises in their capacity as such. The amendment that the previous requirement to classify therefore creates an exception to the ‘fixed foreign-currency-denominated rights issued for fixed’ rule in IAS 32 and requires rights to all existing shareholders on a pro rata issues within the scope of the amendment to basis as derivative liabilities is not consistent be classified as equity. Effective date Annual periods beginning on or after 1 February 2010. It should be applied retrospectively. Early adoption is permitted. EU adoption status Adopted by the European Commission on 24 December 2009. What is a rights issue? strike price in other than the entity’s functional currency violates ‘fixed for A rights issue is used as a means of fixed’ equity classification criterion in capital-raising whereby an entity issues IAS 32 and hence results in the instrument a right, option or warrant to all existing being classified as a derivative liability shareholders of a class of equity on a pro measured at fair value through profit or rata basis to acquire a fixed number of loss. Given that rights issues are usually additional shares at a fixed strike price. relatively large transactions, this would The strike price is usually set below current have a substantial effect on entities’ market share price, and shareholders are financial statements. economically compelled to exercise the rights so that their interest in the entity is What does the amendment not diluted. Rights issues are not used for require? speculative purposes and are required by The IASB recognised that classifying foreign- laws or regulations in many jurisdictions currency-denominated rights issued to all when raising capital. existing shareholders on a pro rata basis Why new guidance now? as derivative liabilities was not consistent with the substance of the transaction, which Rights issues have become popular in represents a transaction with owners acting the current environment due to liquidity in their capacity as such. The amendment constraints on the markets. Entities therefore created an exception to the ‘fixed listed in different jurisdictions are for fixed’ rule in IAS 32 and required rights normally required by laws or regulations issues within the scope of the amendment to to issue rights denominated in respective be classified as equity. local currencies. Unfortunately, a fixed4 PwC – A practical guide to new IFRSs for 2011
  7. 7. Financial instrumentsWhat is the scope of the new How will this change currentguidance? practice?The scope is narrow and applies only to Rights issues are now required to bepro rata rights issues to all existing classified as equity if they are issued forshareholders in a class. It does not a fixed amount of cash regardless of theextend to long-dated foreign currency currency in which the exercise price isrights issues or foreign-currency- denominated, provided they are offered ondenominated convertible bonds. For these a pro rata basis to all owners of the sameinstruments, the option to acquire the class of equity. Unlike derivative liabilities,issuer’s equity will continue to be equity instruments are not subsequently re-accounted for as a derivative liability, measured at fair value through profit or loss.with fair value changes recorded in profit The accounting is therefore less complex,or loss. and there is less volatility in profit or loss.Disclosures on transfers of financial assets –IFRS 7 amendmentThe IASB issued an amendment to IFRS 7 requires greater disclosure of transferredon 8 October 2010. The amendment financial assets. Effective date Annual periods beginning on or after 1 July 2011. Comparative information is not needed in the first year of adoption. EU adoption status Not adopted by the European Commission at the time of going to print. Expected to be adopted Q2 2011.How extensive are the new derecognised in their entirety (for requirements? example, factoring of trade receivables with no recourse).The new disclosure requirements applyto transferred financial assets. An entity The amendment requires only minortransfers a financial asset when it transfers additional disclosure for the first category;the contractual rights to receive cash flows however, the new disclosure requirementsof the asset to another party − for for the second category could be extensive.example, on the legal sale of a bond. What are the disclosureAlternatively, a transfer takes place when requirements for the transferredthe entity retains the contractual rights ofthe financial asset but assumes a assets that are not derecognised?contractual obligation to pay the cash flows The required disclosures for these financialon to another party, as is often the case assets add to those already in IFRS 7. Therewhen factoring trade receivables. are only two new requirements: • a description of the nature of theThe amendment has different relationship between the transferredrequirements for the following two assets and the associated liabilitiescategories: should be provided, including restrictions• transferred assets that are not arising from the transfer on the reporting derecognised in their entirety (for entity’s use of the transferred assets; and example, in a typical sale and • when the counterparty to the associated repurchase (‘repo’) of a security for a liabilities has recourse only to the fixed price, or on the transfer of assets transferred assets, a schedule should be to securitisation vehicles that are given that sets out the fair value of the consolidated by the transferor); and transferred assets, the fair value of the• certain transferred assets that are associated liabilities and the net position. PwC – A practical guide to new IFRSs for 2011 5
  8. 8. Financial instruments What are the disclosure • the carrying amount and fair value of the requirements for the transferred continuing involvement; assets that are derecognised in • the maximum exposure to loss from the their entirety? continuing involvement; • any future cash outflows to repurchase The new disclosure requirements for the derecognised assets (for example, derecognised financial assets apply the strike price in an option agreement) only where the entity has a ‘continuing and a maturity analysis of those cash involvement’, which may not occur outflows; frequently in practice. This is where, as part • a description of the nature and purpose of the transfer, the entity retains any of the of the continuing involvement and the contractual rights or obligations inherent in risk the entity remains exposed to; the derecognised financial asset or obtains • the gain or loss at date of derecognition; any new contractual rights or obligations • the income and expense recognised from relating to the transferred financial asset. the continuing involvement (current and The new disclosures are mainly about the cumulative); and entity’s continuing involvement. They • whether transfer activity is unevenly include disclosure of: distributed in the period. IFRS 9, ‘Financial instruments’ Effective date Annual periods starting 1 January 2013. Early adoption is permitted from 12 November 2009 (see detail below). However, the IASB is consulting – at the time of going to print – on the effective dates of a number of standards. The effective date of IFRS 9 may therefore change. EU adoption status Not adopted by the European Commission at the time of going to print. IFRS 9, ‘Financial instruments’, replaces be required to early adopt subsequent stages IAS 39, ‘Financial instruments: Recognition in the IAS 39 replacement project – that is, and measurement’. It generally applies impairment and hedging. This is to facilitate retrospectively, with some exceptions. early adoption of IFRS 9. However, if an Comparative information is not required to entity chooses to early adopt any of the be adjusted retrospectively for adoptions subsequent stages, it will be required to before 2012. early adopt all preceding stages from the same date. If an entity early adopts IFRS 9, it will not Classification and measurement of financial assets How are financial assets to be What determines classification? measured? IFRS 9 introduces a two-step classification IFRS 9 requires all financial assets to be approach. First, an entity considers its measured at either amortised cost or full business model − that is, whether it holds fair value. Amortised cost provides decision- the financial asset to collect contractual cash useful information for financial assets that flows rather than to sell it prior to maturity are held primarily to collect cash flows to realise fair value changes. If the latter, the that represent the payment of principal instrument is measured at fair value through and interest. For all other financial assets, profit or loss. If the former, an entity including those held for trading, fair value further considers the contractual cash flow is the most relevant measurement basis. characteristics of the instrument.6 PwC – A practical guide to new IFRSs for 2011
  9. 9. Financial instrumentsWhat is a contractual cash flow What are common features thatcharacteristics test? would generally fail the cash flowA financial asset within a qualifying characteristics test?business model will be eligible for • Linkage to equity index, borrower’s netamortised cost accounting if the income or other variables.contractual terms of the financial asset give • Inverse floating rate.rise on specified dates to cash flows that • Call option at an amount not reflectiveare solely payments of principal and of outstanding principal and interest.interest on the principal amount • Issuer is required or can choose to deferoutstanding. Interest is defined as interest payments and additionalconsideration for the time value of money interest does not accrue on thoseand for the credit risk associated with the deferred amounts.principal amount outstanding during a • In a variable rate financial asset, aparticular period of time. borrower option to choose a rate at eachAny leverage feature increases the interest rate reset day such that the ratevariability of the contractual cash flows does not compensate the lender for thewith the result that they do not have the time value of money (for example, aneconomic characteristics of interest. If a option to pay one-month LIBOR for acontractual cash flow characteristic is not three-month term and one-month LIBORgenuine, it does not affect the classification is not reset each month).of a financial asset. A cash flow • A variable rate that is reset periodicallycharacteristic is not genuine if it affects the but always reflects a five-year maturity ininstrument’s contractual cash flows only on a five-year constant maturity bond (thatthe occurrence of an event that is is, the rate is disconnected with the termextremely rare, highly abnormal and very of the instrument except at origination).unlikely to occur. • An equity conversion option in a debt host (from a holder perspective).What are common features that Are reclassifications permitted?would generally pass the cash Classification of financial assets isflow characteristics test? determined on initial recognition.• Unleveraged linkage to an inflation index Subsequent reclassification is permitted only in the currency in which the financial in those rare circumstances when there is a asset is denominated. change to the business model within which• Multiple extension options (for example, the financial asset is held. In such cases, a perpetual bond). reclassification of all affected financial assets• Call and put options if they are not is required. contingent on future events, and the IFRS 9 specifies that changes in business pre-payment amount substantially model are expected to be very infrequent, represents unpaid amounts of principal should be determined by the entity’s senior and interest on the principal amount management as a result of external or outstanding, which may include internal changes, should be significant to reasonable additional compensation for the entity’s operations and demonstrable to the early termination of the contract. external parties.• Interest rate caps, floors and collars that effectively switch the interest rate from For example, an entity has a portfolio of fixed to variable and vice versa. commercial loans that it holds to sell in the• In a variable rate financial asset, a short term. The entity acquires a company borrower option to choose a rate at each that manages commercial loans and has a interest rate reset day as long as the rate business model that holds the loans in order compensates the lender for the time value to collect the contractual cash flows. The of money (for example, an option to pay portfolio of commercial loans is no longer three-month LIBOR for a three-month for sale, and the portfolio is now managed term or one-month LIBOR for a one- together with the acquired commercial month term). loans; all are held to collect the contractual cash flows. PwC – A practical guide to new IFRSs for 2011 7
  10. 10. Financial instruments Another example of a change in the business recent information is available or where model is where an entity decides to shut there is a wide range of possible fair down a line of service (for example, a retail value measurements. Cost will not be an mortgage business). The line of service does appropriate estimate of fair value if there not accept new business, and the affected are changes in investee circumstances, portfolio is being actively marketed for sale. markets or wider economy, or if there is evidence from external transactions or for IFRS 9 indicates that changes in intentions investments in quoted equity instruments. with respect to individual instruments, To the extent factors exist that indicate cost temporary disappearance of a particular might not be representative of fair value, the market or transfers of instrument between business models do not represent a change entity should estimate fair value. in business model. What does this mean for hybrid contracts? What does this mean for IFRS 9 requires financial assets to be equity investments? classified in their entirety. Hybrid Equity investments do not demonstrate contracts are those instruments that contractual cash flow characteristics of contain a financial or non-financial host principal and interest; they are therefore and an embedded derivative. Hybrid accounted for at fair value. However, contracts within the scope of IFRS 9 − IFRS 9 provides an option to designate that is, hybrid contracts with financial a non-trading equity investment at fair asset hosts − are assessed in their value though profit or loss or at fair value entirety against the two classification through other comprehensive income. The criteria. Hybrid contracts outside the scope designation is available on an instrument- of IFRS 9 are assessed for bifurcation by-instrument basis and only on initial under IAS 39. In many cases, hybrid recognition. Once made, the designation is contracts may fail the contractual cash irrevocable. flow characteristic test and should therefore be measured at fair value All realised and unrealised fair value gains and losses follow the initial designation, and through profit or loss. there is no recycling of fair value gains and Is a fair value option available? losses recognised in other comprehensive income to profit or loss. Dividends that Two of the existing three fair value represent a return on investment from option criteria currently in IAS 39 equity investments will continue to be become obsolete under IFRS 9, as a fair- recognised in profit or loss regardless of the value-driven business model requires fair designation. value accounting, and hybrid contracts are classified in their entirety. The remaining fair value option condition in Can an equity investment be IAS 39 is carried forward to the new measured at cost where no standard – that is, management may reliable fair value measure still designate a financial asset as at fair is available? value through profit or loss on initial IFRS 9 removes the cost exemption for recognition if this significantly reduces unquoted equities and derivatives on recognition or measurement inconsistency, unquoted equities but stipulates that, commonly referred to as ‘an accounting in certain circumstances, cost may be mismatch’. The designation at fair value an appropriate estimate of fair value. through profit or loss will continue to This may be the case where insufficient be irrevocable. Classification and measurement of financial liabilities How are financial liabilities to be measured at fair value through profit be measured? or loss or an entity has chosen to measure a liability at fair value through profit Financial liabilities are measured at or loss. amortised cost unless they are required to8 PwC – A practical guide to new IFRSs for 2011
  11. 11. Financial instrumentsWhat determines classification? The accounting mismatch must arise due to an economic relationshipThe classification and measurement of between the financial liability and afinancial liabilities under IFRS 9 remains financial asset that results in theunchanged from the guidance in IAS 39 liability’s credit risk being offset by aexcept where an entity has chosen to change in the fair value of the asset.measure a liability at fair value throughprofit or loss. There continue to be two The accounting mismatch:measurement categories for financial • is required to be determined whenliabilities: fair value and amortised cost. the liability is first recognised;Certain liabilities are required to be at • is not reassessed subsequently; andfair value through profit or loss, such as • must not be caused solely by theliabilities held for trading and derivatives. measurement method that an entityOther liabilities are measured at amortised uses to determine the changes in acost unless the entity elects the fair liability’s credit risk.value option; however, if the liability Use of this exemption from thecontains embedded derivatives, the requirement to present movements inembedded derivatives might be required the own credit risk of a liability in OCI isto be separated and measured at fair value expected to be rare.through profit or loss. What are the eligibility criteriaWhat is the accounting for for the fair value option?financial liabilities that arerequired to be at fair value The eligibility criteria for the fair value option remain the same; they are basedthrough profit and loss? on whether:Financial liabilities that are required to be • the liability is managed on a fairmeasured at fair value through profit or value basis;loss (as distinct from those that the entity • electing fair value will eliminate orhas chosen to measure at fair value through reduce an accounting mismatch; orprofit or loss) continue to have all fair value • the instrument is a hybrid contractmovements recognised in profit or loss, with (that is, it contains a host contractnone of the fair value movement recognised and an embedded derivative) forin ‘other comprehensive income’ (OCI). This which separation of an embeddedincludes all derivatives (such as foreign derivative would be required.currency forwards or interest rate swaps), or What might be a common reasonan entity’s own liabilities that are ‘held fortrading’. Similarly, financial guarantees and for electing the fair value option?loan commitments that entities choose to A common reason is where entities havemeasure at fair value through profit or loss embedded derivatives that they do notwill have all fair value movements in profit wish to separate from the host liability. Inor loss. addition, entities may elect the fair value option for liabilities that give rise to anWhat is the accounting for accounting mismatch with assets that arefinancial liabilities that an required to be held at fair value throughentity chooses to account for profit or loss.at fair value? Have there been any changesIFRS 9 changes the accounting for financial in the accounting forliabilities that an entity chooses to account embedded derivatives?for at fair value through profit or loss, usingthe fair value option. For such liabilities, The existing guidance in IAS 39 forchanges in fair value related to changes embedded derivatives has been retainedin own credit risk are presented in this new part of IFRS 9. Entities are stillseparately in OCI. required to separate derivatives embedded in financial liabilities where they are notHowever, if presenting the changes in closely related to the host contract – forown credit of a financial liability in OCI example, a structured note where thewould create an accounting mismatch in interest is linked to an equity index. Theprofit or loss, all fair value movements separated embedded derivative continues toare recognised in profit or loss. PwC – A practical guide to new IFRSs for 2011 9
  12. 12. Financial instruments be measured at fair value through profit or IFRS 9 clarifies that if the changes in loss, and the residual debt host is measured fair value arising from factors other than at amortised cost. The accounting for changes in the liability’s credit risk or embedded derivatives in non-financial host changes in observed interest rates (that contracts also remains unchanged. is, benchmark rates such as LIBOR) are significant, an entity is required to use an Is the treatment of derivatives alternative method and may not use the embedded in financial liabilities default method. For example, changes symmetrical to the treatment of in the fair value of a liability might arise derivatives embedded in due to changes in value of a derivative financial assets? embedded in that liability rather than changes in benchmark interest rates. In No. The existing embedded derivative that situation, changes in the value of the guidance in IAS 39 is retained in IFRS 9 embedded derivative should be excluded in for financial liabilities and non-financial determining the amount of own credit risk instruments. This results in some embedded that is presented in OCI. derivatives still being separately accounted for at fair value through profit or loss. The expanded guidance in IFRS 9 However, embedded derivatives are no confirms that the credit risk of a liability longer separated from financial assets. with collateral is likely to be different Instead, they are part of the contractual from the credit risk of an equivalent terms that are considered in determining liability without collateral issued by the whether the entire financial asset meets same entity. the contractual cash flow test (that is, the It also clarifies that unit-linking features instrument has solely payments of principal usually give rise to asset performance risk and interest) to be measured at amortised rather than credit risk − that is, the value cost or whether it should be measured at of the liability changes due to changes in fair value through profit or loss. value of the linked asset(s) and not because How are financial liabilities at of changes in the own credit risk of the fair value to be measured? liability. This means that changes in the fair value of a unit-linked liability due to Entities will need to calculate the amount changes in the fair value of the linked asset of the fair value movement that relates to will continue to be recognised in the income the credit risk of the liability. IFRS 7 already statement: they are not regarded as being requires disclosure of the amount of fair part of the own credit risk of the liability value changes that are attributable to own that is recognised in OCI. credit risk for liabilities designated at fair value through profit or loss. The existing What is the impact of the guidance on how to calculate own credit changes on the presentation risk in IFRS 7 is retained but has been of financial liabilities? relocated to IFRS 9, and some aspects have Elements of the fair value movement of been clarified. the liability are presented in different parts How can own credit risk of the performance statement; changes in be determined? own credit risk are presented in OCI, and all other fair value changes are presented in This can be determined as either: profit or loss. This means that the amount • the amount of fair value change not of the overall fair value movement does attributable to changes in market risk not change, but it is presented in separate (for example, benchmark interest rates) sections of the statement of comprehensive – this is often referred to as the default income. method; or • an alternative method that the entity Amounts in OCI relating to own credit are believes more faithfully represents not recycled to the income statement even the changes in fair value due to ‘own when the liability is derecognised and the credit’ (for example, a method that amounts are realised. However, the standard calculates credit risk based on credit does allow transfers within equity. default swap rates).10 PwC – A practical guide to new IFRSs for 2011
  13. 13. Deferred tax accounting forinvestment property at fairvalue – IAS 12 amendmentThe IASB amended IAS 12, ‘Income taxes’, tax assets or liabilities arising on investmentto introduce an exception to the existing property measured at fair value.principle for the measurement of deferred Effective date Annual periods beginning on or after 1 January 2012. Early adoption is permitted. EU adoption status Not adopted by the European Commission at the time of going to print. Expected to be adopted Q3 2011.Why was this amendment needed? Key provisionsThe current principle in IAS 12 requires The IASB has added another exceptionthe measurement of deferred tax assets or to the principles in IAS 12: theliabilities to reflect the tax consequences rebuttable presumption that investmentthat would follow from the way that property measured at fair value ismanagement expects to recover or settle recovered entirely by sale. The rebuttablethe carrying amount of the entity’s assets presumption also applies to the deferredor liabilities. For example, management tax liabilities or assets that arise frommay expect to recover an asset by using it, investment properties acquired in a businessby selling it or by a combination of use and combination, if the acquirer subsequentlysale. Management’s expectations can uses the fair value model to measure thoseaffect the measurement of deferred taxes investment properties.when different tax rates or tax bases apply The presumption of recovery entirely byto the profits generated from using and sale is rebutted if the investment propertyselling the asset. is depreciable (for example, buildings, andThe IASB believes that entities holding land held under a lease) and is held withininvestment properties that are measured a business model whose objective is toat fair value sometimes find it difficult or consume substantially all of the economicsubjective to estimate how much of the benefits embodied in the investmentcarrying amount will be recovered through property over time, rather than throughrental income (that is, through use) and sale. The presumption cannot be rebuttedhow much will be recovered through sale, for freehold land that is an investmentparticularly when there is no specific plan property, because land can only befor disposal at a particular time. recovered through sale. PwC – A practical guide to new IFRSs for 2011 11
  14. 14. Deferred tax The amendments also incorporate Who does the amendment affect? SIC 21, ‘Income taxes – Recovery of All entities holding investment properties revalued non-depreciable assets’, into measured at fair value in territories where IAS 12, although this guidance will not there is no capital gains tax or where the be applied to investment property capital gains rate is different from the measured at fair value. The SIC 21 income tax rate (for example, Singapore, guidance has been included because New Zealand, Hong Kong and South it is applied by analogy in a number Africa) will be significantly affected. The of situations. amendment is likely to reduce significantly What are the transition the deferred tax assets and liabilities implications? recognised by these entities. It will also mean that, in jurisdictions where there is The amendment is effective for annual no capital gains tax, there will often be no periods beginning on or after 1 January tax impact of changes in the fair value of 2012. Management can elect to early investment properties. It might be necessary adopt the amendment for financial for management to reconsider recoverability years ending 31 December 2010. of an entity’s deferred tax assets because of Entities should apply the amendment the changes in the recognition of deferred retrospectively in accordance with tax liabilities on investment properties, and IAS 8, ‘Accounting policies, changes in to consider the impact of the amendment on accounting estimates and errors’. previous business combinations.12 PwC – A practical guide to new IFRSs for 2011
  15. 15. Related-party disclosures –IAS 24 amendmentIAS 24, ‘Related-party transactions’, was example, a government-controlled railwayamended in November 2009. The revised was theoretically required to disclose detailsstandard removes the requirement for of its transactions with the post office. Thisgovernment-related entities to disclose information was not necessarily useful todetails of all transactions with the users of the financial statements and wasgovernment and other government-related costly and time-consuming to collect.entities. It also clarifies and simplifies the The financial crisis widened the range ofdefinition of a related party. entities subject to related-party disclosureThe previous version of IAS 24 did requirements. The financial supportnot contain any specific guidance for provided by governments to financialgovernment-related entities. They were institutions in many countries means thattherefore required to disclose transactions the government now controls or significantlywith the government and other government- influences some of those entities. Arelated entities. This requirement was government-controlled bank, for example,onerous in territories with pervasive would be required to disclose details of itsgovernment control; it placed a significant transactions, deposits and commitmentsburden on entities to identify related-party with all other government-controlled bankstransactions and collect the information and with the central bank.required to make the disclosures. For Effective date Annual periods beginning on or after 1 January 2011. Earlier adoption is permitted either for the entire standard or for the reduced disclosures for government-related entities. EU adoption status Adopted by the European Commission on 19 July 2010. PwC – A practical guide to new IFRSs for 2011 13
  16. 16. Related-party disclosures What is the definition of a transaction was required to make related- government-related entity? party disclosures. The definition has been amended to remove such inconsistencies Government-related entities are now defined and to make it simpler to apply. as entities that are controlled, jointly controlled or significantly influenced by a What is the impact of the government. amended definition? What disclosures are While the new definition will make the government-related entities definition of a related party easier to apply, required to make? some entities will be required to make additional disclosures. The amendment introduces an exemption from the disclosure requirements of The entities that are most likely to be IAS 24 for transactions between affected are those that are part of a government-related entities and the group that includes both subsidiaries and government, and all other government- associates, and entities with shareholders related entities. Those disclosures are that are involved with other entities. For replaced with a requirement to disclose: example, a subsidiary is now required to • the name of the government and disclose transactions with an associate of the nature of the relationship; its parent. Similarly, disclosure is required • the nature and amount of any of transactions between two entities where individually-significant both entities are joint ventures (or one is an transactions; and associate and the other is a joint venture) • a qualitative or quantitative of a third entity. In addition, an entity indication of the extent of any that is controlled by an individual that is collectively-significant transactions. part of the key management personnel of another entity is now required to disclose What is the impact of the change transactions with that second entity. in disclosure requirements? What next steps should This is a significant relaxation of the management consider? disclosure requirements and should be of substantial benefit to government-related Management of government-related entities entities. The complexity and volume of the should consider whether they wish to adopt disclosures in the financial statements and the amendment early. Early adoption is the costs of record-keeping will be likely to be attractive for many entities, reduced. The new disclosures will provide but management intending to adopt early more meaningful information about the should also consider the revised disclosure nature of an entity’s relationship with requirements and put in place procedures to the government. collect the required information. EU entities cannot currently apply the amendment Why has the definition of a because the European Commission has not related party changed? yet adopted it. The previous definition of a related party Management of all entities should consider was complicated and contained a number the revised definition to determine of inconsistencies. These inconsistencies whether any additional disclosures will be meant, for example, that there were required and put in place procedures to situations in which only one party to a collect that information.14 PwC – A practical guide to new IFRSs for 2011
  17. 17. First-time adoption −IFRS 1 amendmentsFinancial instrument disclosuresThe IASB has issued an amendment to transition relief that existing IFRS preparersIFRS 1, ‘First-time adoption of IFRS’, to received in the March 2009 amendment toprovide first-time adopters with the same IFRS 7, ‘Financial instruments: Disclosures’. Effective date Annual periods beginning on or after 1 July 2010. Earlier adoption is permitted. Early adoption is required for a first-time adopter that has a first reporting period that begins earlier than 1 July 2010 in order to benefit from the disclosure relief. EU adoption status Adopted by the European Commission on 30 June 2010.What triggered this amendment? provisions (and thereby the same relief) as included in the amendment to IFRS 7.Existing IFRS preparers were granted relief It made a consequential amendment tofrom presenting comparative information IFRS 7 to remove the wording, ‘In thefor the new disclosures required by the first year of application’, and to replace itMarch 2009 amendments to IFRS 7 with date-specific relief for comparative‘Financial instruments: Disclosures’. The information. Any comparative periodsrelief was provided because the that end before 31 December 2009 areamendments to IFRS 7 were issued after exempt from the disclosures required bythe comparative periods had ended, and the amendments to IFRS 7. The reliefthe use of hindsight would have been applies to disclosures related to both therequired. The IASB therefore permitted statement of comprehensive income andentities to exclude comparative disclosures the statement of financial position.in the first year of application. Certainfirst-time adopters (for example, those Who is affected?with a first reporting period beginning on A first-time adopter may use the reliefor after 1 January 2009) would otherwise offered under the amendment to thebe required to make the comparative period extent its first IFRS financial statementsdisclosures, as first-time adopters do not use present comparative periods that endthe transition provisions in other IFRSs. before 31 December 2009. This includesThe IASB has therefore issued an any comparative annual periods that endamendment to IFRS 1 to provide first-time before 31 December 2009 and any year-endadopters with the same transition comparative statements of financial PwC – A practical guide to new IFRSs for 2011 15
  18. 18. First-time adoption position as at a date before 31 December What action do first-time adopters 2009. This includes the opening statement need to take? of financial position as at the date of transition. Any comparative interim First-time adopters should consider periods (full financial statements and not the comparative periods that are being IAS 34 condensed) that fell within the presented in their first IFRS financial first annual period for which the statements and determine whether they amended IFRS 7 disclosures were should take advantage of the disclosure effective are not exempt. relief offered by this amendment. Exemption for severe hyperinflation and removal of fixed dates The IASB made two amendments to • an exemption for severe IFRS 1, ‘First-time adoption of IFRS’, hyperinflation; and in December 2010: • removal of fixed dates. Effective date Annual periods beginning on or after 1 July 2011. Earlier adoption is permitted. EU adoption status Not adopted by the European Commission at the time of going to print. Expected to be adopted Q3 2011. Severe hyperinflation What is the issue? severe hyperinflation when: • a reliable general price index is The amendment creates an additional not available to all entities with exemption when an entity that has been transactions and balances in the subject to severe hyperinflation resumes currency; and presenting, or presents for the first time, • exchangeability between the financial statements in accordance with currency and a relatively stable IFRSs. The exemption allows an entity to foreign currency does not exist. elect to measure certain assets and liabilities at fair value; and to use that fair An entity’s functional currency ceases to value as the deemed cost in the opening be subject to severe hyperinflation on the IFRS statement of financial position. functional currency normalisation date, which occurs: An entity might be unable to prepare • when one or both of the financial statements in accordance with characteristics of severe IFRSs for a period of time because it hyperinflation no longer exist; or could not comply with IAS 29, ‘Financial • when the first-time adopter reporting in hyperinflationary economies’, changes its functional currency to a due to severe hyperinflation. The exemption currency that is not subject to applies where the entity is able to begin severe hyperinflation. reporting in accordance with IFRS. The exemption applies to entities that were What are the key provisions? subject to severe hyperinflation and are The amendment states that the currency of adopting IFRS for the first time or have a hyperinflationary economy is subject to previously applied IFRS.16 PwC – A practical guide to new IFRSs for 2011
  19. 19. First-time adoptionWhen an entity’s date of transition to Who does the amendment affect?IFRS is on or after the functional currency The amendment is expected to have anormalisation date, it may elect to measure limited impact, as it is only available toassets and liabilities acquired before that entities whose functional currency wasdate at fair value and use that fair value as subject to severe hyperinflation. Thedeemed cost in the opening IFRS statement Zimbabwean economy has beenof financial position. identified as an economy that was subjectIFRS 1 defines the date of transition as to severe hyperinflation until early 2009;the beginning of the earliest period for the amendment is unlikely to apply inwhich an entity presents comparative other territories at the time of going toinformation under IFRS in its first IFRS print.financial statements. When the functional The amendment would not change orcurrency normalisation date falls within the allow any additional IFRS 1 exemptionscomparative period, that period may be less for a reporting entity that has control,than 12 months, provided that a complete joint control or significant influence overset of financial statements (as required by an entity subject to severe hyperinflation,IAS 1) is provided for that shorter period. except to the extent that the reportingThe entity cannot comply with IFRS due entity is also a first-time adopter.to the severe hyperinflation in periodsbefore the date of transition to IFRS, so the What do affected entities needcomparative information for this period to do?cannot be prepared in accordance with Management of entities in Zimbabwe andIFRS. The entity should therefore consider first-time adopters that have interests inwhether disclosure of non-IFRS Zimbabwe should consider:comparative information and historical • their functional currency summaries in accordance with IFRS 1 normalisation date;would provide useful information to the • their proposed date of transitionusers of the financial statements. to IFRS;If an entity applies the new • whether the comparative period exemption to comply with IFRS, it will be presented for a period should explain the transition to IFRS, shorter than 12 months; andand why and how the entity ceased to • the assets and liabilities they wishhave a functional currency subject to to measure at fair value on severe hyperinflation. transition to IFRS.Removal of fixed dates requirementWhat is the issue? transition to IFRS rather than from 25 October 2002 or 1 January 2004. ThisThe IASB amended IFRS 1 to eliminate means that a first-time adopter does notreferences to fixed dates for one exception need to determine the fair value of financialand one exemption, both dealing with assets and liabilities for periods prior tofinancial assets and liabilities. the date of transition. IFRS 9 has also beenThe first change requires first-time amended to reflect these changes.adopters to apply the derecognitionrequirements of IFRS prospectively Who does the amendment affect?from the date of transition, rather than Entities that had derecognised financialfrom 1 January 2004. assets or liabilities before the date ofThe second amendment relates to financial transition to IFRS will need to apply theassets or liabilities at fair value on initial derecognition guidance from the date ofrecognition where the fair value is transition, as it is a mandatory exception.established through valuation techniques The second change will only be relevantin the absence of an active market. The for entities that elect to use theamendment allows the guidance in exemption for fair value established byIAS 39 AG76 and IAS 39 AG76A to be valuation techniques.applied prospectively from the date of PwC – A practical guide to new IFRSs for 2011 17
  20. 20. Pre-payments of a minimum funding requirement − IFRIC 14 The amendment to IFRIC 14, ‘IAS 19 – The removes an unintended consequence of limit on a defined benefit asset, minimum IFRIC 14 relating to voluntary pension pre- funding requirements and their interaction’, payments when there is a minimum was published on 26 November 2009. It funding requirement. Effective date Annual periods beginning on or after 1 January 2011; it will apply from the beginning of the earliest comparative period presented. Earlier adoption is permitted. EU adoption status Adopted by the European Commission on 19 July 2010. How does the amendment differ benefit pension plan and choose to pre-pay from previous guidance? those contributions. Some companies that are subject to a Those affected are companies that: minimum funding requirement may elect • have a defined benefit pension plan to pre-pay their pension contributions. The - that is subject to a minimum pre-paid contributions are recovered through funding requirement; and lower minimum funding requirements in • have prepaid (or expect to prepay) the future years. An unintended consequence of minimum funding requirement in the interpretation, prior to this amendment, respect of future employee service, was that IFRIC 14 could prevent the leading to a pension surplus. recognition of an asset for any surplus What do affected entities need arising from such voluntary pre-payment of to do? minimum funding contributions in respect of future service. The interpretation has Such entities should reconsider their been amended to require an asset to be accounting in the light of the revised recognised in these circumstances. guidance to determine whether an asset for the pre-paid contributions should be Who does the amendment affect? recognised. They should assess the impact It will have a limited impact, as it applies as early as possible to determine whether only to companies that are required to make the amendment should be adopted before minimum funding contributions to a defined the effective date.18 PwC – A practical guide to new IFRSs for 2011
  21. 21. Extinguishing financialliabilities with equityinstruments – IFRIC 19IFRIC 19, ‘Extinguishing financial liabilities terms of its debt with the result that thewith equity instruments’, was published on liability is extinguished by the debtor issuing26 November 2009. IFRIC 19 clarifies the its own equity instruments to the creditoraccounting when an entity renegotiates the (referred to as a ‘debt for equity swap’). Effective date Annual periods beginning on or after 1 July 2010. Early adoption is permitted. The interpretation should be applied retrospectively from the beginning of the earliest comparative period presented, as adoption in earlier periods would result only in a reclassification of amounts within equity. EU adoption status Adopted by the European Commission on 23 July 2010.Why new guidance now? What is the scope of newMany entities were compelled to guidance?renegotiate their debt as it came due, in IFRIC 19 addresses the accounting bythe current challenging economic climate. an entity that renegotiates the terms ofRenegotiations would commonly lead a financial liability and issues shares toeither to modification of debt or settlement the creditor to extinguish all or part ofof the liability by way of issuing equity the financial liability. It does not addressinstruments to the lender. IFRS did not the accounting by the creditor; and itaddress accounting for such debt for equity does not apply to situations where theswaps before IFRIC 19, and there was liability may be extinguished with equitydiversity in practice. Some recognised the instruments in accordance with theequity instrument at the carrying amount original terms of the instrument (forof the financial liability and did not example, convertible bonds). Therecognise any gain or loss on settlement in interpretation is further restricted toprofit or loss. Others recognised the equity exclude transactions where the creditorinstruments at their fair value and recorded is also a shareholder acting in its capacityany difference between that amount as such, or transactions under commonand the carrying amount of the financial control where the transaction in substanceliability in profit or loss. The financial crisis represents an equity distribution by, orexacerbated the issue. contribution to, the entity. PwC – A practical guide to new IFRSs for 2011 19
  22. 22. IFRIC 19 What does the interpretation the issuance of the entity’s own equity address? instruments. This is consistent with the general approach to derecognition of IFRIC 19 addresses the following issues: financial liabilities established by IAS 39. • Are equity instruments issued to The amount of the gain or loss recognised extinguish a financial liability in profit or loss is determined as the ‘consideration paid’? difference between the carrying value of the • How should an entity initially financial liability and the fair value of the measure equity instruments issued equity instruments issued. If the fair value to extinguish a financial liability? of the equity instruments cannot be reliably • How should an entity account for measured, the fair value of the existing any difference between the financial liability is used to carrying amount of the financial measure the gain or loss and to record liability extinguished and the initial issued equity instruments. measurement amount of the equity instruments issued? How will this change current practice? What does the interpretation require? Entities will no longer be permitted to reclassify the carrying value of the existing IFRIC 19 considers that equity instruments financial liability into equity (with no gain issued to settle a liability represent or loss being recognised in profit or loss). ‘consideration paid’. It therefore requires The amount of the gain or loss should be a gain or loss to be recognised in profit separately disclosed in the statement of or loss when a liability is settled through comprehensive income or in the notes.20 PwC – A practical guide to new IFRSs for 2011
  23. 23. Annual improvementsproject 2010The table below identifies the more from the 2010 annual improvements projectsignificant changes to the standards arising and the implications for management. Effective date See final column in table below. EU adoption status Adopted by the European Commission on 18 February 2011. Standard/ interpretation Amendment Practical implications Effective date Amendment • The impact of a previous • The amendment clarifies that, for Annual periods to IAS 1, amendment to IAS 1 by each component of equity, an entity beginning on or ‘Presentation IAS 27 was to make may present the breakdown of other after 1 January of financial explicit the requirement to comprehensive income either in the 2011. Early statements’ present each item of other statement of changes in equity or in adoption is comprehensive income in the notes to the financial statements. permitted. the statement of changes in equity, along with the profit or loss and transactions with owners. The amendment removes the requirement for each item of other comprehensive income to be presented separately in the statement of changes in equity. Amendment • Additional guidance has • The amendment is based on the Annual periods to IAS 27, been included within changes in IAS 27. It states that beginning on ‘Consolidated IAS 21, which clarifies the loss of control over a subsidary, the or after 1 July and separate accounting for disposals or loss of significant influence over an 2009. financial partial disposals of a foreign associate and loss of joint control statements’ operations. over a jointly controlled entity are • Guidance in the IAS 28 similar events and should therefore and IAS 31 amendment be accounted for similarily. Such clarifies disposal accounting an event should be recognised and for associates and jointly measured at fair value and any gain controlled entities in or loss is recognised in the profit or accordance with IAS 39. loss. Amendment • The amendment emphasises • Greater emphasis has been placed Annual periods to IAS 34, the existing disclosure on the disclosure principles for beginning on or ‘Interim financial principles in IAS 34 and significant events and transactions. after 1 January reporting’ adds further guidance to Additional requirements cover 2011. Early illustrate how to apply these disclosure of changes to fair value adoption is principles. measurements (if significant), and the permitted. need to update relevant information from the most recent annual report. PwC – A practical guide to new IFRSs for 2011 21