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Overview of presentation. a recap of the major issues;lessons learned so far;case studies; andpreparing your first set of accounts under the new standards. Structure of framework. IFRSs will form the 1-99 series ie AASB1 = IFRS1IASs will form the 100
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1: IFRS Update Not-for-profit
2: Overview of presentation a recap of the major issues;
lessons learned so far;
case studies; and
preparing your first set of accounts under the new standards
3: Structure of framework IFRSs will form the 1-99 series ie AASB1 = IFRS1
IASs will form the 100 999 series ie AASB 138 = IAS 38
Existing standards not for retraction will form the 1000+ series ie AASB 1031 = AASB 1031 'materiality'
Consequential changes series by year i.e. 2004-1, 2005-1 etc.
AASB 1048
4: Key dates December Y/E
5: Key dates June Y/E
6: Main requirements of AASB 1 First set of A-IFRS accounts
Recognition
Derecognition
Reclassifications
Disclosures
Exemptions
7: Scope First financial report
Interim financial report
Explicit statement
8: Case study 1
9: Key definitions Date of transition to A-IFRS
Deemed cost
10: Recognition and measurement Opening B/S
Accounting policies:
Current A-IFRS standards
Recognition
Derecognition
Reclassificaton
11: Exemptions from other A-IFRS Business combinations:
Retrospective application
AASB 121
Derecognition
Goodwill
Retained earnings
Deemed cost
12: Exemptions from other A-IFRS Value of goodwill:
Adjustments
Contingencies
Impairment
13: Exemptions from other A-IFRS Deemed cost:
Cost
Revalued GAAP amount
Fair value
PPE
Investment properties
Intangibles
14: Exemptions from other A-IFRS Employee benefits:
Defined benefit plans:
Corridor approach
Cumulative actuarial gains/losses
Cumulative translation differences:
Deemed to be zero
Subsequent exclusions
15: Exemptions from other A-IFRS Decommissioning and restoration:
UIG interpretation 1
Measurement of liability
Present value of liability
Accumulated depreciation
16: Case study 2
18: Presentation and disclosure Comparative information
Exemptions:
AASB 132, AASB 139, AASB 6, AASB 4, AASB 1023 and AASB 1038
Previous GAAP
Disclose basis of preparation
Disclose main adjustments
Date of transition
19: Presentation and disclosure Reconciliations:
Equity:
Date of transition
End of last GAAP period
Profit and loss
Impairment losses
20: Presentation and disclosure AASB 108
Designation of financial assets and financial liabilities:
Fair value
Deemed cost:
Disclosures
21: AASB 102: Inventories NRV
Current replacement cost
Inventories held for distribution
22: AASB 102: Inventories Cost of inventories
Subsequent measurement of inventories
Not reliant on the inventories ability to generate net cash inflows
23: AASB 108: Accounting Policies, changes in Accounting estimates & errors Voluntary changes
Prior period errors
Accounting estimates
24: Main requirements of AASB 116 prescribes requirements for recognition and measurement at recognition;
prescribes measurement after recognition, and derecognition of PPE assets;
prescribes requirements for depreciation of PPE assets;
requires that all PPE assets be subjected to the requirements of AASB 136 Impairment of Assets; and
requires disclosures about PPE.
25: Differences between AASB 116 and existing standards Tangible assets
Revaluations
individual assets
Deferred settlement
discounted to P.V
cash price equivalent
Ceasing to revalue
Assets acquired at zero or nominal value
26: Case study 3
27: Case study solution Profit entity
28: Case study solution Not-for-profit entity
29: Key definitions PPE
Recoverable amount
Residual value
Useful life
30: Scope Excludes:
AASB 5;
AASB 140;
AASB 141; and
AASB 6.
31: Recognition Criteria:
probable; ad
reliable.
Spare parts:
consumables
Unit of measure
Measurement at recognition
32: Case study 4
33: Recognition Elements of cost:
purchase price;
costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and
initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.
34: Recognition Measurement of cost:
cash price equivalent
deferred payment:
excess recorded as interest
AASB 123
35: Subsequent costs Servicing
Repairs and maintenance
36: Case study 5
37: Measurement after recognition Cost model
Revaluation model:
regularity
38: Case study 6
39: Measurement after recognition Classes of assets:
land;
land and buildings;
machinery;
ships;
aircraft;
motor vehicles;
furniture and fixtures; and
office equipment.
40: Measurement after recognition Revaluation increases and decreases:
classes of assets;
increments;
decrements; and
offsets.
41: Case study 7
42: Case study 7 - solution Original depreiaction $1m/20 years = $50,000 p.a.
Current depreciation $1.35m/18 years = $75,000 p.a.
Difference $25,000 p.a.
43: Depreciation Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately
Depreciable amount
Depreciable period
44: Depreciation Review of residual value and useful life
AASB 108
Depreciation method
Review of depreciation method
45: Case study 8
46: Derecognition The carrying amount of an item of PPE shall be derecognised:
on disposal; or
when no future economic benefits are expected from its use or disposal.
Treatment of gain/loss
47: Disclosures Class of PPE:
measurement basis
depreciation methods
useful lives
carrying amounts
reconciliations
48: Disclosures Other disclosures:
restrictions
construction expenses
contractual commitments
compensation
49: Disclosures AASB 108
Revaluations:
date
assumptions
calculation of fair values
carrying amount under cost model
50: Case study 9
51: Case study 9 - solution Frequency of revaluations
Assess at each reporting date:
external indicators; and
internal indicators.
52: Assets removed from PPE Investment properties:
definition
construction of investment properties
initial recognition
subsequent measurement
Software costs
53: Assets removed from PPE AASB 5
definition
measurement
depreciation
presentation
54: AASB 123 Borrowing Costs Benchmark treatment
Alternative treatment
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined in accordance with this Standard.
55: AASB 117 Straight lining operating leases
Make good provisions
56: Case study 10
57: Case study 10 (a) - solution
58: Case study 10 (b) - solution
59: AASB 117 make good provisions AASB 137 requires a provision for make good costs shall be recognised when:
an entity has a present obligation (legal or constructive) as a result of a past event;
it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
a reliable estimate can be made of the amount of the obligation.
60: Financial statement impact
61: AASB 119 Employee provisions Short-term v long-term
Sick leave
Accumulating
Non-accumulating
Accounting for:
Short-term benefits
Long-term benefits
62: AASB 119 Example An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current years entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 20X1, the average unused entitlement is two days per employee. The entity expects, based on past experience which is expected to continue, that 92 employees will take no more than five days of paid sick leave in 20X2 and that the remaining eight employees will take an average of six and a half days each.
63: AASB 119 Defined benefit supn Corridor approach
All actuarial gains/losses
Past service cost
Example
64: Main requirements of AASB 136 Ensures assets are not carried at amounts in excess of their recoverable amounts
Concept of cash-generating units
Impairment indicators
Finite and indefinite useful lives
Treatment of goodwill
65: Differences between AASB 136 and AASB 1010 AASB 136 applies to all assets
Impairment indicators
Discounted cash flows
66: Key definitions Active market
Cash-generating unit
Recoverable amount
67: Asset impairment Annual testing for:
indefinite lives;
not yet available for use; and
goodwill.
Impairment indicators:
External sources
Internal sources
68: Recoverable amount Net fair value
Value in use
Depreciated Replacement cost
Cash-generating unit
Useful life
69: Example White Cross (W.C) (a charitable organisation) owns it office building which was constructed 5 years ago and has a carrying amount of $450,000 on their books. W.C. depreciates the building at 5% on a straight line basis. On reviewing their impairment indicators W.C. has found one present for the building. An expert has valued the NRV of the building to be $400,000 and the current replacement cost to be $600,000.
Is the building impaired?
70: Solution AASB 136 paragraph AUS 32.1
Depreciated replacement cost
= $600k - 600k * 5% * 5 years
= $600k 150k
= $450k
71: Formula Recoverable Amount =
Higher of
Net Fair Value
or
Value in Use/Depreciated replacement cost
72: Impairment loss Generally recognised in P&L
Depreciation/amortisation charge adjusted
Liability?
73: Cash-generating units Where an asset belongs to a cash-generating unit and there is an indication it is impaired the entity shall determine the recoverable amount of the cash-generating unit to which the entity belongs
74: Case study 11
75: Goodwill Allocated to a cash-generating unit
Apportioned to the asset or part of the unit sold
76: Timing of impairment tests Annual
Where impairment indicators exist
77: Other Treatment of corporate assets
Impairment losses for cash-generating units:
Goodwill
Other assets
78: Case study 12
79: Case Study 12 - Solution
80: Reversing impairment losses Indicators
Individual assets
Cash-generating units
81: Case study 13
82: Case Study 13 - Solution
83: Case Study 13 Solution contd
84: Reversing impairment losses Goodwill
85: Disclosures More extensive than AASB 1010!
86: Conclusion First Time Adoption
Determining Cash Generating Units
Calculating Value in Use
87: AASB 138 - Intangibles Prohibition on internally generated brands, mastheads etc.
Revaluation only with reference to an active market
Treatment of R&D
88: First time adoption of AASB 7 1 Jan 2007
Early adoption
Comparatives
89: Main requirements of AASB 7 Presentation and disclosure requirements for financial instruments including:
significance on an entitys financial position and performance; and
qualitative and quantitative information about exposure to risks.
90: Scope The Standard applies to all types of financial instruments, both recognised and unrecognised, except:
AASB 127, AASB 128 and AASB 131;
AASB 119;
AASB 3;
AASB 4; and
AASB 2.
Application to different entities.
91: AASB 7 Vs AASB 132 AASB 7 will supersede the disclosure requirements of AASB 130 and AASB 132
enhanced balance sheet and income statement disclosures
both quantitative and qualitative disclosures required
parent entity disclosures
92: Definitions Credit risk
Currency risk
Interest rate risk
Liquidity risk
Market risk
Other price risk
93: Key requirements of AASB 7 Balance sheet
financial assets at fair value through profit or loss;
held-to-maturity investments;
loans and receivables;
available-for-sale financial assets;
financial liabilities at fair value through profit or loss; and
financial liabilities measured at amortised cost.
94: Key requirements of AASB 7 Income statement disclosures for:
loan or receivable (or group of loans or receivables) at fair value through profit or loss; and
financial liability at fair value through profit or loss.
95: Key requirements of AASB 7 Reclassifications
Derecognition
Collateral
Defaults and breaches
96: Key requirements of AASB 7 Income statement disclosures for financial instruments:
net gains or net losses;
total interest income and total interest expense;
fee income and expense;
interest income on impaired financial assets; and
the amount of any impairment loss for each class of financial asset.
97: Key requirements of AASB 7 Hedge accounting:
a description of each type of hedge;
a description of the financial instruments designated as hedging instruments and their fair values at the reporting date;
the nature of the risks being hedged;
fair value of hedges; and
Hedge ineffectiveness in P&L.
98: Key requirements of AASB 7 Qualitative disclosures:
Credit risk
Liquidity risk
Market risk
99: First time adoption of AASB 132 1 Jan 2005
Early adoption
Comparatives
100: Main requirements of AASB 132 clarifying the liability and equity classification of financial instruments;
prescribing conditions under which assets and liabilities may be set-off; and
requiring disclosure of fair value for each class of financial assets and financial liabilities.
101: Scope The Standard applies to all types of financial instruments, both recognised and unrecognised, except:
AASB 127, AASB 128 and AASB 131;
AASB 119;
AASB 3;
AASB 4; and
AASB 2.
102: Differences between AASB 132 and 1033 Converting instruments:
securities that vary with changes in their fair value, but conversion is not mandatory; and
resetting preference shares.
In-substance defeasance
Fair value disclosures
Puttable financial instruments
103: Differences between AASB 132 and 1033 Fair value and reliability
Derivative disclosures
Interest rate disclosures:
Fourth approach
weighted average rates or a range of rates may be presented for each class of financial instrument
104: Key definitions Financial instrument
Financial asset
Financial liability
Equity instrument
105: Liabilities and Equity the instrument is an equity instrument if, and only if:
The instrument includes no contractual obligation:
to deliver cash or another financial asset to another entity; or
to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer.
106: If the instrument will or may be settled in the issuers own equity instruments, it is:
a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.
Liabilities and Equity (cont.)
107: Case study 14
108: Settlement options When a derivative financial instrument gives one party a choice over how it is settled (e.g. the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an equity instrument.
109: Case study 15
110: Compound financial instruments The issuer of a non-derivative financial instrument shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments in accordance with the substance of the contractual arrangement and the definitions of a financial liability.
111: Compound financial instruments: Example 2,000 convertible bonds.
The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000.
Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent.
Each bond is convertible at any time up to maturity into 250 ordinary shares.
When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.
112: Compound financial instruments: Example
113: Other issues Treasury shares
Interest, Dividends, Losses and Gains
Offsetting a Financial Asset and a Financial Liability
legally enforceable right to set off the recognised amounts; and
intention either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
114: AASB 132 Disclosures Refer detailed notes and AASB 7 discussion
115: First time adoption of AASB 139 1 Jan 2005
Early adoption
Comparatives
Initial values
Grandfather rules
116: Main requirements of AASB 139 The Standard establishes principles for recognising and measuring financial assets and financial liabilities including derivatives and certain embedded derivatives
117: Contents of AASB 139 Measurement & accounting for financial assets & liabilities
Derecognition of financial assets & liabilities
Derivatives & embedded derivatives
Hedge accounting
118: Differences to existing standards AASB 139 does not supersede any equivalent Australian Accounting
Standard
119: Scope The Standard applies to all types of financial instruments, both recognised and unrecognised, except:
AASB 127, AASB 128 and AASB 131;
AASB 119;
AASB 3;
AASB 4; and
AASB 2.
120: Key Definitions AASB 139 Derivative
Firm commitment
Forecast transaction
Hedge effectiveness
Amortised cost
Effective interest method
121: Amortised cost and effective interest method Example:
A $1M 3 year bond with a coupon rate of 6% is purchased 1 July 2005 at 5% discount, yield of 7.9% calculated as follows:
122: Solution
123: Categories of financial instruments On recognition of financial instruments they are to be classified into one of the following:
- held for trading (HFT)
- held to maturity (HTM)
- loans & receivables
- available for sale (AFS)
124: Categories of financial instruments Classification determines method of measurement & movement recognition
125: Held for trading (HFT) HFT defined as:
- acquired or incurred principally for the purpose of selling or repurchasing it in the near term
- part of portfolio that are managed together for which there is evidence of recent pattern of short term profit taking
- a derivative (except hedging instrument)
126: Held for trading (HFT)
Financial asset or liability designated when initially recognised to be carried at fair value except those equity instruments without an active market
Measured at fair value with changes in fair value taken to profit or loss
Classification irreversible
127: Held to maturity (HTM) HTM's are defined as non derivative financial assets with fixed or determinable payments & fixed maturity that an entity has the intention of holding to maturity other than:
- instruments designated to be held at fair value on recognition & fair value movement taken to P/L
- instruments designated as for sale
- loans & receivables
128: Held to maturity (HTM) Measured at amortised cost subject to impairment
129: Loans & receivables Are non-derivative financial assets with fixed or determinable payments that are not quoted other than:
- those for immediate or near term sale which are classified for trading or designated on recognition to carried at fair value with movements recognised in P/L
130: Loans & receivables - those designated for sale
- interest in a mutual fund or similar
Measured at amortised cost, subject to impairment
131: Available for sale (AFS) Non derivative financial assets designated available for sale or not classified in other categories
Measured at fair value with change in value recognised directly in equity
132: Available for sale (AFS)
On derecognition related amount in equity is transferred to P/L
Most losses brought to account in P/L immediately
133: Case study 16
134: Case study 16 solution (a)
135: Case study 16 solution (b) sale
136: Case study 16 solution (b) cont.
137: Case study 16 discussion issues Invested in a number of different shares?
Invested in non-listed shares?
138: Other issues Term deposits?
Cash Management accounts?
139: 2005-4 Application date
Fair value through profit and loss restricted, must result in more relevant information because either:
significantly reduces a measurement or recognition inconsistency; or
performance is evaluated on a fair value basis
140: Impairment Specific guidance of indicators of impairment of financial assets
Indicators include:
- breach of contract such as default or delinquency
- lender granting concessions
- probable bankruptcy of borrower
- disappearance of active market
- adverse change in status of borrower
141: Impairment Can adjust carrying value directly or via allowance & reverse same way
Impairment losses must be based on objective evidence
Effect of disallowing general provisions e.g. against doubtful debts
Assessment on collective basis
142: Debtor provisioning Highglo Ltd has a policy of providing for 2% of debtors as doubtful
Glolow has a policy of providing the following percentage of debtors as doubtful:
Over 90 days 20%
60-90days 10%
30-60 days 5%
0-30 days 0%
143: Case study 17
144: Case study 17 discussion issues Bond with a yearly dedn 2.5%
Reliable measurement of expected repayment is possible
145: Case study 18
146: Action points establish procedures to identify all financial instruments and inventory all instruments noting terms and conditions
consider classifications
consider whether entity intends to designate an initial recognition as at fair value through P/L
consider systems to classify & fair value account
147: Action points consider knowledge & resources needed for fair value accounting
assess impact on hedging strategies, documentation & monitoring
related systems changes
create checklists for checking for existence of embedded derivatives
148: IFRS accounts Income Statement
149: IFRS accounts Income Statement (cont)
150: IFRS accounts Balance Sheet
151: IFRS accounts Balance Sheet
152: IFRS accounts Changes in Equity
153: IFRS accounts Cash Flow
154: IFRS accounts Cash Flow
155: Questions?