IFRS NewsletterDecember 2012Welcome to IFRS Newsletter—a       This December 2012 edition starts with a      We go on to I...
Hedge accounting to move closer to riskmanagementHedge accounting project                           Major features of the ...
Qualifying for hedge accounting under the new principles                                                       Establish w...
A new concept of rebalancing                                  New requirements restricting                       Effective...
IASB work planIn December, the IASB issued a revisedversion of its work plan. The plan shows the       IASB’s projected ta...
IASB issues an exception toconsolidation for investment entitiesIn October 2012, the IASB issuedamendments to IFRS 10, IFR...
Grant Thornton International guide toIFRS 10 publishedThe Grant Thornton International IFRS             •   identifying si...
Grant Thornton International 2012Example IFRS Financial StatementsreleasedThe Grant Thornton International IFRS           ...
Spotlight on our IFRS InterpretationsGroup             In each newsletter, we throw a spotlight on   Keith Reilly, Austral...
Round-upIASB editorial corrections                   Valuation in the mining, oil                    Canada confident on i...
Effective dates of new standards andIFRIC interpretationsThe table below lists new IFRS and IFRIC interpretations with an ...
New IFRS and IFRIC interpretations with an effective date on or after July 1, 2011                                        ...
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IFRS Newsletter (December 2012)


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Welcome to IFRS Newsletter—a newsletter that offers a summary of certain developments in International Financial Reporting Standards (IFRS) along with insights into topical issues.

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IFRS Newsletter (December 2012)

  1. 1. IFRS NewsletterDecember 2012Welcome to IFRS Newsletter—a This December 2012 edition starts with a We go on to IFRS-related news at Grant look at the International Accounting Thornton, including the publication of newnewsletter that offers a summary Standards Board (IASB) Review Draft of a guides on IFRS 10 Consolidated Financialof certain developments in forthcoming new standard on hedge Statements and IAS 7 Statement of Cash Flows.International Financial accounting and its main implications. We We end with a more general round-up of then look at how the IASB’s other projects activities affecting the IASB, and theReporting Standards (IFRS) are progressing as well as considering some implementation dates of newer standardsalong with insights into topical IFRS-related developments. that are not yet mandatory.issues.
  2. 2. Hedge accounting to move closer to riskmanagementHedge accounting project Major features of the likely new standardnears completion Features Key pointsIn September, the IASB published a ReviewDraft of the general hedge accounting Objective of the • to better align hedging from an accounting point of view withsection of IFRS 9 Financial Instruments. The (proposed) entities’ underlying risk management activitiesBoard intends to proceed to finalize it standardduring the first quarter of 2013. Similarities with IAS • hedge accounting remains an optional choice 39 • the three types of hedge accounting (fair value hedges, cash The IASB is not seeking comments on flow hedges and hedges of a net investment) remainthe draft but is making it available for • ineffectiveness needs to be measured and included in profit orinformation purposes to enable constituents lossto familiarize themselves with the document. The major changes • increased eligibility of hedged itemsIt is then effectively a preview of the • increased eligibility of hedging instruments and reducedexpected final standard. If finalized in its volatilitycurrent form, the standard should make it • revised criteria for hedge accounting qualification and foreasier for many entities to reflect their actual measuring hedge ineffectivenessrisk management activities in their hedge • a new concept of rebalancing hedging relationshipsaccounting and thus reduce profit or loss • new requirements restricting the discontinuance of hedge accountingvolatility. By way of contrast the previousstandard, IAS 39 Financial Instruments:Recognition and Measurement, was heavily The major changes What is a risk component?criticized for containing complex rules which Increased eligibility of hedged • Something that is less than the entireeither made it impossible for entities to use itemhedge accounting or, in some cases, simply itemsput them off doing so. Risk components When can a risk component • if finalized in its current form, the be a hedged item?The final standard should IASB’s new standard will make it easier • To be eligible:make it easier for many to achieve hedge accounting for – it must be a separately identifiableentities to achieve hedge individual components of an identified component of the financial or non- risk financial itemaccounting and should also • it is now possible to treat a “riskreduce profit or loss volatility component” as an eligible hedged item if – the changes in the cash flows or fairWe outline in the table hereinafter the major it is separately identifiable and reliably value of the item attributable tofeatures of the likely new standard before measurable changes in that risk component mustconsidering the changes from the be capable of reliable measurement. • it does not matter if the risk is a financialrequirements of the previous standard in or a non-financial risk provided thesemore detail in the main body of the text. criteria are met • the proposed standard contains a rebuttable presumption that inflation risk is not an eligible risk component that can be hedged unless it is contractually specified.2 IFRS Newsletter – December 2012
  3. 3. Qualifying for hedge accounting under the new principles Establish whether there is an economic relationship between the hedged item and the hedging instrument Yes Does the effect of credit risk dominate the fair value changes in the hedging relationship? No Base the hedge ratio on the actual quantities used for risk managementGroups of items Increased eligibility of Revised criteria for hedge• the rules regarding hedging groups of hedging instruments and accounting qualification and items have also been significantly relaxed reduced volatility for measuring hedge• a net position arising from a group of cash inflows and outflows can qualify as • a non-derivative financial instrument can ineffectiveness a hedged item in a cash flow hedge now be treated as a hedging instrument To qualify for hedge accounting under provided that: provided it is measured at fair value IAS 39, the hedge had to be highly effective through profit or loss on both a prospective and a retrospective – the items in the group would on an • in practice there are relatively few non- basis. Demonstrating effectiveness required a individual basis be capable of derivative financial instruments mathematical assessment of the degree of qualifying as hedged items measured at fair value through profit or offset between the hedging instrument and – the items in the group are managed loss, so this may not be a big change the hedged item, the results of which were on a group basis for risk • new rules on the accounting for the time required to show an offset of between the management purposes value of options and the forward points range of 80/125%.• there is no longer a requirement for the in forward contracts may reduce profit These requirements have been replaced individual cash flows in the group to or loss volatility compared to under with the following more principle-based affect profit or loss all at the same time IAS 39: qualifying criteria: as had been earlier proposed – if an entity uses an option to hedge To qualify for hedge accounting under• cash flow hedge accounting is however and designates as the hedging the proposed new standard, three limited to a hedge of foreign exchange instrument only the change in the requirements must be met: risk. intrinsic value of the option, theHedged items that include derivatives changes in fair value of the time • an economic relationship must exist• an aggregated exposure that includes a value of the option will initially be between the hedged item and the derivative (sometimes referred to as a shown in other comprehensive hedging instrument “synthetic position”) would be capable income (OCI) • the effect of credit risk should not of being treated as an eligible hedged – similarly, there is an accounting dominate the value changes in the item policy choice to show the change in hedging relationship• this is a change from IAS 39 which value of the forward points in OCI • the weightings of the hedged item and prohibits such exposures from being for hedges based on the spot rate of the hedging instrument (the hedge ratio) hedged items a forward contract. must be based on the quantities of• this may be welcomed by entities that hedged item and hedging instrument that manage risk exposures which themselves the entity actually uses to meet its risk include derivative positions. management objective (unless this would deliberately create ineffectiveness). The assessment of whether a hedging relationship meets the new requirements for hedge effectiveness need only be performed on a prospective basis. However, hedge ineffectiveness must still be measured and recognized at the end of each reporting period. IFRS Newsletter – December 2012 3
  4. 4. A new concept of rebalancing New requirements restricting Effective date and transitionhedging relationships the discontinuance of hedge The expected date of the hedge accounting• rebalancing denotes adjustments to the chapter of IFRS 9 is anticipated to be annual accounting designated quantities of the hedged item periods beginning on or after January 1, • unlike under IAS 39, an entity cannot 2015, with earlier application permitted. The or the hedging instrument of an already voluntarily discontinue hedge accounting existing hedging relationship for the new requirements would, apart from a few • under the proposed standard, an entity is exceptions, be applied on a prospective purpose of maintaining a hedge ratio not allowed to discontinue hedge that complies with the hedge basis. The figures for the comparative period accounting where the hedging would show hedge accounting under the effectiveness requirements relationship: previous requirements of IAS 39.• the proposed standard requires – still meets the risk management rebalancing to be undertaken if the risk objective1 and management objective remains the same, but the hedge effectiveness requirements – continues to meet all other are no longer met qualifying criteria• rebalancing will usually only be needed • discontinuation can affect either a when adjustments are made to the actual hedging relationship in its entirety or just quantities used for risk management a part of it, and is accounted for purposes prospectively from the date on which• it should only result in adjustments that the qualifying criteria are no longer met; maintain an appropriate hedge ratio and • it is possible to designate a new hedging should not be applied any wider relationship that involves the hedging• where the risk management objective for instrument or hedged item of a previous a hedging relationship has changed, hedging relationship for which hedge rebalancing does not apply and the accounting was (in part or in its entirety) hedging relationship must be discontinued. discontinued (see below). 1 The risk management objective is not the same as the risk management strategy. The risk management strategy is established at the highest level at which an entity determines how it manages its risk and typically includes some flexibility to react to changes in circumstances. The risk management objective on the other hand applies at the particular hedge relationship level and is a means of executing the risk management strategy.4 IFRS Newsletter – December 2012
  5. 5. IASB work planIn December, the IASB issued a revisedversion of its work plan. The plan shows the IASB’s projected targets for 2012 and the first half of 2013IASB’s projected targets for work to be Q4 2012 Q1 2013 Q2 2013undertaken in the remainder of 2012 and thefirst three quarters of 2013. IFRS 9 Financial Instruments • Classification and measurement Published ED Of particular interest are the latest plans • Impairment Target EDfor the IASB’s projects on financial • General hedge accounting Target IFRSinstruments, revenue recognition, leases and • Macro hedginginsurance contracts. These plans arose from Target DPthe IASB’s convergence work with the US Revenue recognition Target IFRSFinancial Accounting Standards Board Leases Target ED(FASB), and represent a barometer by which Insurance contracts Target EDwe can gauge its enthusiasm for continuingwith convergence with US generally accepted Key: ED = Exposure Draft DP = Discussion Paperaccounting principles (GAAP). Moregenerally, the work plan is an important Overall, the revised work plan indicates In addition to the items shown in theresource for companies wishing to plan that the IASB remains committed to the table, the IASB notably plans to make aahead for their future reporting majority of projects that were started under number of narrow scope amendments to therequirements. the leadership of former chairman, Sir David standards it released on consolidations last Tweedie. Despite this however, there are The timing of deliverables on these year. In November, the IASB has published indications that it may be prepared to letmajor projects is set out in the table below. one of the Exposure Drafts planned on some projects, such as leases, which wereIn addition to the progress being made on its these amendments and others are expected formerly seen as key, drop.financial instruments project, it now looks to be released soon. Moreover, the IASB hascertain that a new standard dealing with published in November the Exposure Draftrevenue recognition will be released in 2013. Annual Improvements to IFRSs 2011-2013 CycleFurther Exposure Drafts are however resulting from its Annual Improvementsplanned for both the leases and insurance process (a process for making non-urgent,contracts projects. but necessary, amendments to IFRS). The IASB will also consider the findings from its post- implementation review of IFRS 8 Operating Segments and initiate a similar review of IFRS 3 Business Combinations. IFRS Newsletter – December 2012 5
  6. 6. IASB issues an exception toconsolidation for investment entitiesIn October 2012, the IASB issuedamendments to IFRS 10, IFRS 12 Disclosure Definition of “investment entity”of Interests in Other Entities and IAS 27 Separate • an investment entity is an entity that:Financial Statements, which provide an – obtains funds from one or more investors for the purpose of providing thoseexception for qualifying investment entities investor(s) with investment management servicesfrom consolidating their controlled – commits to its investor(s) that its business purpose is to invest funds solely forinvestments. returns from capital appreciation, investment income or both – measures and evaluates the performance of substantially all of its investments Many commentators have long held the on a fair value basisview that consolidating the financial • an entity is not disqualified from being an investment entity only because it providesstatements of an investment entity and its investment-related services, either to its investors or to third partiesinvestees does not provide the most useful • an investment entity does not plan to hold its investments indefinitely. Accordingly, an investment entity shall have an exit strategy documenting how the entity plans toinformation. Their concern is that the realize capital appreciation for certain investments, because these investments havereported investment performance of the the potential to be held indefinitelyinvestment entity is distorted by • an investment entity and its affiliates do not obtain, or have the objective of obtaining,consolidating a small number of investees benefits from their investments that are either of the following:over which it holds a controlling interest. – other than capital appreciation or capital appreciation and investment income andConsolidation in such circumstances makes – not available to other parties that are not related to the investeeit more difficult for investors to understand • an entity that has more than an insignificant amount of investments that are notwhat they are most interested in—the value measured or managed on a fair value basis would not be an investment entityof the entity’s investments. • typically, an investment entity would have all the following characteristics (if it does not, it is required to provide additional disclosures): The IASB has been influenced by these – more than one investmentarguments and, in August 2011, published an – more than one investorExposure Draft Investment Entities. The – investors that are not related to the entity or other members of the group containing the entityExposure Draft proposed an exception to – ownership interests in the form of equity or similar interests.the consolidation principle such that aqualifying investment entity would have beenrequired to: as shown in the table above. from much of the time and effort involved• measure its investments in controlled in reassessing their control conclusions based entities at fair value through profit or As a result of the changes to the on IFRS 10. loss definition initially proposed in the Exposure• provide additional disclosures to enable Draft, an investment entity with only a single Grant Thornton International has users of its financial statements to investor would not necessarily be precluded published a document entitled IFRS News evaluate the nature and financial effects from meeting the requirements for Special Edition which explains the key features of its investment activities exception. For entities that do qualify, the of the amendments to IFRS 10, 12 and IAS consolidation exception will be mandatory, 27 and provides practical insights into their• meet detailed criteria in order to qualify not optional. application and impact. However, this as an investment entity. publication does not address the specifics The timing of finalization was significant The Exposure Draft proposed six criteria related to the date of application for because the effective date of IFRS 10 isto qualify as an investment entity, all of Canadian investment entities whose January 1, 2013. The amendments publishedwhich would have to have been satisfied. mandatory IFRS changeover date has been in October 2012 apply for annual periodsHowever, following feedback from deferred until January 1, 2014. For beginning on or after January 1, 2014. Theirconstituents, the IASB has made several information on the application for Canadian earlier application is permitted. Clearly, achanges and improvements. In accordance entities, refer to our Adviser alert – IASB issues consolidation exception has a huge impactwith the issued amendments, the key features an exception to consolidation for Investment Entities. on the entities affected—and spare themof the definition of an investment entity are6 IFRS Newsletter – December 2012
  7. 7. Grant Thornton International guide toIFRS 10 publishedThe Grant Thornton International IFRS • identifying situations in which IFRS 10 isteam has issued a new publication entitled more likely to affect the scope ofUnder Control? A Practical Guide to IFRS 10 consolidationConsolidated Financial Statements. • identifying and addressing the key The guide has been written to assist practical application issues andmanagement in transitioning to and applying judgements.IFRS 10. More specifically it aims to assist To obtain a copy of the publication,readers in: please get in touch with your Grant Thornton adviser.• understanding IFRS 10’s new requirements on control and consolidation and how they differ from the previous requirementsGrant Thornton International guide toIAS 7 publishedThe Grant Thornton International IFRS IFRS experts.team has published IAS 7: Statement of Cash To obtain a copy of the publication,Flows – a guide to avoiding common pitfalls and please get in touch with your Grantapplication issues. Thornton adviser. Increased attention to companies’ cashgeneration and liquidity position has resultedin more scrutiny of the statement of cashflows by financial statement users, regulatorsand other commentators. The GrantThornton International IFRS team haswritten the guide to remind users of thebasic requirements for preparing thestatement of cash flows while providinginsights on avoiding common pitfalls andapplication issues that have been highlightedby regulators and seen in practice by our IFRS Newsletter – December 2012 7
  8. 8. Grant Thornton International 2012Example IFRS Financial StatementsreleasedThe Grant Thornton International IFRS To obtain a copy of the 2012 Exampleteam has issued the 2012 version of its IFRS Consolidated Financial Statements, pleaseExample Consolidated Financial Statements. get in touch with your Grant Thornton adviser. The new version of the publication hasbeen reviewed and updated to reflectchanges in IFRS that are effective for annualperiods ending December 31, 2012. It alsoreflects the early-adoption of certainamendments to IAS 1 Presentation of FinancialStatements, effective for annual periodsbeginning on or after July 1, 2012. Thepublication does not reflect the earlyadoption of any other changes in IFRS thathave been issued but are not yet effective.Raymond Chabot Grant Thornton hostsIFRS seminar for mining companies inCanadaRaymond Chabot Grant Thornton hosted an income tax reconciliation for a mining review of annual and quarterly financialinformation day for mining companies at the exploration company, as well as changes to statements. Several presentations were alsobeginning of October, attracting around 50 Grant Thornton’s model financial statements made by financing entities who exploredclients and potential clients. for mining exploration companies. A some of the challenges that mining number of guest speakers also presented exploration companies currently face when The seminar covered recent IFRS during the course of the day. A presentation trying to raise capital.developments, transactions specific to the was made by the Autorité des Marchésmining sector, an example of a typical Financiers on their findings from their8 IFRS Newsletter – December 2012
  9. 9. Spotlight on our IFRS InterpretationsGroup In each newsletter, we throw a spotlight on Keith Reilly, Australia one of the members of the Grant Thornton Keith Reilly is Grant Thornton Australia’s International IFRS Interpretations Group National Head of Professional Standards. (IIG). In this newsletter we focus on Australia’s representative: Keith has over 40 years’ experience in financial reporting. During that time he has been the technical director and adviser for the Institute of Chartered Accountants in Australia (ICAA) and a member of the Australian Accounting Standards Board’s Urgent Issues Group. He is currently a member of the Australian Institute of Company Directors’ Financial Reporting Committee, a member of Macquarie University’s Advisory Board’s Department of Accounting and Corporate Governance, and various ICAA, CPA Australia, and IPA Committees. Keith writes and lectures extensively on financial reporting and assurance issues. IFRS Newsletter – December 2012 9
  10. 10. Round-upIASB editorial corrections Valuation in the mining, oil Canada confident on its IFRSThe IASB published a collection of and gas industries strategyeditorial corrections in November and This IVSC’s project looks to provide greater Following the adoption of IFRS in Canadain July 2012. Editorial corrections valuation guidance to the mining, oil and gas last year, the Canadian Accountingconsist of those amendments that are industries. Standards Board has reflected on theneeded as a result of an error made experience in its 2011/2012 annual report.when writing or typesetting the The adoption of IFRS during recentdocuments (for example spelling errors, years has exposed many inconsistencies in While the standard setter notes somegrammatical mistakes or unmarked how the values of mineral reserves and areas of criticisms, such as divergence inconsequential amendments). resources are being estimated around the practice on some IFRS interpretative issues globe, causing concern for financial and the lack of specific guidance on theIVSC Discussion Papers regulators, auditors and investor groups. effects of rate regulation, it is generallyThe International Valuation Standards confident that its choice of adopting IFRSCouncil (IVSC) has issued Discussion has been the right one. It notes in particularPapers on trade-related properties and that although IFRS require improvement,on valuation in the mining, oil and gas they represent the only practical route toindustries. achieving the goal of a single set of high quality, globally accepted financial reportingTrade-related properties standards contributing to the improvedThe IVSC Discussion Paper examines functioning of global capital markets.the methods used for valuing trade-related properties around the world,following concern about the differentpractices that are currently being used. The Discussion Paper focuses inparticular on the valuation of hotels,although the issues are equally relevantto other trade-related properties such asbars, restaurants, other properties in theleisure sector and specialized health carefacilities.10 IFRS Newsletter – December 2012
  11. 11. Effective dates of new standards andIFRIC interpretationsThe table below lists new IFRS and IFRIC interpretations with an effective date on or after July 1, 2011. Companies are required to makecertain disclosures in respect of new standards and interpretations under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.New IFRS and IFRIC interpretations with an effective date on or after July 1, 2011 Effective for accounting Title Full title of standard or interpretation periods beginning on Early adoption permitted?* or after IFRS 9 Financial Instruments January 1, 2015 Yes (extensive transitional rules apply) IAS 32 Offsetting Financial Assets and Financial Liabilities January 1, 2014 Yes (but must also make the (Amendments to IAS 32) disclosures required by Disclosures – Offsetting Financial Assets and Financial Liabilities) Various Investment Entities (Amendments to IFRS 10, IFRS 12 January 1, 2014 Yes and IAS 27) Various Annual Improvements to IFRSs 2009-2011 Cycle January 1, 2013 Yes IFRS 1 Government Loans (Amendments to IFRS 1) January 1, 2013 Yes IFRS 7 Disclosures – Offsetting Financial Assets and Financial January 1, 2013 Not stated (but we presume yes) Liabilities (Amendments to IFRS 7) IFRIC 20 Stripping Costs in the Production Phase of a Surface January 1, 2013 Yes Mine IFRS 13 Fair Value Measurement January 1, 2013 Yes IFRS 12 Disclosure of Interests in Other Entities January 1, 2013 Yes (in its whole or partially) IFRS 11 Joint Arrangements January 1, 2013 Yes (but must be applied in conjunction with IFRS 10, IFRS 12, IAS 27 (amended in 2011) and IAS 28 (amended in 2011)) IFRS 10 Consolidated Financial Statements January 1, 2013 Yes (but must be applied in conjunction with IFRS 11, IFRS 12, IAS 27 (amended in 2011) and IAS 28 (amended in 2011)) IAS 28 Investments in Associates and Joint Ventures January 1, 2013 Yes (but must be applied in conjunction with IFRS 10, IFRS 11, IFRS 12 and IAS 27 (amended in 2011)) IAS 27 Separate Financial Statements January 1, 2013 Yes (but must be applied in conjunction with IFRS 10, IFRS 11, IFRS 12 and IAS 28 (amended in 2011)) IFRS Practice Management Commentary: A Framework for No effective date as Not applicable Statement Presentation non-mandatory guidance IAS 19 Employee Benefits (Revised 2011) January 1, 2013 Yes IFRS Newsletter – December 2012 11
  12. 12. New IFRS and IFRIC interpretations with an effective date on or after July 1, 2011 Effective for accounting Title Full title of Standard or Interpretation periods beginning on Early adoption permitted?* or after IAS 1 Presentation of Items of Other Comprehensive Income July 1, 2012 Yes (Amendments to IAS 1) IAS 12 Deferred Tax: Recovery of Underlying Assets January 1, 2012 Yes (Amendments to IAS 12) IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for July 1, 2011 Yes First-time Adopters (Amendments to IFRS 1) IFRS 7 Disclosures – Transfers of Financial Assets July 1, 2011 Yes (Amendments to IFRS 7)* As a note of caution, to be in accordance with Canadian GAAP and securities regulations, an entity may not early adopt a new or amended IFRSuntil its issuance in the CICA Handbook.Open for commentThis table lists the documents that theIASB currently has out to comment and Current IASB documentsthe comment deadline. We aim torespond to each of these publications. Document type Title Comment deadline Exposure Draft Annual Improvements to IFRSs 2011-2013 Cycle February 18, 2013 Exposure Draft Equity Method: Share of Other Net Asset Changes March 22, 2013 (Proposed amendments to IAS 28) Exposure Draft Classification and Measurement: Limited March 28, 2013 Amendments to IFRS 9 (Proposed amendments to IFRS 9 (2010)) Exposure Draft Clarification of Acceptable Methods of April 2, 2013 Depreciation and Amortisation (Proposed amendments to IAS 16 and IAS 38)Audit • Tax • Advisorywww.GrantThornton.caAbout Grant Thornton in CanadaGrant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. Togetherwith the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. GrantThornton LLP is a Canadian member of Grant Thornton International Ltd, whose member firms operate in close to 100 countries worldwide.We have made every effort to ensure information in this publication is accurate as of its issue date. Nevertheless, information or views expressed are neitherofficial statements of position, nor should they be considered technical advice for you or your organization without consulting a professional business adviser.For more information about this topic, please contact your Grant Thornton adviser.© 2012 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd.All rights reserved. IFRS Newsletter – November 2012 – 12