Ifrs For Smes.pptx

FULL IFRS and IFRS for SMEs

Learning Objectives At the end of this presentation, participants should be able to: • identify the salient features and differences between full

IFRS and IFRS for SMEs; and • apply their knowledge in the presentation and disclosure requirements of general purpose financial statements.

Key features of IFRS for SMEs •

Good financial reporting made simple

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Simplified PFRSs but built on full PFRS foundation

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Much smaller, 230 pages vs 2,855 pages in full PFRSs

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Designed specifically for SMEs

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User needs for cash flow information

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Costs and SME capabilities

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PFRS for SME’s is a stand-alone document

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Internationally recognized

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Organized by topic

Chapter 1 Preparation and presentation of financial statements

Section 1: Small and medium-sizedentities IFRS IAS 1 Presentation of Financial Statements An entity applies IAS 1 when preparing and presenting general-purpose financial statements in accordance with IFRS.

IFRS for SMEs Section 1 Small and Medium-sized Entities An SME is defined as an entity that: • Does not have public accountability and • Publishes general-purpose financial statements for external users.

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Section 1: Small and medium-sizedentities Philippine Definition of SMEs SMEs are entities that meet the definition of an SME as set forth in the Securities and Exchange Commission (SEC) En Banc Resolution dated August 13, 2009, as follows: • With total assets of between P3 Million and P350 Million or total liabilities of between P3 Million and P250 Million • That is not required to file financial statements under SRC Rule 68.1 • That is not in the process of filing its financial statements for purpose of issuing any class of instruments in a public market • That is not a holder of a secondary license issued by a regulatory agency, such as a bank (all types of banks), an investment house, a finance company, an insurance company, a securities broker / dealer, a mutual fund and a pre-need company; and • That is not a public utility 6

Section 2: Concepts and pervasive principles IFRS Framework for the Preparation and Presentation of Financial Statements IAS 1 Presentation of Financial Statements The Framework considers different measurement bases that may be used in the determination of monetary amounts of elements in the financial statements.

IFRS for SMEs Section 2 Concepts and Pervasive Principles IFRS for SMEs specifies two common measurement bases, which are amortized historical cost and fair value. In most cases the standard specifies which measurement must be used in different sections.

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Amendments to Section 2: Concepts and pervasive principles The amendments provided additional guidance on the 'undue cost and effort' exemption. It is not a general principle. Consideration of cost or effort is from the perspective of the entity whereas considerations of benefits are from the perspective of the potential user. The entity is required to disclose the reasons why it has applied this exemption if it applies it.

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Section 3: Financial statement presentation IFRS IAS 1 Presentation of Financial Statements A complete set of financial statements includes: • A statement of financial position • A statement of comprehensive income (or a separate income statement and statement of comprehensive income) • A statement of changes in equity • A statement of cash flows • Notes comprising significant accounting policies and other explanatory information • A statement of financial position at the beginning of the earliest comparative period when a retrospective change in accounting policy, restatement or reclassification occurs

IFRS for SMEs Section 3 Financial Statements Presentation A complete set of financial statements includes: • A statement of financial position • A statement of comprehensive income (or a separate income statement and statement of comprehensive income) • A statement of changes in equity • A statement of cash flows • Notes comprising significant accounting policies and other explanatory information 9

Section 3: Financial statement presentation IFRS IAS 1 Presentation of Financial Statements

IFRS for SMEs Section 3 Financial Statements Presentation If the only changes to equity during the periods for which financial statements are presented arise from profit or loss, payment of dividends, corrections of prior period errors and changes in accounting policy, the entity may present a single statement of income and retained earnings in place of the statement of comprehensive income and statement of changes in equity. If there are no items of other comprehensive income in all periods, only an income statement need be presented.

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Section 3: Financial statement presentation IFRS IAS 1 Presentation of Financial Statements

IFRS for SMEs Section 3 Financial Statements Presentation

Any other reports or statements presented outside the financial statements are outside the scope of IFRS (this would include environmental reports, etc.).

If segment information, earnings per share or interim financial statements are presented, an entity should disclose the basis of preparation.

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Section 4: Statement of financial position IFRS IAS 1 Presentation of Financial Statements Specific disclosures in respect of the following are required: • Sub-classification of certain asset and liabilities • Specific share capital details (or changes in capital where there are no shares) • Reclassification of puttable instruments.

IFRS for SMEs Section 4 Statement of Financial Position Specific disclosures in respect of the following are required: • Sub-classification of certain asset and liabilities • Specific share capital details (or changes in capital where there are no shares) • Binding sale agreements for a major disposal of assets (or group thereof). 12

Amendments to Section 4: Statement of financial position The amendments now includes a requirement to present investment property measured at cost less accumulated depreciation and impairment separately on the face of the statement of financial position and added relief from requirement to disclose certain comparative information provided. Likewise, it includes a provision requiring an entity with share capital to disclose a reconciliation of the opening and closing share capital for each class of share. Nevertheless, no reconciliation disclosure is required for the comparative period.

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Section 5: Statement of comprehensive income and income statement IFRS IAS 1 Presentation of Financial Statements Other comprehensive income comprises items of income and expense that are not recognized in profit or loss.

Disclosures are required in respect of the taxation effects and any reclassification adjustments relating to components of other comprehensive income.

IFRS for SMEs Section 5 Statement of Comprehensive Income and Income Statement There are three types of other comprehensive income: • Some gains and losses on foreign operations • Some actuarial gains and losses • Some changes in fair values of hedging instruments.

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Amendments to Section 5: Statement of comprehensive income and income statement The amendments provide clarification with regard to the single amount presented for Discontinued Operations as aligned with changes made to IAS 1 Presentation of Financial Statements on reclassifications. Additionally, other comprehensive income items that are recognized outside of profit or loss now include revaluation surplus/ deficits arising from property, plant and equipment.

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Section 6: Statement of changes in equity and statement of income and retained earnings IFRS IAS 1 Presentation of Financial Statements Not applicable.

IFRS for SMEs Section 6 Statement of Changes in Equity and Statement of Income and Retained Earnings A statement of income and retained income may be presented in place of the statement of comprehensive income and statement of changes in equity, if the only changes to equity comprise profit or loss, payment of dividends, corrections of prior year errors and changes in accounting policy. If the statement of income and retained earnings is presented, it must include: • Retained earnings at the beginning of the period • Dividends declared during the period • Restatements of retained earnings for corrections or errors and changes in accounting policy • Retained earnings at the end of the period.

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Section 7: Statement of cash flows IFRS IAS 7 Statement of Cash Flows

IFRS for SMEs Section 7 Statement of Cash Flows

Cash equivalents are held for meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Overdrafts that are repayable on demand and form an integral part of an entity’s cash management are included as a component of cash and cash equivalents.

Cash equivalents are short-term, highly liquid investments held to meet short-term cash commitments rather than for investment or other purposes. Bank overdrafts may be included when repayable on demand and are an integral part of the entity’s cash management. 17

Section 7: Statement of cash flows IFRS IAS 7 Statement of Cash Flows

IFRS for SMEs Section 7 Statement of Cash Flows

Major classes of gross cash receipts and cash payments must be disclosed, other than when a net basis of presentation is permitted.

Major classes of gross cash receipts and cash payments must be disclosed.

The standard provides the situations where a net basis of presentation would be acceptable. The aggregate cash flows on the acquisition or disposal of a business must be disclosed separately.

The aggregate cash flows on the acquisition or disposal of a business must be disclosed separately.

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Section 10: Selection and application of accounting policies IFRS IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Where transactions, events and conditions are specifically dealt with in IFRS, the relevant standard must be applied. In the absence of a section that applies, judgment is used to develop a policy that is relevant and reliable.

IFRS for SMEs Section 10 Accounting Policies, Estimates and Errors

Where transactions, events and conditions are specifically dealt with, the standard must be applied. In the absence of a section that applies, judgment is used to develop a policy that is relevant and reliable. 19

Section 10: Selection and application of accounting policies IFRS IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IFRS for SMEs Section 10 Accounting Policies, Estimates and Errors

In making this judgment, reference is made to: • IFRSs that deal with similar or related issues • The definitions, recognition and measurement concepts in the Framework.

In making this judgment, reference is made to: • Sections of IFRS for SMEs that deal with similar or related issues • The definitions, recognition and measurement concepts in section 2.

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Section 10: Selection and application of accounting policies IFRS IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Management may also consider recent pronouncements of other standard setters (accounting literature or industry practice) that use a similar conceptual framework. Accounting policies must be applied consistently for similar transactions, events or conditions, unless IFRS specifies otherwise.

IFRS for SMEs Section 10 Accounting Policies, Estimates and Errors

Management may consider full IFRS that deal with similar or related issues. Accounting policies must be applied consistently for similar transactions, events or conditions, unless a section specifies otherwise. 21

Section 33: Related party disclosures IFRS IAS 24 Related Party Disclosures

IFRS for SMEs Section 33 Related Party Disclosures

An entity must disclose key management personnel compensation in total and for each of the following categories:

An entity must disclose key management personnel compensation in total.

a) Short-term employee benefits b) Post-employment benefits c) Other long-term benefits d) Termination benefits e) Share-based payment 22

Section 33: Related party disclosures IFRS IAS 24 Related Party Disclosures

IFRS for SMEs Section 33 Related Party Disclosures

The above disclosures must be made separately for each of the following categories:

The above disclosures must be made separately for each of the following categories:

a)The parent b)Entities with joint control or significant influence over the entity c)Subsidiaries d)Associates e)Joint ventures in which the entity is a venturer f) Key management personnel g)Other related parties.

a)Entities with control, joint control or significant influence over the entity b)Entities over which the entity has control, joint control or significant influence c)Key management personnel d)Other related parties.

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Amendments to Section 33: Related party disclosures The amendments include alignment of the definition of ‘related party’ with IAS 24 Related Party Disclosures, which now includes a management entity providing key management personnel services.

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Chapter 2 Business combinations and group financial statements

Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations The standard applies to all transactions or other events that meet the definition of a business combination, as defined in the standard. (While not specifically mentioned in the scope of the standard, it also addresses accounting for goodwill.)

IFRS for SMEs Section 19 Business Combinations and Goodwill This section is applicable to all business combinations, as defined in the standard. Furthermore, the section also addresses accounting for goodwill at the time of the business combination and subsequently.

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations The standard specifically excludes combinations of entities or businesses under common control, the formation of joint ventures and the acquisition of an asset or group of assets that does not constitute a business.

IFRS for SMEs Section 19 Business Combinations and Goodwill This section specifically excludes combinations of entities or businesses under common control, the formation of joint ventures and the acquisition of a group of assets that does not constitute a business.

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations A business combination is transaction or other event in which an acquirer obtains control of one or more businesses. The definition also includes transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’.

IFRS for SMEs Section 19 Business Combinations and Goodwill A business combination is the bringing together of separate entities or businesses into one reporting entity. A business is an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and proportionately to policyholders or participants.

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

IFRS for SMEs Section 19 Business Combinations and Goodwill Furthermore, a business generally consists of inputs, processes applied to those inputs and resulting outputs that are or will be used to generate revenues. If goodwill is present in a transferred set of activities or assets, the transferred set is presumed to be a business. 29

Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations All business combinations are accounted for using the acquisition method. This method involves identifying the acquirer, determining the acquisition date, recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree and recognizing and measuring goodwill or a gain from a bargain purchase.

IFRS for SMEs Section 19 Business Combinations and Goodwill All business combinations are accounted for using the purchase method. This method involves identifying the acquirer, measuring the cost of the combination and allocating that cost to the assets acquired and liabilities and provisions for contingent liabilities assumed. 30

Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations The cost of a business combination is not separately defined. However, a component of the measurement of any goodwill or gain from a bargain purchase is the consideration transferred, which is calculated as the sum of the fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer.

IFRS for SMEs Section 19 Business Combinations and Goodwill The cost of a business combination is the aggregate of: • The fair values of the assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer plus • Any costs directly attributable to the business combination. 31

Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations The acquirer recognizes the acquisitiondate fair value of any contingent consideration as part of the consideration transferred in exchange for the acquiree. The classification of a contingent consideration obligation as either a liability or equity is based on the definitions of an equity instrument and a financial liability in IAS 32 or other applicable accounting standards.

IFRS for SMEs Section 19 Business Combinations and Goodwill When a business combination agreement provides for an adjustment to the cost of the business combination contingent on future events, the acquirer includes the estimated amount of the adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably. 32

Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations After initial recognition, changes in the fair value of contingent consideration resulting from events after the acquisition date are accounted for as follows:

• Contingent consideration classified as equity is not subsequently remeasured (consistent with the accounting for equity instruments generally) and its subsequent settlement is accounted for within equity

IFRS for SMEs Section 19 Business Combinations and Goodwill If the potential adjustment is not recognized at acquisition date, but subsequently becomes probable and can be measured reliably, the additional consideration is treated as an adjustment to the cost of the combination.

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations The identifiable assets acquired and liabilities assumed of the acquiree are recognized as of the acquisition date, separately from goodwill and measured at fair value as at that date.

IFRS for SMEs Section 19 Business Combinations and Goodwill The acquiree’s identifiable assets and liabilities and any contingent liabilities that can be measured reliably are recognized at their acquisition date fair values. Any difference between the cost of the business combination and the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities must be accounted for as goodwill (or negative goodwill).

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations To qualify for recognition, an item acquired or assumed must be: • An asset or liability at the acquisition date (i.e., meet the definitions in the Framework) • Part of the business acquired (the acquiree) rather than the result of a separate transaction.

IFRS for SMEs Section 19 Business Combinations and Goodwill The following criteria must be satisfied for the acquirer to recognize the acquiree’s identifiable assets and liabilities and any provisions for contingent liabilities at the acquisition date:

• Assets other than an intangible asset — the future economic benefits must be probable and the fair value can be measured reliably 35

Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations

IFRS for SMEs Section 19 Business Combinations and Goodwill • Liability other than a provision for contingent liability — the outflow of resources must be probable and the fair value can be measured reliably • Intangible asset or provision for contingent liability — the fair value can be measured reliably.

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations The measurement of goodwill at the acquisition date is computed as the excess of (a) over (b) below: a)The aggregate of: • The consideration transferred (generally measured at acquisition-date fair value) • The amount of any non-controlling interest in the acquiree • The acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree

IFRS for SMEs Section 19 Business Combinations and Goodwill Goodwill is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. After initial recognition, goodwill is measured at cost less accumulated amortization and accumulated impairment losses.

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations a)The net of the acquisition-date fair values of the identifiable assets acquired and the liabilities assumed. Goodwill acquired in a business combination is not amortized. The acquirer measures goodwill acquired in a business combination at the amount recognized at the acquisition date less any accumulated impairment losses.

IFRS for SMEs Section 19 Business Combinations and Goodwill Goodwill is amortized in accordance with the principles of amortization of intangible assets in Section 18. If a reliable estimate of the useful life of goodwill cannot be made the life is presumed to be 10 years.

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Section 19: Business combinations and goodwill IFRS IFRS 3 Business Combinations Detailed requirements in relation to the subsequent accounting for goodwill are dealt with in IAS 36 Impairment of Assets. This includes the requirement that the acquirer has to test it for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired.

IFRS for SMEs Section 19 Business Combinations and Goodwill Detailed requirements in relation to impairment testing of goodwill are contained in Section 27. This includes the requirement that the acquirer test it for impairment where there is an indication that it may be impaired.

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Amendments to Section 19: Business combinations and goodwill The amendments replaced the undefined term ‘date of exchange’ with the defined term ‘date of acquisition’ when determining the cost of a business combination. It also clarified guidance on the measurement requirements for employee benefit arrangements, deferred tax and non-controlling interests when allocating the cost of a business combination. Finally, it included an addition of an undue cost or effort exemption to the requirement to recognize intangible assets separately in a business combination and the addition of a disclosure requirement for all entities to provide a qualitative description of the factors that make up any goodwill recognized.

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Section 9: Consolidated and separate financial statements IFRS IAS 27 Consolidated and Separate Financial Statements SIC 12 Consolidation — Special Purpose Entities This standard must be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.

IFRS for SMEs Section 9 Consolidated and Separate Financial Statements This section defines the circumstances in which an entity presents consolidated financial statements and the procedures for preparing those statements. It also includes guidance on separate financial statements and combined financial statements. 41

Section 9: Consolidated and separate financial statements IFRS IAS 27 Consolidated and Separate Financial Statements SIC 12 Consolidation — Special Purpose Entities A parent need not present consolidated financial statements if and only if:

a)The parent is itself a wholly-owned subsidiary, or is a partially- owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements

IFRS for SMEs Section 9 Consolidated and Separate Financial Statements Exemption from preparing consolidated financial statements A parent need not present consolidated financial statements if: • Both of the following conditions are met: • The parent is itself a subsidiary and

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Section 9: Consolidated and separate financial statements IFRS IAS 27 Consolidated and Separate Financial Statements SIC 12 Consolidation — Special Purpose Entities The parent’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an overthe-counter market, including local and regional markets) c)The parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of b)

IFRS for SMEs Section 9 Consolidated and Separate Financial Statements • Its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with full IFRS or with this IFRS or • It has no subsidiaries other than one that was acquired with the intention of selling or disposing of it within one year. A parent accounts for such a subsidiary:

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Section 9: Consolidated and separate financial statements IFRS IAS 27 Consolidated and Separate Financial Statements SIC 12 Consolidation — Special Purpose Entities

IFRS for SMEs Section 9 Consolidated and Separate Financial Statements

of issuing any class of instruments in a public market d) The ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRS.

• At fair value with changes in fair value recognized in profit or loss, if the fair value of the shares can be measured reliably or • Otherwise at cost less impairment. 44

Amendments to Section 9: Consolidated and separate financial statements The following amendments were made to consolidation matters: • General rule – An entity which controls another entity (subsidiary) is required to prepare consolidated financial statements in which all subsidiaries are consolidated. An entity is exempt from preparing consolidated financial statements if it is a subsidiary of another entity and the parent prepares consolidated IFRS/ IFRS for SME compliant financial statements. • Subsidiary acquired for disposal – If an entity acquires a subsidiary with the intention of selling it within 12 months from acquisition, it is required to measure it in terms of S11 – Basic financial instruments. If after 12 months, the entity still controls the subsidiary, it will consolidate it from the date of acquisition and restate the prior period financial statements. 45

Amendments to Section 9: Consolidated and separate financial statements The following amendments were made to consolidation matters: • Disposal of a foreign operation – The cumulative foreign currency translation gain or loss recognized in equity relating to a foreign operation shall not be reclassified to profit or loss on disposal (loss of control) of a foreign operation. • Separate financial statements – In the parent’s separate financial statements, it may use either the Cost (less impairment), FV (through P&L) or Equity method accounting policies in respect of its investment in subsidiaries, associates and joint-controlled entities.

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Section 14: Investments in associates IFRS IAS 28 Investments in Associates

IFRS for SMEs Section 14 Investments in Associates

An investor accounts for all of its investments in associates using the equity method. Investments in associates that are classified as held for sale are accounted for as such in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

An investor must account for all of its investments in associates using one of the following: • The cost model (investment is measured at cost less any accumulated impairment losses). This model may not be used for investments for which there is a published price quotation, in which case the fair value model must be applied.

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Section 14: Investments in associates IFRS IAS 28 Investments in Associates The equity method requires that the investment is initially recognized at cost and adjusted thereafter for the post- acquisition change in the investor’s share of the net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.

IFRS for SMEs Section 14 Investments in Associates • The equity method (investment is initially measured at transaction price and subsequently adjusted to reflect the investor’s share of profit or loss and other comprehensive income of the associate).

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Section 14: Investments in associates IFRS IAS 28 Investments in Associates

IFRS for SMEs Section 14 Investments in Associates • The fair value model (investment is initially measured at transaction price and subsequently remeasured to fair value at each reporting date, with changes in fair value recognized in profit or loss). Cost model may be applied to investments for which it is impracticable to measure fair value without undue cost or effort. 49

Section 14: Investments in associates IFRS IAS 28 Investments in Associates

IFRS for SMEs Section 14 Investments in Associates

Requires use of the most recent available financial statements of the associate, and where the associate’s and investor’s reporting period ends differ, the associate must prepare financial statements as of the same date as the investor’s financial statements, unless impracticable.

Requires use of financial statements of the associate as of the same date as those of the investor, unless it is impracticable to do so. If it is impracticable, the investor must use the most recent available financial statements of the associate adjusted for significant transactions or events between the accounting period ends. 50

Section 14: Investments in associates IFRS IAS 28 Investments in Associates Where the associate’s financial statements are prepared as of a different date to the investor, the associate’s statements are adjusted for significant transactions or events between the accounting period ends. In any case, the difference between the reporting period ends may be no longer than three months, and the length of the reporting periods and any difference between the ends of the reporting periods must be the same from period to period.

IFRS for SMEs Section 14 Investments in Associates

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Section 14: Investments in associates IFRS IAS 28 Investments in Associates If the associate’s accounting policies differ from those of the investor for like transactions and events, adjustments must be made to the associate’s policies to conform to the investor’s policies.

IFRS for SMEs Section 14 Investments in Associates If the associate’s accounting policies differ from those of the investor, the investor must adjust the associate’s policies to reflect the investor’s policies unless impracticable.

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Section 14: Investments in associates IFRS IAS 28 Investments in Associates

IFRS for SMEs Section 14 Investments in Associates

An investor must discontinue use of the equity method from the date it ceases to have significant influence.

An investor must cease using the equity method from the date that significant influence ceases.

On loss of significant influence, the investor must measure at fair value any investment the investor retains in the former associate. The investor must recognize in profit or loss any difference between:

If the associate becomes a subsidiary or joint venture, the investor remeasures its previously held equity interest to fair value and recognizes any resulting gain or loss in profit or loss.

• The fair value of any retained investment and any proceeds from disposing of the part interest in the associate

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Section 14: Investments in associates IFRS IAS 28 Investments in Associates • The carrying amount of the investment at the date when significant influence is lost. If the associate becomes a subsidiary or joint venture, the investment is accounted for in accordance with IAS 27 or IAS 31, respectively. Otherwise the investment is accounted for in accordance with IAS 39 and the fair value of the investment at the date when it ceases to be an associate is regarded as its fair value on initial recognition as a financial asset.

IFRS for SMEs Section 14 Investments in Associates If an investor loses significant influence over an associate as a result of a full or partial disposal, it must derecognize that associate and recognize in profit or loss the difference between:

• The sum of the proceeds received plus the fair value of any retained interest • The carrying amount of the investment in the associate at the date significant influence is lost.

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Section 14: Investments in associates IFRS IAS 28 Investments in Associates

IFRS for SMEs Section 14 Investments in Associates Thereafter, the investor accounts for any retained interest as a financial asset using Section 11 and Section 12, as appropriate. If an investor loses significant influence for reasons other than a partial disposal of its investment, the investor regards the carrying amount of the investment at that date as a new cost basis and accounts for the investment using Sections 11 and 12, as appropriate.

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Section 15: Investments in joint ventures IFRS IAS 31 Interests in Joint Ventures The standard applies in accounting for all interests in joint ventures regardless of the structures or forms under which the joint venture activities take place. However, the scope excludes interests in jointly controlled entities held by venture capital organizations or mutual funds, unit trusts and similar entities that on initial recognition are designated as at fair value through profit or loss or classified as held for trading under IAS 39.

IFRS for SMEs Section 15 Investments in Joint Ventures The section is applicable to accounting for all joint ventures in consolidated financial statements and in financial statements of an investor that is not a parent but has an interest in one or more joint ventures. Accounting for interests in joint ventures in a venturer’s separate financial statements is covered in Section 9. 56

Section 15: Investments in joint ventures IFRS IAS 31 Interests in Joint Ventures

IFRS for SMEs Section 15 Investments in Joint Ventures

A venturer must account for all of its interests in jointly controlled entities using one of the following:

A venturer must account for all of its interests in jointly controlled entities using one of the following:

• Proportionate consolidation (the financial statements of the venturer include its share of the assets that it controls jointly and of the liabilities for which it is jointly responsible, and its share of the income and expenses of the jointly controlled entity)

• The cost model (investment is measured at cost less any accumulated impairment losses). This model may not be used for investments for which there is a published price quotation in which case the fair value model must be applied

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Section 15: Investments in joint ventures IFRS IAS 31 Interests in Joint Ventures • The equity method (investment is measured using the method applied to associates as outlined in IAS 28). Interests in jointly controlled entities that are classified as held for sale are accounted for as such in accordance with IFRS 5.

IFRS for SMEs Section 15 Investments in Joint Ventures • The equity method (investment is measured using the method as applied to associates and outlined in Section 14) • The fair value model (investment is initially measured at transaction price and subsequently remeasured to fair value at each reporting date, with changes in fair value recognized in profit or loss). Cost model may be applied to investments for which it is impracticable to measure fair value without undue cost or effort.

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Chapter 3 Elements of the statement of financial position

Section 16: Investment property IFRS IAS 40 Investment Property This standard must be applied in the recognition, measurement and disclosure of investment property.

IFRS for SMEs Section 16 Investment Property This section applies to accounting for investments in land or buildings that meet the definition of investment property. Only investment property whose fair value can be measured reliably without undue cost or effort on an ongoing basis is accounted for in accordance with this section. All other investment property is accounted for as property, plant and equipment in accordance with Section 17 Property, Plant and Equipment.

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Section 16: Investment property IFRS IAS 40 Investment Property Investment property may be accounted for using: • Cost model or • Fair value model

IFRS for SMEs Section 16 Investment Property Investment property whose fair value can be measured reliably without undue cost or effort must be measured at fair value at each reporting date with changes in fair value recognized in profit or loss. If a property interest held under a lease is classified as investment property, the item accounted for at fair value is that interest and not the underlying property. An entity accounts for all other investment property as property, plant and equipment using the cost depreciation impairment model in Section 17. 61

Section 16: Investment property IFRS IAS 40 Investment Property

IFRS for SMEs Section 16 Investment Property

Transfers to, or from, investment property must be made when, and only when, there is a change in use.

An entity must transfer a property to, or from, investment property only when the property first meets, or ceases to meet, the definition of investment property.

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Section 17: Property, plant and equipment IFRS IAS 16 Property, Plant and Equipment IAS 16 applies only to property, plant and equipment. Investment property is covered by IAS 40.

IFRS for SMEs Section 17 Property, Plant and Equipment The scope of Section 17 includes investment property whose fair value cannot be measured reliably without undue costs or effort; and non-current assets held for sale.

Non-current assets held for sale is covered by IFRS 5.

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Section 17: Property, plant and equipment IFRS IAS 16 Property, Plant and Equipment Property, plant and equipment may be valued using either: a)The cost model (cost less accumulated amortization and impairment losses) or b)The revaluation model (revalued amount less accumulated amortization and impairment losses). An entity must apply that policy to an entire class of property, plant and equipment.

IFRS for SMEs Section 17 Property, Plant and Equipment An entity must measure all items of property, plant and equipment after initial recognition at cost less any accumulated depreciation and any accumulated impairment losses.

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Section 17: Property, plant and equipment IFRS IAS 16 Property, Plant and Equipment The residual value and the useful life of an asset must be reviewed at least at each financial year-end.

IFRS for SMEs Section 17 Property, Plant and Equipment Factors such as a change in how an asset is used, significant unexpected wear and tear, technological advancement and changes in market prices may indicate that the residual value or useful life of an asset has changed since the most recent annual reporting date. If such indicators are present, an entity must review its previous estimates and, if current expectations differ, amend the residual value, depreciation method or useful life.

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Amendments to Section 17: Property, plant and equipment The amendments included provisions on the alignment with changes made to IAS 16 Property, plant and equipment on classification of spare parts, stand-by and servicing equipment, which can be recognized in accordance with this section if they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. Likewise, an entity may now elect to measure property, plant and equipment using either the cost or revaluation models. The selected policy is to be applied to the entire class of property, plant and equipment. The application of this change is prospective if retrospective application is impracticable. However, where the change is from the cost model to the revaluation model, this change is applied prospectively. 66

Section 18: Intangible assets other than goodwill IFRS IAS 38 Intangible Assets The standard applies to all intangibles other than those within the scope of another standard, financial instruments, exploration and evaluation assets and expenditure on the development and extraction of minerals, oil, natural gas and similar non- regenerative resources.

IFRS for SMEs Section 18 Intangible Assets other than Goodwill This section is applicable to all intangible assets other than goodwill and intangible assets held for sale in the ordinary course of business. Furthermore, the scope excludes financial assets and mineral rights and mineral reserves.

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Section 18: Intangible assets other than goodwill IFRS IAS 38 Intangible Assets An intangible asset is recognized if, and only if, it is probable that there are expected future benefits and cost that can be reliable measured.

IFRS for SMEs Section 18 Intangible Assets other than Goodwill An entity may recognize an intangible asset if it is probable that there are expected future economic benefits, a reliably measurable cost/value and it does not result from expenditure incurred internally on an intangible asset.

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Section 18: Intangible assets other than goodwill IFRS IAS 38 Intangible Assets

IFRS for SMEs Section 18 Intangible Assets other than Goodwill

Initial measurement is dependant on the manner in which the intangible asset is acquired:

Initial measurement is dependant on the manner in which the intangible asset is acquired:

• Separate acquisition — at cost • Business combination — at fair value at the acquisition date • Government grant — at the fair value of the grant or at the nominal amount • Exchange of assets — at the fair value of the asset or cost when the transaction lacks commercial substance or fair values cannot be reliably measured.

• Separate acquisition — at cost • Business combination — at fair value at the acquisition date • Government grant — at the fair value of the grant • Exchange of assets — at the fair value of the asset or cost when the transaction lacks commercial substance or fair values cannot be reliably measured.

69

Section 18: Intangible assets other than goodwill IFRS IAS 38 Intangible Assets Intangible assets may be carried at either: • Cost less accumulated amortization and impairment losses or • Revalued amount less accumulated amortization and impairment losses.

IFRS for SMEs Section 18 Intangible Assets other than Goodwill Intangible assets are measured at cost less accumulated amortization and impairment losses.

70

Section 18: Intangible assets other than goodwill IFRS IAS 38 Intangible Assets Intangible assets must be assessed as to whether they have a finite or an indefinite life. Intangible assets with finite lives are amortized over their useful lives. Those with an indefinite life is not amortized and subject to an annual impairment test. The depreciable amount is allocated over the life of the asset that reflects the pattern in which the asset’s future economic benefits are expected to be consumed.

IFRS for SMEs Section 18 Intangible Assets other than Goodwill Intangible assets must be amortized over there useful lives. If the useful life is not determinable then it is presumed to be 10 years.

The depreciable amount is allocated over the life of the asset that reflects the pattern in which the asset’s future economic benefits are expected to be consumed. 71

Section 18: Intangible assets other than goodwill IFRS IAS 38 Intangible Assets

IFRS for SMEs Section 18 Intangible Assets other than Goodwill

If the pattern cannot be reliably determined, then the straight-line method is utilized.

If the pattern cannot be reliably determined, then the straight-line method is utilized.

The entity will review at each reporting date whether there has been a change in useful life, residual amount or amortization method. If there is an indicator, this will be adjusted as a change in estimate.

The entity will consider at each reporting date whether there are any indicators that there has been a change in useful life, residual amount or amortization method. If there is an indicator, this will be adjusted as a change in estimate. 72

Section 18: Intangible assets other than goodwill IFRS IAS 38 Intangible Assets Research costs are recognized as expense when incurred while developmental costs may be capitalized as part of cost of an intangible asset

IFRS for SMEs Section 18 Intangible Assets other than Goodwill All costs incurred to internally develop intangible assets such as research and development costs are charged to expense.

73

Amendments to Section 18: Intangible assets other than goodwill The amendments modified the requirement on useful life determination for amortization of an intangible. All ntangible assets are deemed to have a finite life. If the useful life of an intangible asset cannot be established reliably, the useful life should be based on management’s best estimate not exceeding 10 years.

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Section 20: Leases IFRS IAS 17 Leases The standard applies to all leases other than: • Those to explore for or use minerals, oil, natural gas and similar non-regenerative resources • Licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights

IFRS for SMEs Section 20 Leases Applies to all leases other than:

• Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources • Licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights • Measurement of property held by lessees for investment property and by lessors under operating leases

75

Section 20: Leases IFRS IAS 17 Leases Operating lease payments are expensed on a straight line basis over the lease term unless another systematic basis is more representative of the use of the asset.

IFRS for SMEs Section 20 Leases Operating leases are expensed on a straight-line basis or another basis that represents the use of the asset, unless payments to the lessor increase with expected inflation in which case the payments are expensed when payable.

76

Section 27: Impairment of assets IFRS IAS 36 Impairment of Assets

IFRS for SMEs Section 27 Impairment of Assets

An impairment loss must be recognized immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another standard. Any impairment loss of a revalued asset must be treated as a revaluation decrease in accordance with that other standard.

An entity must recognize an impairment loss immediately in profit or loss.

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Section 27: Impairment of assets IFRS IAS 36 Impairment of Assets

IFRS for SMEs Section 27 Impairment of Assets

An entity must assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity must estimate the recoverable amount of the asset. Irrespective of whether there is any indication of impairment, an entity must also:

An entity must assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity must estimate the recoverable amount of the asset. If there is no indication of impairment, it is not necessary to estimate the recoverable amount. In assessing whether there is any indication that an asset may be impaired, an entity must consider, as a minimum, external and internal sources of information.

a)Test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually

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Section 27: Impairment of assets IFRS IAS 36 Impairment of Assets

IFRS for SMEs Section 27 Impairment of Assets

by comparing its carrying amount with its recoverable amount b) Test goodwill acquired in a business combination for impairment annually. In assessing whether there is any indication that an asset may be impaired, an entity must consider, as a minimum, external and internal sources of information. 79

Section 27: Impairment of assets IFRS IAS 36 Impairment of Assets An impairment loss recognized for goodwill must not be reversed in a subsequent period. A reversal of an impairment loss for a cash generating unit must be allocated to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets.

IFRS for SMEs Section 27 Impairment of Assets An impairment loss recognized for goodwill must not be reversed in a subsequent period. If the estimated recoverable amount of the cash-generating unit exceeds its carrying amount, that excess is a reversal of an impairment loss. The entity must allocate the amount of that reversal to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets, subject to some limitations.

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Amendments to Section 27: Impairment of assets The amendments clarified that this section does not apply to assets arising from construction contracts.

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Section 13: Inventories IFRS IAS 2 Inventories

IFRS for SMEs Section 13 Inventories

If inventories are damaged, have become wholly or partially obsolete, or selling prices have declined, the inventories are written down to net realizable value.

Assess at the end of each reporting period whether any inventories are impaired, i.e., the carrying amount is not fully recoverable (e.g., because of damage, obsolescence or declining selling prices). If inventory is impaired, it is measure at its selling price less costs to complete and sell. The impairment loss is recognized in profit or loss. A reversal of a prior impairment in some circumstances is required.

A reversal of a prior impairment in some circumstances is required.

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Section 29: Income taxes IFRS IAS 12 Income Taxes

IFRS for SMEs Section 29 Income Tax

A deferred tax asset must be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

Deferred tax assets must be recognized for all temporary differences that are expected to reduce taxable profit in the future as a total amount. An entity must recognize a valuation allowance against deferred tax assets so that the net carrying amount equals the highest amount that is more likely than not to be recovered based on current or future taxable profit.

IAS 12 also requires an entity to reassess the recognition of deferred tax assets and recognize previously unrecognized deferred tax assets at each balance sheet date to the extent it has become probable that the asset will be recovered.

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Section 29: Income taxes IFRS IAS 12 Income Taxes

IFRS for SMEs Section 29 Income Tax

A deferred tax asset is not reported gross, less a valuation allowance, but as an amount representing the ‘amount of income taxes recoverable in future periods in respect of deductible temporary differences, the carry forward of unused tax losses and the carry forward of unused tax credits.’

An entity must review the net carrying amount of a deferred tax asset at each reporting date and adjust the valuation allowance to reflect the current assessment of future taxable profits. Such adjustment is recognized in profit or loss, except that an adjustment attributable to an item of income or expense recognized in accordance with this IFRS as other comprehensive income is recognized in other comprehensive income.

Movements in deferred tax assets are recognized in profit or loss, unless the tax relates to items outside profit or loss.

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Section 29: Income taxes IFRS IAS 12 Income Taxes IAS 12 has a number of specific disclosure requirements.

IFRS for SMEs Section 29 Income Tax IFRS for SMEs does not contain all the disclosures currently contained in IAS 12, yet introduces some new disclosures not currently in IAS 12, including: • The effect on deferred tax expense arising from a change in the effect of the possible outcomes of a review by the tax authorities • Adjustments to deferred tax expense arising from a change in the tax status of the entity or its shareholders

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Section 29: Income taxes IFRS IAS 12 Income Taxes

IFRS for SMEs Section 29 Income Tax (it is notable that IFRS for SMEs doesn’t provide guidance on when or how to recognize the effect of the change in status, but requires disclosure of the effect) • Any change in the valuation allowance • An explanation of the significant differences in amounts presented in the statement of comprehensive income and amounts reported to tax authorities.

86

Amendments to Section 29: Income taxes The amendments provided alignment of the main principles of this section with IAS 12 Income Taxes for the recognition and measurement of deferred income tax, but modified to be consistent with the other requirements in the IFRS for SMEs. There is also an addition of an undue cost or effort exemption to the requirement to offset income tax assets and liabilities. An entity shall offset current tax assets and current tax liabilities, or offset deferred tax assets and deferred tax liabilities if, and only if, it has a legally enforceable right to set off the amounts and the entity can demonstrate without undue cost or effort that it plans either to settle on a net basis or to realize the asset and settle the liability simultaneously. 87

Section 22: Liabilities and equity IFRS IAS 32 Financial Instruments: Presentation An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

IFRS for SMEs Section 22 Liabilities and Equity No definition provided.

88

Section 22: Liabilities and equity IFRS IAS 32 Financial Instruments: Presentation

IFRS for SMEs Section 22 Liabilities and Equity

IAS 32 provides the principle that the issuer of a financial instrument classifies the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions.

Equity is the residual interest in the assets of an entity after deducting all its liabilities. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Some financial instruments that meet the definition of a liability are classified as equity because they represent the residual interest in the net assets of the entity:

89

Section 22: Liabilities and equity IFRS IAS 32 Financial Instruments: Presentation Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability are recognized as income or expense in profit or loss. Distributions to holders of an equity instrument are recognized directly in equity, net of any related income tax benefit.

IFRS for SMEs Section 22 Liabilities and Equity An entity reduces equity for amounts of distributions to owners. When noncash assets are to be distributed, a liability is recognized. The liability is stated at fair value at the end of each reporting period and at date of settlement. Changes are recognized in equity as adjustments to the amount of the distribution. 90

Amendments to Section 22: Liabilities and equity The amendments added clarifying guidance on classifying financial instruments as equity or a liability. An entity shall classify a financial instrument as a financial liability or as equity in accordance with the substance of the contractual arrangement, not merely its legal form, and in accordance with the definitions of a financial liability and an equity instrument. Unless an entity has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability, and is classified as such, except for those instruments classified as equity instruments. 91

Amendments to Section 22: Liabilities and equity It also included an exemption from the initial measurement requirements for equity instruments issued as part of a business combination, including business combinations of entities or businesses under common control. An entity shall measure the equity instruments, other than those issued as part of a business combination or those accounted as extinguishing financial liabilities with equity instruments, at the FV of the cash or other resources received or receivable, net of transaction costs (direct costs of issuing an equity instrument). If payment is deferred and the time value of money is material, the initial measurement shall be on a present value basis. 92

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement An entity will comply with the provisions of IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement and make disclosures in terms of IFRS 7 Financial Instruments: Disclosures.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues An entity makes a policy choice to either: • Comply with Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues of IFRS for SMEs or • Use the recognition and measurement provisions of IAS 39 Financial Instruments: Recognition and Measurement and apply the disclosure requirements of IFRS for SMEs.

93

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement An embedded derivative is separated from the host contract and accounted for as a derivative under IAS 39 if: a)The economic characteristics and risks of the embedded derivative are not closely related to those of the host b)A separate instrument with the same terms would meet the definition of a derivative and c)The hybrid is not measured at fair value through profit or loss.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues There is no concept of embedded derivatives under IFRS for SMEs.

94

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement When a financial instrument is recognized initially, an entity measures it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues Basic financial instruments are measured at their transaction price including transactions costs. If the contract constitutes a financing arrangement it is measured at the present value of future payments discounted at a market rate of interest for a similar instrument (this is not applicable to assets and liabilities classified as current, unless they incorporate a finance arrangement).

95

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues If interest is not at a market rate, the fair value would be future payments discounted at a market rate of interest. Other financial instruments are initially measured at fair value, which is usually their transaction price. This will exclude transaction costs. 96

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues

To qualify for hedge accounting, an entity must meet the following conditions:

To qualify for hedge accounting, an entity must meet the following conditions:

• At inception of the hedge there is formal designation and documentation of the hedging relationship, the entity’s risk management objective and strategy for the hedge • The hedge is expected to be highly effective

• The entity designates and documents the hedging relationship, clearly identifying the risk being hedged, the hedged item and hedging instrument 97

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement • For cash flow hedges, a forecast transaction is highly probable • The effectiveness can be reliably measured • The hedge is assessed on an ongoing basis and `determined to have been actually effective.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues • The hedged risk is one of the specified risks in the standard (see below) • The hedging instrument is as specified in the standard (see below) • The entity expects the hedge to be highly effective. 98

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement IAS 39 permits the following hedge relationships: • Fair value hedge: a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, which is attributable to a particular risk and could affect profit or loss • Cash flow hedge: a hedge of the exposure to variability in cash flows that:

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues IFRS for SMEs only permits hedge accounting when the hedged risk is one of the following risks: • Interest rate risk of a debt instrument measured at amortized cost • Foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction 99

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement • Is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction and • Could affect profit or loss • Hedge of a net investment in a foreign operation as defined in IAS 21.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues • Price risk of a commodity that it holds or in a firm commitment or highly probable forecast transaction to purchase or sell a commodity • Foreign exchange risk in a net investment in a foreign operation. 10 0

Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement IAS 30 does not restrict the circumstances in which a derivative may be a hedging instrument, except for some written options. A nonderivative financial instrument can only be designated as a hedge of a foreign currency risk. Only instruments that involve a party external to the reporting entity can be designated as hedging instruments.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues The Hedge accounting is only permitted if the hedging instrument meets all of the following:

• It is an interest rate swap, a foreign currency swap, a foreign currency forward exchange contract or a commodity forward exchange contract that is expected to be highly effective • It involves a party external to the reporting entity

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Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues • Its notional amount equals the designated amount of the hedged item • It has a specified maturity date not later than: • The maturity of the hedged item • The expected settlement of the commodity commitment • The occurrence of the highly probable forecast transaction • It has no prepayment of early termination or extension features.

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Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement IAS 39 has difference definitions for the types of hedge. However, most hedges of fixed interest rate risk would be fair value hedges. Fair value hedges are accounted for as follows: • The gain or loss on remeasuring the hedging instrument at fair value is recognized in profit or loss • The gain or loss on the hedged item is adjusted against its carrying amount and recognized in profit or loss.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues If the hedged risk is the exposure to a fixed interest rate risk of a debt instrument measured at amortized cost or a commodity price risk, the entity:

• Recognizes the hedging instrument as an asset or liability and changes in the fair value are recognized in profit or loss • Recognizes the change in fair value of the hedged item in profit or loss and as an adjustment to its carrying amount.

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Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement Most hedges of a variable interest rate risk would be cash flow hedges under full IFRS. Cash flow hedges are accounted for as follows:

• The effective portion of the gain or loss on the hedging instrument is recognized in other comprehensive income • The ineffective portion is recognized in profit or loss.

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues If the hedged risk is: • The variable interest rate risk in a debt instrument at amortized cost • The foreign exchange risk in a firm commitment or highly probable forecast transaction • The commodity price risk in a firm commitment or highly probable forecast transaction

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Section 11: Basic financial instruments and Section 12: Other financial instrument issues IFRS IAS 39 Financial Instruments: Recognition and Measurement

IFRS for SMEs Section 11 Basic Financial Instruments Section 12 Other Financial Instrument Issues • The foreign exchange risk in a net investment in a foreign operation the entity recognizes the effective portion of the change in fair value of the hedging instrument in other comprehensive income. Any ineffectiveness is recognized in profit or loss. The gain or loss is reclassified to profit or loss when the hedged item is recognized in profit or loss or the hedging relationship ends.

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Amendments to Section 11: Basic financial instruments and Several clarifications and 'undue cost and effort’ exemption regarding the requirement to measure investments in equity instruments at FV added. Clarifications include: • General measurement basis is cost except for preference shares or ordinary shares which are publicly trades or whose fair values can be measured reliably without undue cost or effort. • Instruments at FV through P&L exclude transaction costs unless the arrangement is in effect a financing transaction in which case the instruments shall be measured at the present value of the future cash flows discounted at the market rare for a similar debt instrument. 10 6

Amendments to Section 12: Other financial instrument issues The amendments provided clarifications on the scope of this section and clarifications regarding hedge accounting are added. The scope includes contracts to buy or sell non-financial items except where these are entered into and continue to be held for the entity’s expected purchase, sale or usage requirements.

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Section 26: Share-based payments IFRS IFRS 2 Share-based Payment An entity measures the fair value of equity instruments granted at the measurement date, based on market prices if available, taking into account the terms and conditions of the grant. If market prices are not available, an entity estimates the fair value of the equity instruments granted using a valuation technique to derive an estimate of the price of the equity instruments in an arm’s length transaction between knowledgeable, willing parties.

IFRS for SMEs Section 26 Share-based Payment IFRS for SMEs uses a hierarchy to determine the fair value of shares issued based on:

• Observable market prices • If unobservable, entity specific observable market data, such as a recent transaction in the instruments or a recent independent valuation of the entity 10 8

Section 26: Share-based payments IFRS IFRS 2 Share-based Payment

IFRS for SMEs Section 26 Share-based Payment • If the fair value is not observable and obtaining entity specific market data is impracticable, the directors should use their judgment to apply the most appropriate valuation methodology.

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Amendments to Section 26: Share-based payments The amendments provided alignment of the scope and the definitions with IFRS 2 Share-based Payment to clarify that share-based payment transactions involving equity instruments of other group entities are in the scope of this Section. The clarifications are as follows: • This section applies to all share-based payment transactions in which the identifiable consideration appears to be less than the FV of the equity instruments granted or the liability incurred and not only to share-based payment transactions that are provided in accordance with programs established under law.

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Amendments to Section 26: Share-based payments The amendments provided alignment of the scope and the definitions with IFRS 2 Share-based Payment to clarify that share-based payment transactions involving equity instruments of other group entities are in the scope of this Section. The clarifications are as follows: • The grant date for vesting conditions and modifications to grants of equity instruments with employees. The requirements also apply to share-based payment transactions with parties other than employees if these transactions are measured by reference to the FV of the equity instrument granted, but reference to the grant date refers to the date that the entity obtains the goods or the counterparty renders the service. • The simplification provided for group plans is for the measurement of the share-based payment expense only and does not provide relief from its recognition.

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Section 28: Employee benefits IFRS IAS 19 Employee Benefits An entity recognizes the net total of the following amounts in profit or loss:

• Service cost, both past and current • Net interest cost • The effect of any curtailments or settlements An entity determines the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost using the projected unit credit method.

IFRS for SMEs Section 28 Employee Benefits An entity recognizes a plan surplus as an asset only to the extent that it is able to recover the surplus either through reduced contributions in the future or through refunds from the plan. The present value of an entity’s obligations reflects the discounted estimated amount of benefit that employees have earned in return for their service in the current and prior periods.

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Section 28: Employee benefits IFRS IAS 19 Employee Benefits

IFRS for SMEs Section 28 Employee Benefits

An entity determines the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost using the projected unit credit method.

This requires the entity to determine how much benefit is attributable to the current and prior periods based on the plan’s benefit formula and to make actuarial assumptions about demographic and financial variables.

Actuarial gains and losses are recognized In the period in which they occur in other comprehensive income.

An entity is required to use the projected unit credit method unless this would require undue cost or effort, in which case, the entity makes the following simplifications:

Gains or losses on curtailment or settlement are recognized when the curtailment or settlement occurs.

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Section 28: Employee benefits IFRS IAS 19 Employee Benefits

IFRS for SMEs Section 28 Employee Benefits • Ignore estimated future salary increases • Ignore future service of current employees • Ignore possible in-service mortality of current employees. If a defined benefit plan has been introduced or changed in the current period, the entity increases or decreases its defined benefit liability to reflect the change and recognizes the increase or decrease in measuring profit or loss.

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Amendments to Section 28: Employee benefits The disclosure requirements on accounting policy for termination benefits has been removed. An entity shall recognize the net change in the liability during the period, other than a change attributable to benefits paid to employees during the period or to contributions from the employer, as the cost of its other long- term employee benefits during the period. That cost is recognized entirely in P&L as an expense unless another section of this IFRS requires it to be recognized as part of the cost of an asset, such as inventories or property, plant and equipment. 11 5

Section 34: Specialized activities — agriculture IFRS IAS 41 Agriculture A biological asset or agricultural produce is recognized when: • The entity controls the asset as a result of past events • It is probable that future economic benefits associated with the asset will flow to the entity and • The fair value or cost of the asset can be measured reliably.

IFRS for SMEs Section 34 Specialized Activities — Agriculture An entity may recognize a biological asset or agricultural produce when: • The entity controls the asset as a result of past events • It is probable that future economic benefits associated with the asset will flow to the entity and • The fair value or cost of the asset can be measured reliably without undue cost or effort.

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Section 34: Specialized activities — agriculture IFRS IAS 41 Agriculture A biological asset is measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, except in cases where the presumption to establish fair value is rebutted. In such cases, biological assets are measured at cost less accumulated depreciation and impairments.

IFRS for SMEs Section 34 Specialized Activities — Agriculture An entity measures a biological asset on initial recognition and at each reporting date at its fair value less costs to sell unless fair value cannot be reliably measured without undue cost or effort. Changes in fair value less costs to sell are recognized in profit or loss. When the fair value is not readily determinable without undue cost or effort, the entity applies the cost model and measures the asset at cost less any accumulated depreciation and impairments.

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Section 34: Specialized activities — agriculture IFRS IAS 41 Agriculture

IFRS for SMEs Section 34 Specialized Activities — Agriculture

Agricultural produce harvested from an entity’s biological assets are measured at its fair value less costs to sell at the point of harvest (thereafter they are treated as inventories or under other applicable standards).

Agricultural produce harvested from an entity’s biological assets are measured at their fair value less costs to sell at the point of harvest under both models (thereafter they are treated as inventory).

Gains and losses on initial recognition (and subsequent remeasurement) of biological assets and agricultural produce are recognized in profit and loss.

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Section 34: Specialized activities — extractive industries IFRS IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS for SMEs Section 34 Specialized Activities — Extractive Industries

IFRS 6 specifies the accounting for exploration and evaluation of mineral resources. It allows entities to develop an accounting policy for these costs without specifically considering IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, which may allow entities to continue recognizing assets on adoption of IFRS that would not otherwise be permitted.

An entity that is engaged in the exploration for, evaluation or extraction of mineral resources accounts for expenditure on the acquisition or development of tangible or intangible assets by applying Section 17 Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill, respectively. When an entity has an obligation to dismantle or remove an item, or to restore the site, such obligations and costs are accounted for in accordance with Section 17 Property, Plant and Equipment and Section 21 Provisions and Contingencies.

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Section 34: Specialized activities — service concession arrangements IFRS IFRIC 12 Service Concession Arrangements The amount due from or at the direction of the grantor is accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement as a loan or receivable, an available-for-sale financial asset, or if so designated upon initial recognition, a financial asset at fair value through profit or loss.

IFRS for SMEs Section 34 Specialized Activities — Service Concession Arrangements The operator initially measures the financial asset at its fair value. Thereafter, it follows Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues in accounting for the financial asset.

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Amendments to Section 34: Specialized activities The amendments removed the requirement to disclose comparative information for the reconciliation of changes in the carrying amount of biological assets. An entity using IFRS that is engaged in exploration for, or evaluation of mineral resources shall determine an accounting policy that specifies which expenditures are recognized as exploration and evaluation assets. The policy must be applied consistently. Costs such as acquisition of rights to explore, topographical and similar studies, exploratory drilling, trenching, sampling and technical feasibility are included in the initial measurements of the asset. Expenditure related to the development of mineral resources shall not be recognized as exploration and evaluation assets. The assets are initially measured at cost and subsequently measured in terms of Section 17 Property, plant and equipment and Section 18 Intangible assets other than goodwill.

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Chapter 4 Elements of the statement of comprehensive income

Section 23: Revenue IFRS IAS 18 Revenue IAS 11 Construction Contracts IAS 18 Revenue applies to accounting for revenue arising from the sale of goods, the rendering of services and the use by others of entity’s assets that yield interest, royalties and dividends. IAS 11 Construction Contracts applies in accounting for construction contracts in the financial statements of contractors.

IFRS for SMEs Section 23 Revenue The section applies in accounting for revenue arising from the following: • The sale of goods • The rendering of services • Construction contracts in which the entity is the contractor • The use by others of entity assets yielding interest, royalties or dividends.

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Section 30: Foreign currency translation IFRS IAS 21 The Effect of Changes in Foreign Exchange Rates

IFRS for SMEs Section 30 Foreign Currency Translation

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in profit or loss in the period in which they arise.

Exchange differences on monetary items are recognized in profit or loss for the period except for those differences arising on a monetary investment in a foreign entity (subject to strict criteria of what qualifies as net investment). In the consolidated financial statements, such exchange differences are recognized in other comprehensive income and reported as a component of equity. Recycling through profit or loss of any cumulative exchange differences that were previously recognized in equity on disposal of a foreign operation is not permitted.

Exchange differences on a monetary item that forms part of a net investment in a foreign operation are reclassified from equity to profit or loss on disposal of the foreign operation.

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Amendments to Section 30: Foreign currency translation The amendments clarified that financial instruments that derive their value from the change in a specified foreign exchange rate are excluded from this Section, but not financial instruments denominated in a foreign currency.

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Section 25: Borrowing costs IFRS IAS 23 Borrowing Costs

IFRS for SMEs Section 25 Borrowing Costs

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset are capitalized. All other borrowing costs are expensed.

All borrowing costs are expensed in profit or loss in the period in which they are incurred.

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