The IFRS Newsletter for December 2012 discusses updates from the IASB, including developments in hedge accounting, new criteria for qualifying hedged items, and the introduction of an exception for investment entities regarding consolidation. The newsletter also highlights upcoming projects and amendments to IFRS standards, such as IFRS 9 on financial instruments and IAS 7 on cash flow statements. Additionally, it provides insights into the impact of these changes on financial reporting and practical guides for users.

1. IFRS Newsletter
December 2012
Welcome 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 new
newsletter that offers a summary Standards Board (IASB) Review Draft of a guides on IFRS 10 Consolidated Financial
of 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 the
Reporting Standards (IFRS) are progressing as well as considering some implementation dates of newer standards
along with insights into topical IFRS-related developments. that are not yet mandatory.
issues.

2. Hedge accounting to move closer to risk
management
Hedge accounting project Major features of the likely new standard
nears completion
Features Key points
In September, the IASB published a Review
Draft of the general hedge accounting Objective of the • to better align hedging from an accounting point of view with
section of IFRS 9 Financial Instruments. The (proposed) entities’ underlying risk management activities
Board intends to proceed to finalize it standard
during 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) remain
the draft but is making it available for • ineffectiveness needs to be measured and included in profit or
information purposes to enable constituents loss
to familiarize themselves with the document. The major changes • increased eligibility of hedged items
It is then effectively a preview of the • increased eligibility of hedging instruments and reduced
expected final standard. If finalized in its volatility
current form, the standard should make it • revised criteria for hedge accounting qualification and for
easier for many entities to reflect their actual measuring hedge ineffectiveness
risk management activities in their hedge • a new concept of rebalancing hedging relationships
accounting and thus reduce profit or loss • new requirements restricting the discontinuance of hedge
accounting
volatility. By way of contrast the previous
standard, 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 entire
either made it impossible for entities to use
item
hedge accounting or, in some cases, simply items
put 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 identifiable
entities to achieve hedge individual components of an identified component of the financial or non-
risk financial item
accounting and should also
• it is now possible to treat a “risk
reduce profit or loss volatility component” as an eligible hedged item if – the changes in the cash flows or fair
We outline in the table hereinafter the major it is separately identifiable and reliably value of the item attributable to
features of the likely new standard before measurable changes in that risk component must
considering the changes from the be capable of reliable measurement.
• it does not matter if the risk is a financial
requirements of the previous standard in or a non-financial risk provided these
more 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. 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 management
Groups 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, the
Hedged 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. A new concept of rebalancing New requirements restricting Effective date and transition
hedging 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. IASB work plan
In December, the IASB issued a revised
version of its work plan. The plan shows the IASB’s projected targets for 2012 and the first half of 2013
IASB’s projected targets for work to be
Q4 2012 Q1 2013 Q2 2013
undertaken in the remainder of 2012 and the
first three quarters of 2013. IFRS 9 Financial Instruments
• Classification and measurement Published ED
Of particular interest are the latest plans • Impairment Target ED
for the IASB’s projects on financial
• General hedge accounting Target IFRS
instruments, revenue recognition, leases and
• Macro hedging
insurance contracts. These plans arose from Target DP
the IASB’s convergence work with the US Revenue recognition Target IFRS
Financial Accounting Standards Board Leases Target ED
(FASB), and represent a barometer by which Insurance contracts Target ED
we can gauge its enthusiasm for continuing
with convergence with US generally accepted Key: ED = Exposure Draft
DP = Discussion Paper
accounting principles (GAAP). More
generally, the work plan is an important Overall, the revised work plan indicates
In addition to the items shown in the
resource for companies wishing to plan that the IASB remains committed to the
table, the IASB notably plans to make a
ahead for their future reporting majority of projects that were started under
number of narrow scope amendments to the
requirements. 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 let
major projects is set out in the table below. one of the Exposure Drafts planned on
some projects, such as leases, which were
In 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 has
certain that a new standard dealing with published in November the Exposure Draft
revenue recognition will be released in 2013. Annual Improvements to IFRSs 2011-2013 Cycle
Further Exposure Drafts are however resulting from its Annual Improvements
planned 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. IASB issues an exception to
consolidation for investment entities
In October 2012, the IASB issued
amendments 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 those
exception for qualifying investment entities investor(s) with investment management services
from consolidating their controlled – commits to its investor(s) that its business purpose is to invest funds solely for
investments. 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 basis
view that consolidating the financial • an entity is not disqualified from being an investment entity only because it provides
statements of an investment entity and its investment-related services, either to its investors or to third parties
investees 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 to
information. Their concern is that the
realize capital appreciation for certain investments, because these investments have
reported investment performance of the the potential to be held indefinitely
investment 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
and
Consolidation in such circumstances makes
– not available to other parties that are not related to the investee
it more difficult for investors to understand • an entity that has more than an insignificant amount of investments that are not
what they are most interested in—the value measured or managed on a fair value basis would not be an investment entity
of 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 investment
arguments and, in August 2011, published an – more than one investor
Exposure Draft Investment Entities. The – investors that are not related to the entity or other members of the group
containing the entity
Exposure Draft proposed an exception to
– ownership interests in the form of equity or similar interests.
the consolidation principle such that a
qualifying investment entity would have been
required 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 is
to qualify as an investment entity, all of Canadian investment entities whose
January 1, 2013. The amendments published
which would have to have been satisfied. mandatory IFRS changeover date has been
in October 2012 apply for annual periods
However, following feedback from deferred until January 1, 2014. For
beginning on or after January 1, 2014. Their
constituents, the IASB has made several information on the application for Canadian
earlier application is permitted. Clearly, a
changes and improvements. In accordance entities, refer to our Adviser alert – IASB issues
consolidation exception has a huge impact
with the issued amendments, the key features an exception to consolidation for Investment Entities.
on the entities affected—and spare them
of the definition of an investment entity are
6 IFRS Newsletter – December 2012

7. Grant Thornton International guide to
IFRS 10 published
The Grant Thornton International IFRS • identifying situations in which IFRS 10 is
team has issued a new publication entitled more likely to affect the scope of
Under Control? A Practical Guide to IFRS 10 consolidation
Consolidated Financial Statements. • identifying and addressing the key
The guide has been written to assist practical application issues and
management 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 requirements
Grant Thornton International guide to
IAS 7 published
The 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 Grant
application issues.
Thornton adviser.
Increased attention to companies’ cash
generation and liquidity position has resulted
in more scrutiny of the statement of cash
flows by financial statement users, regulators
and other commentators. The Grant
Thornton International IFRS team has
written the guide to remind users of the
basic requirements for preparing the
statement of cash flows while providing
insights on avoiding common pitfalls and
application issues that have been highlighted
by regulators and seen in practice by our
IFRS Newsletter – December 2012 7

8. Grant Thornton International 2012
Example IFRS Financial Statements
released
The Grant Thornton International IFRS To obtain a copy of the 2012 Example
team has issued the 2012 version of its IFRS Consolidated Financial Statements, please
Example Consolidated Financial Statements. get in touch with your Grant Thornton
adviser.
The new version of the publication has
been reviewed and updated to reflect
changes in IFRS that are effective for annual
periods ending December 31, 2012. It also
reflects the early-adoption of certain
amendments to IAS 1 Presentation of Financial
Statements, effective for annual periods
beginning on or after July 1, 2012. The
publication does not reflect the early
adoption of any other changes in IFRS that
have been issued but are not yet effective.
Raymond Chabot Grant Thornton hosts
IFRS seminar for mining companies in
Canada
Raymond Chabot Grant Thornton hosted an income tax reconciliation for a mining review of annual and quarterly financial
information day for mining companies at the exploration company, as well as changes to statements. Several presentations were also
beginning of October, attracting around 50 Grant Thornton’s model financial statements made by financing entities who explored
clients 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 Marchés
mining sector, an example of a typical
Financiers on their findings from their
8 IFRS Newsletter – December 2012

9. Spotlight on our IFRS Interpretations
Group
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. Round-up
IASB editorial corrections Valuation in the mining, oil Canada confident on its IFRS
The IASB published a collection of and gas industries strategy
editorial corrections in November and This IVSC’s project looks to provide greater Following the adoption of IFRS in Canada
in July 2012. Editorial corrections valuation guidance to the mining, oil and gas last year, the Canadian Accounting
consist of those amendments that are industries. Standards Board has reflected on the
needed as a result of an error made experience in its 2011/2012 annual report.
when writing or typesetting the The adoption of IFRS during recent
documents (for example spelling errors, years has exposed many inconsistencies in While the standard setter notes some
grammatical mistakes or unmarked how the values of mineral reserves and areas of criticisms, such as divergence in
consequential 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 the
IVSC Discussion Papers regulators, auditors and investor groups. effects of rate regulation, it is generally
The International Valuation Standards confident that its choice of adopting IFRS
Council (IVSC) has issued Discussion has been the right one. It notes in particular
Papers on trade-related properties and that although IFRS require improvement,
on valuation in the mining, oil and gas they represent the only practical route to
industries. achieving the goal of a single set of high
quality, globally accepted financial reporting
Trade-related properties standards contributing to the improved
The IVSC Discussion Paper examines functioning of global capital markets.
the methods used for valuing trade-
related properties around the world,
following concern about the different
practices that are currently being used.
The Discussion Paper focuses in
particular on the valuation of hotels,
although the issues are equally relevant
to other trade-related properties such as
bars, restaurants, other properties in the
leisure sector and specialized health care
facilities.
10 IFRS Newsletter – December 2012

11. Effective dates of new standards and
IFRIC interpretations
The table below lists new IFRS and IFRIC interpretations with an effective date on or after July 1, 2011. Companies are required to make
certain 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. 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 IFRS
until its issuance in the CICA Handbook.
Open for comment
This table lists the documents that the
IASB currently has out to comment and Current IASB documents
the comment deadline. We aim to
respond 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 • Advisory
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IFRS Newsletter – November 2012 – 12