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Diploma in IFRS Module 5 Performance Measurement title goes here

Introduction and Overview Learning Objectives Explain the core principles in revenue reporting as set out in IAS 18 Revenue Explain how to account for contracts with multiple sale elements and how to allocate fair values across different elements of a contract Outline how to apply the general principles to specific applications Outline the latest changes being proposed in the ED Revenue Recognition in contracts with customers

Introduction and Overview • Explain the rationale behind segment reporting • Define an operating segment and outline the information that must be reported under IFRS 8, Operating Segments Explain why it is necessary to charge an expense for share-based payment schemes under IFRS 2, Share Based Payment • Explain the differences between the three main types of options – equity settled, cash settled and hybrid schemes • Calculate the fair value of the options as at the date of grant and show what information needs to be reported in the financial statements Learning Objectives (Cont’d)

Introduction and Overview Learning Objectives (Cont’d) Outline the requirements of IAS 19, Employee Benefits, in relation to short-term and long-term employee-benefits Outline how to account for termination benefits Understand the difference between defined-contribution and defined-benefit pension schemes and their impact on their accounting treatment Calculate defined benefit surpluses/deficits and account for these in the Statement of Financial Position and Statement of Comprehensive Income

Introduction and Overview Learning Objectives (Cont’d) Outline the disclosures required by IAS 19 Revenue Understand why it is necessary to calculate earnings per share Define both basic and diluted earnings per share (EPS) and outline how they are accounted for under IAS 33, Earnings per Share Calculate both EPSs with the inclusion of rights and bonus issues (basic) and share options and convertible loans (diluted) Explain the importance of diluted EPS

IAS 18 Revenue General Principles Key Figure – used in ratio analysis Substance over form Covers goods, services, interest, royalties and dividends Key issue – when can revenue be recognised?

IAS 18 Revenue Definition Revenue Fair value

If consideration is receivable in the future, use present value and recognise interest income as discount unwinds IAS 18 Revenue Measurement Fair value of consideration received or receivable

IAS 18 Revenue Example – future cash payment Abbey sells goods to Brett on 1 January 2011 for 3,600, receivable on 1 January 2013. The fair value of revenue recognised by Abbey is based on the present value of future cash flow, assuming a rate of interest of 4.5% per annum. On 1 January 2011, Abbey should recognise revenue of 3,297 (3,600 discounted for 2 years) The discount should be ‘unwound’ at each period end to reflect the passage of time. The resulting increase in the trade receivables balance represents interest income which is recognised over the period from the date of sale to the date of receipt of cash.

Assuming the year end is 31 December, the following would be recorded: Opening balance Statement of Closing balance Comprehensive Income Trade receivables Interest income Revenue Trade receivables Year 2011 3,297 148 3,297 3,445 Year 2012 3,445 155 3,600

IAS 18 Sale of goods bill and hold sales; goods shipped subject to conditions; lay away sales; orders when payment is received in advance; sale and repurchase agreements; sales to intermediate parties for resale; subscriptions to publications and similar items; instalment sales. Examples

IAS 18 Sale of goods - Recognition Revenue from the sale of goods shall be recognised when all of the following conditions are satisfied: the seller has transferred to the buyer the significant risks and rewards of ownership of the goods; the seller retains neither continuing managerial involvement with the goods nor effective control over them; the amount of revenue can be reliably measured; it is probable that the economic benefits associated with the transaction will flow to the seller, and; the costs incurred (or to be incurred) in respect of the transaction can be measured reliably.

Transfer of risks and rewards of ownership Revenue is recognised only when significant risks and rewards of ownership are transferred - normally transfer of legal title or the passing of possession Examples where the seller retains significant risks and rewards include: the seller retains an obligation for unsatisfactory performance not covered by normal warranty conditions; the receipt of revenue from a particular sale depends on the buyer being able to sell the goods on to a third party; goods are shipped subject to installation and the installation is a significant part of the contract which has not yet been completed; the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return. If the seller retains only insignificant risks and rewards of ownership, the transaction is a sale and revenue can be recognised.

Example Bill and hold sales Example – bill-and-hold sales Wicklow Ltd entered into a contract during 2009 to supply 100,000 game consoles at 50 each. The contract contains specific instructions from customer Y with regard to the timing and location of the delivery. Wicklow Ltd must deliver the consoles at a date specified by the customer. Normal payment terms apply. At 31 December 2009, Wicklow Ltd still has 10,000 game consoles relating to the contract with Customer Y. However, Wicklow cannot use these consoles to satisfy other sales orders and at 31 December 2009 title to the 10,000 consoles has passed to Customer Y. Delivery is expected to take place in 2010. The consoles are sold by Wicklow Ltd at a margin of 20%. Solution Revenue should be recognised in year ended 31 December 2009 for this entire contract. Goods are specific to the customer, the customer has taken title, and delivery has been delayed at the request of customer. Year ended 31 December 2009 Revenue (100,000 x 50) 5,000,000 Cost of sales (5,000,000 x 80/100) 4,000,000

Probability that economic benefits will flow Revenue is recognised only when it is probable that the economic benefits associated with the transaction will flow to the seller. In some cases there may be uncertainties – e.g. goods sold to an overseas customer may require government approval before consideration can be passed. If a significant uncertainty exists, revenue should not be recognised until the uncertainty is removed. If revenue is recognised but subsequently a bad debt occurs, the uncollectible amount is treated as an expense (bad debt) rather than a reduction in the amount of revenue originally recognised.

IAS 18 Rendering of Services installation fees; servicing fees included in the price of a product; advertising commissions; insurance agency commissions; financial services fees; admission fees; tuition fees; initiation, entrance and membership fees; franchise fees; fees from the development of customised software The performance of a contractually-agreed task over an agreed period of time. May be rendered in a single period or over more than one period Examples

IAS 18 Rendering of Services Recognition The outcome of a transaction can be estimated reliably when all of the following conditions are satisfied: the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; the stage of completion of the transaction at the end of the period can be measured reliably; the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. The stage of completion may be determined by a variety of methods: survey of work performed; percentage of total services to be performed; proportion that costs incurred to date bear to the estimated total costs of the transaction

IAS 18 Rendering Services Example – rendering of services Kildare Ltd opened a sports centre in January 2008 and charges a joining fee of 250 entitling members to life membership. There are no annual charges and members pay 4 per session at the centre. Non-members are allowed to use the centre for 6 per visit. Based on experiences of similar sports centres, Kildare Ltd estimates that members use the centre about 50 times per year and that, on average, each member remains active for 2 years. No extra services are provided to members compared to non-members. During the years ended 31 December 2008 and 31 December 2009, 1,000 and 1,200 new members joined respectively. The joining fees have been credited to revenue in both years.

Solution The discount that each member obtains can be estimated at 200 (2 per visit x 100 visits over course of active membership). Therefore, 50 may be recognised when membership commences and the remaining 200 spread over the expected 2 years of active membership. 2008 - Cash received 1,000 x 250 = 250,000 Revenue recognised in 2008: (1,000 x 50) + (1,000 x ½ 3 200) = 150,000 Revenue recognised in 2009: (1,000 x ½ 3 200) + 100,000 2009 - Cash received 1,200 x 250 = 300,000 Revenue recognised in 2009: (1,200 x 50) + (1,200 x ½ 3 200) = 180,000 Revenue recognised in 2010: (1,200 x ½ 3 200) + 120,000

Royalties, interest and dividends Recognition – interest, royalties and dividends These revenues are recognised when both of the following conditions are satisfied: it is probable that the economic benefits associated with the transaction will flow to the entity; and the amount of the revenue can be measured reliably If conditions are satisfied: interestis recognised using the effective interest method (as per IAS 39 Financial Instruments); royaltiesare recognised on the accruals basis; dividendsare recognised when the shareholder’s right to receive payment is established.

Example – multiple-element transactions Samson Ltd sells a particular machine and, in addition, provides a maintenance service for a year. The price of the machine and maintenance package is 200,000. Customers can also purchase the machine and maintenance service separately. The price of the machine is 190,000 and the price of the maintenance contract is 20,000 per annum. A customer purchases the machine and maintenance package and receives delivery of the machine on 1 July 2010. How much revenue should Samson Ltd recognise in the year ended 31 December 2010?

Example – multiple-element transactions Solution As it is possible to purchase the machine and maintenance separately, the contract has two separate components. The discount offered when the components are sold together of 10,000 (210,000 less 200,000) - apply pro-rata each component based on its individual fair value: Fair value of machine (190,000/210,000) x 200,000 180,952 Fair value of maintenance contract (20,000/210,000) x 200,000 19,048 Total revenue 200,000 Revenue recognised for the year ended 31 December 2010 Machine 180,952 Maintenance contract (1 Jul – 31 Dec) 19,048 x 6/12 9,524 Total revenue recognised 190,476 The other 9,524 is recorded as deferred income in the Statement of Financial Position and recognised in revenue in 2011.

IAS 18 Presentation and Disclosure The following disclosures must be made: accounting policies adopted for the recognition of revenue, including the methods adopted to determine the stage of completion of transactions involving the rendering of services; the amount of each significant category of revenue recognised during the period; the amount of revenue arising from exchanges of goods or services included in each significant category of asset. An entity must also disclose any contingent assets and contingent liabilities, such as warranty costs, claims, penalties or possible losses (in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets).

Services Percentage of completion method IAS 11 construction contracts Goods Transfer of risks & rewards Management involvement Substance of the transaction Interest– time apportion Royalties– accruals basis Dividends– when right to receive established General Principles Measure reliably Flow of economic benefits probable Costs measured reliably

ED Revenue from Contracts with Customers (June 2010) 1. Identifying the contract Commercial substance, approval, identification of rights and terms/manner of payment 2. Combination and segmentation of contracts Single contracts normal Combination – same time, single package, performed concurrently or consecutively Segmentation – prices independent

ED Revenue from Contracts with Customers (June 2010) 3. Contract modifications If modification interdependent – recognise in period If not interdependent – treat as separate contract 4. Identifying Separate performance obligations Must identify distinct goods/services (sold separately or could be sold separately) 5. Record revenue when obligations performed

IAS 18 Extracts from published accounts Attica Group – Year Ended 31 December 2009 (Greece) Accounting Policy Note – Revenue Cyprus Airways – Year Ended 31 December 2009 (Cyprus) Accounting Policy Note – Revenue Cyprus Airways – Year Ended 31 December 2009 (Cyprus) Note to the Financial Statements – Revenue South African Broadcasting Corporation – Year Ended 31 March 2009 (South Africa) Accounting Policy Note – Revenue South African Broadcasting Corporation – Year Ended 31 March 2009 (South Africa) Note to the Financial Statements – Revenue

Attica Group

Cyprus Airways

South African Broadcasting

IAS 18 Revenue Self Test Questions Gigmaster Ltd Your Bay Ltd Purple Ltd

Case Study 1 Tambo Plc

Case Study Tambo Plc Solution

Case Study Tambo Plc solution

IFRS 8 Operating Segments Introduction Multi national companies diversified products and geographically Definition Operating segment Chief operating decision maker

Identifying operating segments Management Approach Internal Management structure Start up operations Could be a segment Corporate HQ Through the eyes of management

Reportable segments Entities must disclose separately information about each operating segment. Two or more operating segments may be combined into a single operating segment if they have similar economic characteristics and are similar in each of the following respects: nature of the products and services; nature of production processes; type or class of customer for their products or services; methods used to distribute their products or provide their services; nature of the regulatory environment (if applicable).

Quantitative thresholds Entities must disclose separately information about each operating segment that meets any of the following quantitative thresholds: its reported revenue (internal and external) is at least 10% of the combined revenue of all operating segments; its reported profit or loss is at least 10% of the greater of the: i) combined reported profit of all operating segments that did not report a loss, and ii) combined reported loss of all operating segments that reported a loss; or its assets are at least 10% of the combined assets of all operating segments.

Operating segments not meeting quantitative thresholds If an operating segment does not meet any of these quantitative thresholds, it still may be treated as a separate reportable segment if management believes that information about the segment would be useful to users of the financial statements. Alternatively, the entity may combine such segments with other segments that do not meet the thresholds, but only with segments that have similar economic characteristics. At least 75% of an entity’s external revenue must be reported by operating segments. If the 75% criterion is not met, the entity must identify additional segments (even if they do not meet the quantitative thresholds) until at least 75% of the entity’s external revenue is reported. Other business activities and operating segments that are not reportable should be combined and disclosed in an ‘all other segments’ category.

IFRS 8 Disclosure Entities must disclose separately information about each operating segment that meets any of the following quantitative thresholds: its reported revenue (internal and external) is at least 10% of the combined revenue of all operating segments; its reported profit or loss is at least 10% of the greater of the: combined reported profit of all operating segments that did not report a loss, and combined reported loss of all operating segments that reported a loss; or its assets are at least 10% of the combined assets of all operating segments.

IFRS 8 Disclosure General information An entity must disclose the following general information: factors used to identify the entity’s reportable segments, including the basis of organisation (e.g. products, services, geographical areas, regulatory environments); and types of products and services from which each reportable segment derives its revenues. Information about profit or loss, assets and liabilities An entity must report a measure of profit or loss and total assets for each reportable segment. A measure for total liabilities must also be reported if such an amount is regularly provided to the chief operating decision-maker.

IFRS 8 Disclosure An entity must disclose the following about each reportable segment if the specified amounts are included in the measure of segment profit or loss reviewed by the chief operating decision maker: revenues from external customers; revenues from transactions with other operating segments of the same entity; interest revenue; interest expense; depreciation and amortisation; material items of income and expense disclosed in accordance with IAS 1; the entity’s interest in the profit and loss of associates and joint ventures accounted for by the equity method; income tax expense or income; material non-cash items other than depreciation and amortisation.

IFRS 8 Measurement Internal information used for decision making purposes the basis of accounting for transactions between reportable segments; the nature of any differences between the measurement of the reportable segment’s profit/loss and the entity’s reported profit/loss (e.g. accounting policies, policies for the allocation of jointly used assets); the nature of any differences between the measurement of the reportable segment’s liabilities and the entity’s liabilities (e.g. accounting policies, policies for the allocation of jointly utilised liabilities); the nature and effect of any changes from prior periods in the measurement methods used to determine reported segment profit/loss; the nature and effect of any asymmetrical allocations to reportable segments (e.g. depreciation allocated to a segment but not the related asset).

IFRS 8 Reconciliations An entity shall provide reconciliations of all of the following: •the total of the reportable segments’ revenue to the entity’s revenue; •the total of the reportable segments’ profit or loss to entity’s profit or loss; •the total of the reportable segments’ assets to the entity’s assets; •the total of the reportable segments’ liabilities to the entity’s liabilities (if reported above); and •the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity.

Restatement of previously reported information If an entity changes the structure of its internal organisation in a manner that causes the composition of the reportable segments to change, the corresponding information for earlier periods must be restated unless the information is not available and the cost to develop it would be excessive. If segment information for earlier periods is not restated, the entity must disclose the segment information for the current period on both the old basis and the new basis of segmentation, unless the necessary information is not available and the cost to develop it would be excessive.

IFRS 8 Disclosures Entity-wide disclosures The following entity-wide information must be disclosed: •revenues from external customers for each product, service or groups of similar products or services; •revenues from external customers attributed to the entity’s country of domicile; •revenues from external customers attributed to all foreign countries in total; •non-current assets located in the entity’s country of domicile; •non-current assets located in all foreign countries in total; and •the total amount of revenue generated by an individual customer and the related segment(s) where it is reported, where an individual customer generates 10% or more of the total external revenue. Customers’ identities need not be disclosed.

IFRS 8 Self Test Example Sparks Plc

Extracts from Published Accounts Anheuser-Busch InBev – 31 December 2009 (Belgium) Change in Accounting Policy – Operating Segments Anheuser-Busch InBev – 31 December 2009 (Belgium) Accounting Policy Note – Operating Segments Anheuser-Busch InBev – 31 December 2009 (Belgium) Note to the Financial Statements – Operating Segments (extract from note) Zeltia Group – 31 December 2009 (Spain) Standard Modification Adopted by the Group – Operating Segments Zeltia Group – 31 December 2009 (Spain) Accounting Policy Note – Operating Segments Zeltia Group – 31 December 2009 (Spain) Note to the Financial Statements – Operating Segments

Anheuser Busch

ZeltiaPlc

Case Study GetfitPlc

Case Study GetfitPlc solution

IFRS 2 Share Based Payment Share options popular form of employee remuneration Definition Share based payment Equity settled share transactions Cash settled share transactions

IFRS 2 Share Based Payment Accounting for Equity Settled Transactions Measure at fair value date of grant Use Black Scholes, Binomial Lattice, Monte Carlo Simulation models Alter estimate of employees likely to be still working for entity at date of vesting and reestimate at every year end Charge to income statement over the vesting period and credit equity reserves If exercise cancel reserves and credit Share Capital and Premium appropriately If do not exercise by date of expiry transfer option reserve to retained earnings

IFRS 2 Share based payment Example – equity-settled transaction On 1 January 2008, Snow Ltd issues 200 share options to each of its 1,000 members of staff. The vesting period for the options is 3 years and the fair value of the options at the grant date is 5. Expected employee turnover is estimated at 5% per annum. On 31 December 2009, the company revises its estimate of employee turnover to 8% per annum. On 31 December 2010, the actual employee turnover has averaged at 6% per annum for the 3-year vesting period. Options vest as long as employees remain with the company for the 3-year period. Requirement Determine the expense to be charged over the vesting period in respect of the share options.

Solution Year ended 31 December 2008 Total fair value of share options 1,000 x 200 x 5 x 0.95 x 0.95 x 0.95 = 857,375 Charge to Statement of Comprehensive Income 857,375 x 1/3 years = 285,792 Year ended 31 December 2009 Amended fair value of share options 1,000 x 200 x 5 x 0.92 x 0.92 x 0.92 = 778,688 Charge to Statement of Comprehensive Income 778,688 x 2/3 years = 519,125 Less amount recognised to date 285,792233,333 Year ended 31 December 2010 Actual value of share options 1,000 x 200 x 5 x 0.94 x 0.94 x 0.94 = 830,584 Charge to statement of comprehensive income 830,584 Less amount recognised to date 519,125 311,459

IFRS 2 Share Based Transactions Accounting for cash settled transactions Measure at Fair value of liability at date of grant Remeasure at every year end Charge to income and credit liabilities Remeasure liability right up to date of expiry If exercise Dr liability Cr Bank If no exercise Dr Liability Cr Retained earnings

IFRS 2 Share Based Payment Example – cash-settled transaction On 1 January 2005 Storm Ltd granted 1,000 share appreciation rights (SAR) to each of its 40 managers entitling them to receive, at the date the rights are exercised, cash equal to the appreciation in the entity’s share price since the grant date. All rights vest on 31 December 2006. They can be exercised during 2007 and 2008. Management estimates, at the grant date, that the fair value of each SAR is 11 and that 10% of employees will leave evenly during the two-year period. The fair values of the SARs at each year-end are: 31 December 2005 12 31 December 2006 8 31 December 2007 13 31 December 2008 12 10% of employees left during 2006, On 31 December 2007, 6 employees exercised their option (at an intrinsic value of 10) On 31 December 2008, 30 employees exercised their option (at an intrinsic value of 12)

The accounting treatment will be as follows: Year Expense Liability Calculation of liability 31 December 2005 216,000 216,000 36 x1,000 x 12 x ½ 31 December 2006 72,000 288,000 36 x1,000 x 8 31 December 2007 162,000 390,000 30 x1,000 x 13 Expense 390,000 – 288,000 less 60,000 (cash paid 6 x 1,000 x 10) 31 December 2007 (30,000) Nil Negative expense 360,000 cash paid (30 x 1,000 x 12) less 390,000 liability

IFRS 2 Share Based Payment Accounting for Transactions Which May be Settled in Cash or Shares (Hybrid Schemes) Choice of entity or employee/supplier Cash settled if liability to settle in cash Example – hybrid schemes An entity has granted to its management team the right to each receive 15,000 shares or a cash payment equivalent to the value of 10,000 shares. The entity may choose the settlement method. Accordingly, management does not consider that the entity has established an obligation to settle in cash, and so the transaction is accounted for as an equity-settled transaction. An expense is measured on the basis of the fair value of 15,000 shares at grant date. The corresponding credit is recognised in equity. On the settlement date, the share price is 10. Therefore the fair value of the shares (150,000) exceeds the fair value of the cash (100,000). If the entity chooses to settle the transaction in cash, the resulting payment of 100,000 is deducted from equity and treated as a re-purchase of shares. If the entity chooses to settle the transaction with shares, the excess of the fair value of the shares over the cash (50,000) is recognised as an expense.

IFRS 2 Share Based Payment Example – vesting period An entity grants options to its employees with a fair value of 300,000. In the case of no vesting period, the accounting treatment will be as follows: Year 1 Dr Expense 300,000 Cr Liability In the case of a vesting period, the options may vest in three years’ time the condition being that the employees remain in employment for that period. Assuming that all of the options do vest (no employees leave the entity) the accounting treatment will be as follows: Years 1- 3 (charged each year) Dr Expense 100,000 Cr Liability 100,000 This will be the charge each year regardless of any subsequent movements in the share price.

IFRS 2 Share based payment Self Test Question Apple Ltd

IFRS 2 Share based payment Carrefour Share-based payments The Group has established two share-based payment methods designed for its managers and certain employees: share-purchase option plans and free-share plans. Upon transitioning to the IFRS, in accordance with the option offered under IFRS 1, the Group elected to limit the application of IFRS 2 – Share-Based Payment, to stock-option plans paid in shares that were allocated after November 7, 2002, the rights to which had not yet been acquired as of January 1, 2004. This application had no effect on total shareholders’ equity as of January 1, 2004. By contrast, the plans granted between 2003 and 2010 fall within the scope of IFRS 2. The benefits granted under these plans are recorded as personnel expenses, offsetting a capital increase since the plans are paid as equity instruments. The expense recognized for each period corresponds to the fair value of the benefits granted on the basis of the Black-Scholes formula, on the date the share-purchase options were granted or, for the free shares, on the basis of the market price on the date they were granted. The resulting charge is then spread over the vesting period. In accordance with IFRS 2, acquisition conditions other than market conditions are not taken into account when the fair value of shares and share-purchase options are estimated on the valuation date.

SHARE-BASED PAYMENT The charge recorded in the 2010 income statement for share-based payments stood at 54 million euros. This charge amounted to 61 million euros in 2009. In accordance with the IFRS 2 standard, this charge, adjusted for tax effect, was offset by an increase in shareholders’ equity. The share-purchase option and free-share plans established by the Group as compensation for its managers and certain employees have the following characteristics:

Case Study Vidal Junction Plc solution

Case Study Vidal Junction Plc

Case Study Vidal Junction Plc solution

Case Study Accra Plc

Case Study Accra Plc solution

IAS 19 Employee Benefits Introduction Employee Benefits Short term benefits Post employment benefits Defined contribution Defined benefit Termination benefits Current service costs Interest costs

IAS 19 Employee Benefits Short term benefits Wages, salaries and social security contributions; Holiday pay and sick pay; Profit-sharing and bonuses; Non-monetary benefits for current employees, such as health care, company cars, accommodation Expensed as incurred unless part of capital item Accrual if not paid by year end

IAS 19 Employee Benefits Profit sharing and bonus schemes Example As part of a profit sharing plan, an entity agrees to pay a specified percentage of its profit for the year to employees in the form of a bonus. The bonus is to be paid three months after the period-end. At the end of the reporting period, based on staff turnover, the entity calculates an expected payment plans of 800,000 in relation to bonuses. At the period-end, the entity will recognise a liability and an expense for 800,000.

IAS 19 Employee benefits Post Employment benefits Defined Contribution Schemes Defined Benefit Schemes

IAS 19 Employee Benefits Defined Contribution Schemes Contributions paid expensed straight line basis Example Arnold Ltd has payroll costs of 1.35 million for the year ended 31 December 2010. The company has a defined contribution scheme and pays pension contributions of 5% of salary costs each year. During the year, Arnold Ltd paid 5,000 per month and will pay over the balance in January 2011. Statement of Comprehensive Income Pension cost 1,350,000 x 5% 67,500 Statement of Financial Position Accrued pension costs (67,500 – 60,000) 7,500

Post-Employment Benefits IAS 19 covers 2 types of post-employment (pension) scheme Defined contribution schemes Definedbenefit schemes The entity pays agreed contributions into a plan and has no further liability Any other type of scheme. Typically a pension is guaranteed based on final salary Accounted for on anaccruals basis Accounted for using the projected unit credit method

Pension scheme surplus or deficit on balance sheet. Defined Benefit Schemes Defined Benefit Schemes Scheme Assets Scheme Liabilities Measure at fair value at balance sheet date Measure at present value of future obligations

IAS 19 Employee Benefits Actuarial gains and losses Actuarial gains and losses can result from increases or decreases in the present value of plan liabilities or increases or decreases in the fair value of plan assets. Causes include: unexpectedly high or low rates of employee turnover; early retirement or mortality; salary increases; changes in discount rates; differences between actual and expected return on plan assets

IAS 19 Employee Benefits Determining actuarial gains and losses Actuarial gains and losses in respect of plan assets or plan liabilities are calculated as follows: Plan assets ‘000 Fair value at start of period XX Market valuations should be carried out regularly Expected return XX Expected increase in fair value of plan assets during period Contributions made XX Amounts contributed by employer and employees to plan Benefits paid (XX) Amounts paid out from pension fund in current year to pensioners, thus reducing value of remaining assets Actuarial gain/(loss) X/(X)Balancing figure Fair value at end of period XX

IAS 19 Employee Benefits Plan liabilities ‘000 Present value at start of period XX Accumulated pension benefits earned by past and present employees in return for services to date, which will be payable in the future Current service cost XX Extra pension benefits earned by employees in return for services in current period. Estimated by a qualified actuary - affected by mortality rates, future salaries, etc. Interest cost XX Increase in the present value of future obligations during the current period (‘unwinding the discount’) Arises because the pension benefits for employees are now one year closer to being paid Benefits paid (XX) Amounts paid out from pension fund in current year, thus reducing future liability of the plan as recipients are one more year into their retirement Actuarial (gain)/loss X/(X)Balancing figure Present value at end of period xx

Scheme Assets & Liabilities Present value of defined benefit obligation £m Actuarialloss (balancing figure) 34 At 1 January 1,990 Interest cost 158 Current service cost 170 Benefits paid (212) At 31 December 2,140 Fair value of plan assets £m Actuarialloss (balancing figure) (423) At 1 January 1,827 Expected return 180 Contributions 128 Benefits paid (212) At 31 December 1,500

IAS 19 Employee Benefits Accounting for actuarial gains and losses IAS 19 offers the following choice of accounting treatments for actuarial gains and losses. It is expected that the method chosen will be applied consistently for all defined benefit plans. immediate recognition of actuarial gains and losses as a ‘defined benefit expense’; immediate recognition of actuarial gains and losses as ‘other comprehensive income’; any systematic method that results in faster recognition of actuarial gains and losses; or recognition of a ‘portion’ of actuarial gains and losses using the ‘corridor method’.

IAS 19 Employee BenefitsIThe corridor method In the long term, actuarial gains and losses may offset one another. Therefore, the standard permits an entity to carry forward a modest amount of the actuarial gains or losses. IAS 19 requires entities to recognise, as a minimum, a specified portion of the actuarial gains or losses that fall outside a ‘corridor’ of plus or minus 10%. Actuarial gains or losses which do not exceed 10% of the present value of the plan liabilities, and also do not exceed 10% of the fair value of the plan assets, may be carried forward as part of the defined benefit liability. Gains and losses outside this 10% ‘corridor’ must be recognised as follows: recognised in the Statement of Comprehensive Income over average remaining service life of current employees; or recognised in the Statement of Comprehensive Income over a shorter period, provided it is systematic.

IAS 19 Employee Benefits Presentation of a defined-benefit plan Statement of Comprehensive Income The amount of the defined-benefit expense which is recognised in the Statement of Comprehensive Income is determined as follows: ‘000 Recognised current (and past) service cost xx Interest cost xx Expected return on plan assets (xx) Recognised actuarial (gains)/losses (x)/X Employee contributions during period (xx) Defined-benefit expense XX

IAS 19 Employee Benefits Statement of Financial Position The amount of the defined-benefit asset/liability which is recognised in the Statement of Financial Position is determined as follows: ‘000 Fair value of plan assets XX Present value of plan liabilities (XX) Past service cost not yet recognised (XX) Net unrecognised actuarial gains XX Net unrecognised actuarial losses (XX) Pension asset/(liability) XX Offsetting of assets and liabilities is not normally permitted

Example – defined-benefit plan Arc Ltd operates a defined-benefit scheme for its employees. The plan is reviewed on an annual basis. The company’s actuaries have provided the following information: 31 December 31 December 2010 2009 ’000 2010 ’000 Fair value of plan assets 10,000 12,000 Present value of plan liabilities 10,000 14,000 Current service cost – y/e 31 December 2010 1,500Contributions paid – y/e 31 December 2010 1,000 Benefits paid – y/e 31 December 2010 1,200 Unrecognised losses at 1 January 2010 2,000 Expected return on plan assets at 1 January 2010 8%Discount rate for plan liabilities at 1 January 2010 10% Average remaining working lives of employees 20 years Requirement Prepare extracts of Arc’s financial statements for the year ended 31 December 2010 assuming the company applies the corridor method to unrecognised actuarial gains and losses.

IAS 19 Employee Benefits

IAS 19 Defined Benefit Plans (June 2011) 1. Immediate recognition of DB cost Problems – asset if deficiency - G/L in SOCI previous years - no comparison across companies Proposal - Abolish corridor and other spreading options - Permit ONLY immediate write off

IAS 19 Defined Benefit Plans (June 2011) 2. Presentation Problems – Interest different positions - Actuarial G/L different periods - Previous year G/L recognised current Proposals - Service cost P/L - Finance cost – finance costs in P/L - Remeasurement – Other CI

IAS 19 Defined Benefit Plans (June 2011) 3.Disclosure Problems - Too much - Not highlighting risks in DB plans Proposal – Improved disclosure Characteristics of DB Plans Amounts in the financial statements Risks in defined benefit plans Participation in multi employer plans

IAS 19 Employee Benefits Other Long-Term Employee Benefits Other long-term employee benefits include: long-term leave or sabbatical leave; jubilee or other long-term benefits; long-term disability benefits; profit-sharing and bonuses payable after more than 12 months; deferred compensation payable after more than 12 months.

IAS 19 Employee Benefits Accounting treatment for other long-term employee benefits The entity shall recognise as a liability at the end of the reporting period the present value of accumulated benefits to which the employees are entitled in return for services to date, less the fair value of any plan assets. The entity shall recognise as income or expense the following amounts: current service cost; interest cost; expected return on any plan assets or any reimbursement right recognised as an asset; actuarial gains and losses, which shall be recognised immediately – no corridor is applied

IAS 19 Employee Benefits Termination Benefits The entity shall recognise termination benefits as a liability and as an expense when the entity is demonstrably committed to either: terminating the employment of an employee before the normal retirement date; or providing termination benefits as a result of an offer made in order to encourage voluntary redundancy. An entity is demonstrably committed when the entity has a detailed formal plan for the termination and is without realistic possibility of withdrawal. The detailed plan should include: location, function, and approximate number of employees whose services are to be terminated; termination benefits for each job classification or function; and time at which the plan will be implemented.

IAS 19 Employee Benefits Accounting treatment for termination benefits The liability must be discounted to present value if the benefits fall due more than 12 months after the period end. Where an offer is made in order to encourage voluntary redundancy, the amount of termination benefits included are based on the number of employees expected to accept the offer

IAS 19 Employee Benefits Disclosures There are a significant number of disclosures required by an entity in relation to defined benefit plans. They include: the entity’s accounting policy for recognising actuarial gains and losses; a general description of the type of plan; a reconciliation of opening and closing balances of the present value of the defined-benefit obligation; an analysis of the defined-benefit obligation into amounts arising from plans that are wholly unfunded from plans that are wholly or partly funded; a reconciliation of the opening and closing balances of the fair value of plan assets; a reconciliation of the present value of the defined-benefit obligation and the fair value of the plan assets to the assets / liabilities in the SOFP; the total amounts in respect of current service cost, interest costs, expected return on plan assets, recognised in profit or loss for various items; the total amount of actuarial gains and losses recognised in other comprehensive income; the principal actuarial assumptions used as at the end of the reporting period.

IAS 19 Employee Benefits Frames Ltd operates a defined benefit scheme for its employees. The expected average remaining working lives of employees is 12 years. The directors have provided the following information for the current year 30 June 2009: the actuarial cost of providing benefits in respect of employees’ service for the year ended 30 June 2009 was 80m (i.e. present value of pension benefits earned by employees in the year); the pension benefits paid to former employees in the year were 84m; the present value of the obligation to provide benefits to current and former employees was 6,000m at 30 June 2008 and 6,750m at 30 June 2009; Frames Ltd paid 40m contributions during the year into the fund; the fair value of the plan assets was 5,800m at 30 June 2008 and 6,340m at 30 June 2009; The actuarial gains recognised at 30 June 2008 were 672m. Self Test Question Frames Ltd

IAS 19 Employee Benefits With effect from 1 July 2008, the company had amended the plan so that the employees were now provided with an increased pension entitlement. The benefits became vested immediately and the actuaries computed that the present value of the cost of these benefits at 1 July 2008 was 250m. The discount rates and expected rates of return on the plan assets were as follows: 30 June 2008 30 June 2009 Discount rate 6% 7% Expected rate of return on plan assets 8% 9% Requirement Prepare extracts of Frames Ltd’s financial statements for the year ended 30 June 2009 assuming that the company recognises all actuarial gains and losses immediately in the Statement of Comprehensive Income.

IAS 19 Employee Benefits Solution Statement of Comprehensive Income (extract) ‘000 Current service cost 80 Interest cost (6,000 x 6%) 360 Expected return on plan assets (5,800 x 8%) (464) Past service cost 250 Recognised actuarial loss (W1) 24 Defined-benefit expense 250

IAS 19 Employee Benefits W1 Plan assets Plan liabilitiesSoCI ‘000 ‘000 ‘000 Balance @ 1 July 2008 5,800 (6,000) Interest cost (6,000 x 6%) (360) 360 Past service cost (250) 250 Current service cost (80) 80 Benefits paid (84) 84 Expected return on assets (5,800 x 8%) 464 (464) Employer contributions 40 Actuarial gain / (loss) 120 (144) 24 Balance @ 30 June 2009 6,340 (6,750)

IAS 19 Employee Benefits - Disclosure SABC (n) Employee benefits (i) Defined benefit pension plans The net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefits that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and any unrecognised past service cost and the fair value of any plan assets are deducted. The discount rates used were the following: yield on Government Stock, the zerocoupon yield curve provided by the South African Bond Exchange that have maturity dates approximating the terms of the Group’s obligations. When the benefits of a plan improve, the portion of the increased benefit relating to past service by employees is recognised as an expense in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in profit or loss.

IAS 19 Employee Benefits – Disclosure SABC Actuarial gains and losses arising from experience adjustments, and changes in actuarial assumptions, are recognised out of profit or loss as other comprehensive income, (refer to note 5). These defined benefit pension plans liabilities or assets, are valued annually by independent qualified actuaries. Where the calculation results in a defined benefit, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. No asset is recognised if future refunds from the plan or reductions in future contributions are uncertain.

IAS 19 Employee Benefits – Disclosure SABC (ii) Other post-employment benefit obligations The Group provides a subsidy for medical aid contributions payable by those employees who elect to remain on the medical aid scheme after retirement. The entitlement to these benefits is usually conditional on the employee remaining in service up to normal retirement age or the completion of a minimum service period in the event of early retirement. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that used for the defined benefit pension plan. This liability relating to post-employment medical benefits is valued annually by independent qualified actuaries. This practice of post-retirement medical aid contribution was discontinued for all new employees after 1 July 2004. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions, are recognised out of profit or loss and recognised in the statement of comprehensive income, (refer note 5).

IAS 19 Employee Benefits – Disclosure SABC (iii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

IAS 19 Employee Benefits – Disclosure SABC

IAS 19 Employee Benefits – Disclosure Ceylon Breweries

IAS 19 Employee Benefits – Disclosures Ceylon Breweries

IAS 33 Earnings Per Share Introduction Basis of P/E Ratio Consistency Basic and Diluted Listed companies only

IAS 33 Earnings Per Share Basic EPS is calculated as follows: Profit attributable to ordinary shareholders* Weighted average number of ordinary shares outstanding** during period Profit for the period after tax, preference dividends and non-controlling interest ** Shares are outstanding as from date on which they are issued Basic EPS must take account of shares issued during the period, bonus issues of shares during the period and rights issues of shares during the period.

IAS 33 Earnings Per Share Shares issued during period The weighted average number of ordinary shares outstanding during the period can be determined as follows: Number of ordinary shares outstanding at the start of the period + Number of ordinary shares issued during the period 3 months held - Number of ordinary shares bought back during the period 3 months not held Example – determining weighted-average number of shares On 1 January 2010 a company’s issued share capital consisted of 60,000 ordinary 1 shares • 1 March 2010 - company issued 30,000 ordinary shares; • 1 October 2010 - company bought back 10,000 ordinary shares; • both the share issue and the buy-back were made at full market price. Calculate the weighted-average number of ordinary shares outstanding during the year to 31 December 2010 Solution Weighted-average number of ordinary shares outstanding during year = 60,000 + (30,000 x 10/12) – (10,000 x 3/12) = 82,500

IAS 33 Earnings Per Share Example - basic earnings per share A company’s profit after tax for the year to 31 July 2010 was 3.8 million. The comparative figure for the year to 31 July 2009 was 3.6 million. The company’s issued share capital at 1 August 2008 consisted of 4 million ordinary shares of 0. 50. No shares were issued during the year to 31 July 2009 but a further 1 million ordinary shares were issued (at full market price) on 1 November 2009. Calculate the company’s basic EPS for the years to 31 July 2009 and 2010. Solution Weighted average number of ordinary shares outstanding during the year to 31 July 2010 = 4,000,000 + (1,000,000 x 9/12) = 4,750,000 Basic EPS for y/e 31 July 2009 = 3,600,000 + 4,000,000 = 90p Basic EPS for y/e 31 July 2010 = 3,800,000 ÷ 4,750,000 = 80p

IAS 33 Earnings Per Share Example – bonus issue A company’s profit after tax for the year to 30 June 2010 was 2.2 million. The comparative figure for the year to 30 June 2009 was 2 million. The company’s issued share capital at 1 July 2008 consisted of 800,000 ordinary shares. No shares were issued during the year to 30 June 2009. A 1 for 4 bonus issue was made on 1 March 2010. Calculate the company’s basic EPS for the year to 30 June 2010 and the restated comparative figure for the year to 30 June 2009. Solution Treat bonus issue as if made on 1 July 2008 - therefore assume 1,000,000 shares o/s in both years Basic EPS for y/e 30 June 2010 2,200,000 ÷ 1,000,000 = 2.20 Restated basic EPS for y/e 30 June 2009 2,000,000 ÷1,000,000 = 2.00

IAS 33 Earnings Per Share If a rights issue is made at less than full market price, which is often the case, the issue must be split into two elements – a bonus element and an issue at full market price. It is necessary to calculate the ‘theoretical’ market price per share after the rights issue – known as ‘theoretical ex-rights price’. Example – rights issue A company’s profit after tax for the year to 31 March 2010 was 351,000. The comparative figure for the year to 31 March 2009 was 288,000. Issued share capital at 1 April 2008 consisted of 100,000 ordinary shares. No shares were issued during the year to 31 March 2009 but a 1 for 2 rights issue was made on 1 October 2009 at 0.60 per share. The market value of the company’s shares just before this rights issue was 1.20 per share. Calculate the company’s basic EPS for the year to 31 March 2010 and the restated comparative figure for the year to 31 March 2009.

IAS 33 Earnings Per Share Solution Theoretical ex-rights price No. shares Before rights issue 2 2.40 Rights issue 1 0.60 After rights issue 3 3.00 Theoretical ex-rights price 3.00/3 = 1.00 Rights issue of 50,000 shares @ 0.60 = 30,000 Equivalent to: 30,000 shares @ 1.00 = 30,000 20,000 shares @ nil = 0 (bonus element) Treat bonus element (20,000 shares) as if made at start of previous year. Therefore total number of shares for the year to 31 December 2009 = 120,000 shares Weighted average no. ordinary shares for y/e 31 March 2010 120,000 + (30,000 x 6/12) = 135,000 shares Restated basic EPS for year to 31 March 2009 288,000 ÷120,000 = 2.40 Basic EPS for year to 31 March 2010 351,000 ÷ 135,000 = 2.60

IAS 33 Earnings Per Share Diluted EPS represents the EPS which would arise if all ‘dilutive potential ordinary shares’ were issued. If the issue of potential ordinary shares would increase EPS, the shares are said to be ‘anti-dilutive’ and are ignored. Examples of potential ordinary shares include: convertible loan stock, convertible preference shares; and share options.

IAS 33 Earnings Per Share The following adjustments are required in calculating diluted EPS: adjust earnings for after-tax effects of any changes in income or expenses, e.g. increased earnings due to no longer paying interest on convertible loan stock; and increase the weighted-average number of ordinary shares to reflect the maximum number of additional ordinary shares that would become outstanding if all dilutive potential ordinary shares were issued (at the most advantageous conversion rate for holders). These shares are treated as if issued at the start of the year.

IAS 33 Earnings Per Share Example - convertible loan stock A company’s issued share capital consists of 8 million ordinary shares. The company’s after-tax profit for the year to 30 September 2010 is 2 million. In 2007, the company issued 10 million of 8% convertible loan stock. This stock is convertible into ordinary shares during 2013 at the rate of 1 ordinary share per 5 of loan stock. A tax rate of 30% may be assumed. Requirement Calculate basic EPS for the year to 30 September 2010. Determine whether potential ordinary shares are dilutive or anti-dilutive and calculate diluted EPS for the year. Explain how the situation would differ if the loan stock attracted interest at 6% rather than 8%.

IAS 33 Earnings Per Share Solution Basic EPS 2m/8m shares = 0.25 Interest saved if all loan stock converted 800,000 Extra after-tax profits 560,000 (800,000 less 30%) There would be 2m extra shares, and so incremental EPS would be 0.28 (560,000/2m shares). As this exceeds basic EPS, the potential ordinary shares are anti-dilutive and can be ignored. Therefore, diluted EPS = basic EPS. Extra after-tax profits 420,000 (600,000 less 30%) Diluted EPS 2,420,000 ÷ 10,000,000 = 0.242 Note: Incremental EPS would be 0.21 (420,000/2,000,000), i.e. dilutive

IAS 33 Earnings Per Share Example – share options A company’s issued share capital consists of 5 million ordinary shares. The company’s after-tax profit for the year to 31 December 2010 is 2.6 million. Share options exist which, when exercised, would result in the issue of a further 400,000 ordinary shares at a price of 1 per share. The current market value per ordinary share is 5. Requirement Calculate basic and diluted earnings per share for the year to 31 December 2010.

IAS 33 Earnings Per Share Solution Basic earnings per share 2.6 million/5 million shares = 0.52 Diluted earning per share Share option exercised: 400,000 shares @ 1 = 400,000 Equivalent to: 80,000 shares @ 5 = 400,000 (non-dilutive, ignore) 320,000 shares @ nil = 0 Diluted EPS 2.6 million/5.32 million shares = 0.489

IAS 33 Earnings Per Share Example – ranking dilutive securities Calculate diluted EPS from the following information for the year ended 31 December 2007: Profit after tax and non-controlling interest 18,160,000 Number of ordinary shares of 1 40,000,000 Average fair value for year of ordinary shares 1.50 Share options outstanding at 31 December 2007 2,000,000 6% Convertible bonds at 31 December 2007 20,000,000 10% Convertible preference shares 1,600,000 Notes: Share options entitle owners to subscribe for ordinary shares at 1.20 per share between 2008 and 2009 The bonds may be converted as follows (per 200 nominal value of bond): Conversion date No of shares 31 May 2008 23 31 May 2009 22 3. Convertible preference shares can be converted into two ordinary shares in 2009. 4. The tax rate is 33%

IAS 33 Earnings Per Share

IAS 33 Earnings Per Share Presentation of Earning per Share Basic and diluted EPS must be presented on the face of the Statement of Comprehensive Income, even if they are negative. Comparative figures must also be presented. Where there are discontinued operations, an entity should also calculate the following ratios: basic and diluted EPS based on profit from continuing operations (presented on the face of the Statement of Comprehensive Income); and basic and diluted EPS based on profit from discontinued operations (presented on the face of the Statement of Comprehensive Income or in the notes to the financial statements)

IAS 33 Earnings Per Share Disclosures The following disclosures must be made: the amounts used for earnings in calculating basic and diluted EPS and a reconciliation of those amounts to profit or loss for period; the weighted-average number of ordinary shares used to calculate basic and diluted EPS; financial instruments which give potentially dilute EPS but were not included in the calculation of diluted EPS because they are anti-dilutive for the period presented; and a description of the ordinary share transactions or potential ordinary share transactions that occur after the period end and would have significantly affected the calculation of EPS if they had occurred before the end of the reporting period.

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