International Financial Reporting Standards Pocket … pocket guide provides a summary of the...

International Financial Reporting Standards Pocket guide – 2009

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This pocket guide provides a summary of the recognition and measurementrequirements of International Financial Reporting Standards (IFRS) issued upto March 2009, including IAS 1 (revised), ‘Presentation of financialstatements’.

There is a choice within IAS 1 (revised) of presenting income and expenseas a single statement or as two statements. The sections below assume theadoption of the two-statement approach for the presentation of income andexpense (that is, an ‘income statement’ and a ‘statement of comprehensiveincome’), with the exception of section 4, ‘Presentation of financialstatements under IAS 1 (revised)’. This assumes the adoption of the single-statement approach (that is, a ‘statement of comprehensive income’).

This guide does not address in detail the disclosure requirements; these canbe found in the PwC publication IFRS disclosure checklist.

The information in this guide is arranged in six sections:

• Accounting rules and principles.

• Income statement and related notes.

• Balance sheet and related notes.

• Consolidated and separate financial statements.

• Other subjects.

• Industry-specific topics.

More detailed guidance and information on these topics can be found in theIFRS Manual of Accounting 2009 and other publications fromPricewaterhouseCoopers. A list of all IFRS publications is provided on theinside front and back covers.

International Financial Reporting Standards Pocket guide – 2009

i IFRS pocket guide 2009

Contents

i IFRS pocket guide 2009

Accounting rules and principles

1. Introduction 12. Accounting principles and applicability of IFRS 23. First-time adoption 34. Presentation of financial statements 55. Accounting policies, accounting estimates and errors 96. Financial instruments 117. Foreign currencies 208. Insurance contracts 22

Income statement and related notes

9. Revenue 2310. Segment reporting 2611. Employee benefits 2712. Share-based payment 3013. Taxation 3214. Earnings per share 34

Balance sheet and related notes

15. Intangible fixed assets 3516. Property, plant and equipment 3717. Investment property 3918. Impairment of assets 4019. Lease accounting 4220. Inventories 4321. Provisions and contingences 4422. Post-balance-sheet events and financial statements 4723. Share capital and reserves 48

IFRS pocket guide 2009 ii

Contents

Consolidated and separate financial statements

24. Consolidated and separate financial statements 5024A. Consolidated and separate financial statements (IAS 27 revised) 5225. Business combinations 5425A. Business combinations (IFRS 3 revised) 5626. Disposals of subsidiaries, business and non-current assets 5827. Associates 6028. Joint ventures 61

Other subjects

29. Related-party disclosures 6230. Cash flow statements 6331. Interim reports 6432. Service concession arrangements 66

Industry-specific topics

33. Agriculture 6834. Retirement benefit plans 6935. Extractive industries 70

Index by standards and interpretation 73

1IFRS pocket guide 2009



1 Introduction

Recent years have seen major changes in financial reporting worldwide.Most obvious is the continuing adoption of IFRS worldwide. Many territorieshave been using IFRS for some years, and more are planning to come onstream from 2011. The next wave of transitioning countries includes Korea,India, Japan, much of South and Central America and Canada. The keycountries in this regard – but still something of any unknown quantity – isthe US. The decision about adoption of IFRS in the US is still to be taken,although many US companies are acting as if it will definitely happen.Despite this, the likely adoption date is now more often quoted as 2016rather than 2014. Convergence between IFRS and US GAAP continues inthe meantime.

An important recent development is the extent to which IFRS is affected bypolitics. The credit crunch, the problems in the banking sector and theattempts of politicians to resolve these questions have resulted in muchpressure on standard setters to amend, often at short notice, theirstandards, primarily those on financial instruments. This pressure is unlikelyto disappear, at least in the short term. The IASB is working hard to respondto this; we can therefore expect a continuous stream of changes to thestandards in the next few months and years.

2 IFRS pocket guide 2009


2 Accounting principles and applicability of IFRS

The IASB has the authority to set IFRS and to approve interpretations ofthose standards.

IFRSs are intended to be applied by profit-orientated entities. These entities’financial statements give information about performance, position and cashflow that is useful to a range of users in making financial decisions. Theseusers include shareholders, creditors, employees and the general public. A complete set of financial statements includes a:

• Balance sheet. • Income statement.• Cash flow statement. • A description of accounting policies. • Notes to the financial statements.

The concepts underlying accounting practices under IFRS are set out in theIASB’s ‘Framework for the preparation and presentation of financialstatements’.



3 First-time adoption of IFRS – IFRS 1

An entity moving from national GAAP to IFRS should apply theserequirements. The basic requirement is full retrospective application of allIFRSs effective at the reporting date for an entity’s first IFRS financialstatements. However, there are a number of exemptions and fourexceptions to the requirement for retrospective application.

The exemptions cover standards for which the IASB considers thatretrospective application could prove to be too difficult or could result in acost likely to exceed any benefits to users. The exemptions are optional.Any, all or none of the exemptions may be applied.

The exemptions relate to:

• Business combinations.• Share-based payment transactions.• Insurance contracts.• Fair value or revaluation as deemed cost for property, plant and

equipment and other assets.• Leases.• Employee benefits.• Cumulative translation differences.• Investments in subsidiaries, jointly controlled entities and associates.• Assets and liabilities of subsidiaries, associates and joint ventures.• Compound financial instruments.• Assets and liabilities of subsidiaries.• Designation of previously recognised financial instruments.• Fair value measurement of financial assets or financial liabilities at initial

recognition.• Decommissioning liabilities included in the cost of property, plant and

equipment.• Service concession arrangements.• Borrowing costs.



The exceptions cover areas in which retrospective application of the IFRSrequirements is considered inappropriate. The exceptions are mandatory, notoptional.

The exceptions relate to:

• Estimates.• Derecognition of financial assets and financial liabilities.• Hedge accounting.• Some aspects of accounting for non-controlling interests.

Comparative information is prepared and presented on the basis of IFRS.Almost all adjustments arising from the first-time application of IFRS areagainst opening retained earnings of the first period that is presented on anIFRS basis.

Certain reconciliations from previous GAAP to IFRS are also required.



4 Presentation of financial statements – IAS 1 (revised)

The IASB issued IAS 1 (revised), ‘Presentation of financial statements’, inSeptember 2007, to replace the existing IAS 1 (2005) for annual periodsbeginning on or after 1 January 2009. Early adoption is permitted.

The objective of financial statements is to provide information that is useful inmaking economic decisions. The objective of IAS 1 (revised) is to ensurecomparability of presentation of that information with the entity’s financialstatements of previous periods and with the financial statements of otherentities.

Financial statements are prepared on a going concern basis unlessmanagement intends either to liquidate the entity or to cease trading, or hasno realistic alternative but to do so. An entity prepares its financialstatements, except for cash flow information, under the accrual basis ofaccounting.

A complete set of financial statements comprises a statement of financialposition (or ‘balance sheet’), a statement of comprehensive income, astatement of changes in equity, a statement of cash flows (collectivelydescribed as the primary financial statements) and explanatory notes(including accounting policies).

There is no prescribed format for the financial statements. However, there areminimum disclosures to be made in the financial statements as well as in thenotes. The implementation guidance to IAS 1 (revised) contains illustrativeexamples of acceptable formats.

Financial statements disclose corresponding information for the precedingperiod (comparatives) unless a standard or interpretation permits or requiresotherwise.

Statement of financial position (balance sheet)

The statement of financial position presents an entity’s financial position at aspecific point in time. Subject to meeting certain minimum presentation anddisclosure requirements, management may use its judgement regarding theform of presentation, such as whether to use a vertical or a horizontal format,which sub-classifications to present and which information to disclose on theface of the statement or in the notes.



The following items, as a minimum, are presented on the face of the balancesheet:

• Assets – property, plant and equipment; investment property; intangibleassets; financial assets; investments accounted for using the equitymethod; biological assets; deferred tax assets; current tax assets;inventories; trade and other receivables; and cash and cash equivalents.

• Equity – issued capital and reserves attributable to the owners of theparent; and minority interest.

• Liabilities – deferred tax liabilities; current tax liabilities; financial liabilities;provisions; and trade and other payables.

• Assets and liabilities held for sale – the total of assets classified as heldfor sale and assets included in disposal groups classified as held for sale;and liabilities included in disposal groups classified as held for sale inaccordance with IFRS 5, ‘Non-current assets held for sale anddiscontinued operations’.

Current and non-current assets and current and non-current liabilities arepresented as separate classifications in the statement unless presentationbased on liquidity provides information that is reliable and more relevant.

Statement of comprehensive income

The statement of comprehensive income presents an entity’s performanceover a specific period. Entities have a choice of presenting this in a singlestatement or as two statements. The statement of comprehensive incomeunder the single-statement approach includes all items of income andexpense and includes each component of other comprehensive incomeclassified by nature. Under the two statement approach, all components ofprofit or loss are presented in an income statement, followed immediately bya statement of comprehensive income. This begins with the total profit orloss for the period and displays all components of other comprehensiveincome.



Items to be presented in statement of comprehensive income

The following items, as a minimum, are presented in the statement ofcomprehensive income:

• Revenue.• Finance costs.• Share of the profit or loss of associates and joint ventures accounted for

using the equity method.• Tax expense.• Post-tax profit or loss of discontinued operations aggregated with any

post-tax gain or loss recognised on the measurement to fair value lesscosts to sell (or on the disposal) of the assets or disposal group(s)constituting the discontinued operation.

• Profit or loss for the period.• Each component of other comprehensive income classified by nature.• Share of the other comprehensive income of associates and joint ventures

accounted for using the equity method.• Total comprehensive income.

Profit or loss for the period and total comprehensive income are allocated inthe statement of comprehensive income to the amounts attributable to minority interest and to the owners of the parent.

Additional line items or sub-headings are presented in this statement whensuch presentation is relevant to an understanding of the entity’s financialperformance.

Material items

The nature and amount of items of income and expense are disclosedseparately, where they are material. Disclosure may be in the statement or inthe notes. Such income/expenses may include items such as restructuringcosts; write-downs of inventories or property, plant and equipment; litigationsettlements; and gains or losses on disposals of non-current assets.


Extraordinary items

All items of income and expense are deemed to arise from an entity’s ordinaryactivities. This categorisation is therefore prohibited.

Tax on components of other comprehensive income

An entity presents each component of other comprehensive income in thestatement either (i) net of its related tax effects, or (ii) before its related taxeffects, with the aggregate tax effect of these components shownseparately.

Statement of changes in equity

The following items are presented in the statement of changes in equity:

• Total comprehensive income for the period, showing separately the totalamounts attributable to owners of the parent and to minority interest.

• For each component of equity, the effects of retrospective application orretrospective restatement recognised in accordance with IAS 8,‘Accounting policies, changes in accounting estimates and errors’.

• Amounts of transactions with owners in their capacity as owners, showingseparately contributions by and distributions to owners.

• For each component of equity, a reconciliation between the carryingamount at the beginning and the end of the period, separately disclosingeach change.

Statement of cash flows

Cash flow statements are addressed in section 30.

Notes to the financial statements

The notes are an integral part of the financial statements. Notes provideinformation additional to the amounts disclosed in the ‘primary’ statements.They include accounting policies and critical accounting estimates andjudgements.




5 Accounting policies, accounting estimates and errors –IAS 8

The accounting policies that an entity follows are often those required byIFRS that are relevant to the circumstances of the particular company.However, for some situations, standards are either silent or offer a choice.Management should select the appropriate accounting policies.

Management uses its judgement in developing and applying an accountingpolicy that results in information that meets the qualitative characteristics ofrelevance and reliability, including faithful representation, substance overform, neutrality, prudence and completeness. If there is no IFRS standard orguidance, management should consider the applicability of the requirementsand guidance in IFRS on similar and related issues, and then the definitions,recognition criteria and measurement concepts for assets, liabilities, incomeand expenses in the Framework. Management may also consider the most recent pronouncements of other standard-setting bodies, otheraccounting literature and accepted industry practices, where these do notconflict with IFRS.

Accounting policies should be applied consistently to similar transactionsand events.

Changes in accounting policies

Changes in accounting policies made on adoption of a new standard areaccounted for in accordance with the transition provisions (if any) containedwithin that standard. If specific transition provisions do not exist, a changein policy (whether required or voluntary) is accounted for retrospectively(that is, by restating comparative figures) unless this is impracticable.



Issue of new/revised standards

Standards are normally published well in advance of a requiredimplementation date. In the intervening period, management discloses thefact that a new standard has been issued but is not yet effective. It alsoprovides the known or reasonably estimable information relevant toassessing the impact that the application of the standard might have on the entity’s financial statements in the period of initial recognition.

Changes in accounting estimates

Management recognises prospectively the changes in accounting estimatesby including the effects in profit or loss in the period that is affected (theperiod of the change and future periods), except if the change in estimategives rise to changes in assets, liabilities or equity. In this case, it isrecognised by adjusting the carrying amount of the related asset, liability orequity in the period of the change.

Errors

Errors may arise from mistakes and oversights or misinterpretation ofinformation.

Material prior-period errors are adjusted retrospectively (that is, by restatingcomparative figures) unless this is impracticable

.



6 Financial instruments – IAS 32, IFRS 7 and IAS 39

Objectives and scope

Financial instruments are addressed in three standards: IAS 32, which dealswith distinguishing debt from equity and with netting; IAS 39, whichcontains requirements for recognition and measurement; and IFRS 7, whichdeals with disclosures.

The objective of the three standards is to establish requirements for allaspects of accounting for financial instruments, including distinguishingdebt from equity, netting, recognition, derecognition, measurement, hedgeaccounting and disclosure.

The scope of the standards is broad. The standards cover all types offinancial instrument, including receivables, payables, investments in bondsand shares, borrowings and derivatives. They also apply to certain contracts to buy or sell non-financial assets (such as commodities) that can be net-settled in cash or another financial instrument.

Nature and characteristics of financial instruments

Financial instruments include a wide range of assets and liabilities, such astrade debtors, trade creditors, loans, financial lease receivables andderivatives. They are recognised and measured according to IAS 39’srequirements and are disclosed in accordance with IFRS 7.

Financial instruments represent contractual rights or obligations to receiveor pay cash or other financial assets. Non-financial items have a moreindirect, non-contractual relationship to future cash flows.

A financial asset is: cash; a contractual right to receive cash or anotherfinancial asset; a contractual right to exchange financial assets or liabilitieswith another entity under conditions that are potentially favourable; or anequity instrument of another entity.

A financial liability is a contractual obligation to deliver cash or anotherfinancial asset; or to exchange financial instruments with another entityunder conditions that are potentially unfavourable.



An equity instrument is any contract that evidences a residual interest in theentity’s assets after deducting all of its liabilities.

A derivative is a financial instrument that derives its value from an underlyingprice or index; requires little or no initial net investment; and is settled at afuture date.

Embedded derivatives in host contracts

Some financial instruments and other contracts combine, in a singlecontract, both a derivative and a non-derivative. The derivative part of thecontract is referred to as an ‘embedded derivative’. Its effect is that some ofthe contract’s cash flows vary in a similar way to a stand-alone derivative.For example, the principal amount of a bond may vary with changes in astock market index. In this case, the embedded derivative is an equityderivative on the relevant stock market index.

Embedded derivatives that are not ‘closely related’ to the rest of thecontract are separated and accounted for as stand-alone derivatives (that is,measured at fair value, generally with changes in fair value recognised inprofit or loss). An embedded derivative is not ‘closely related’ if its economiccharacteristics and risks are different from those of the rest of the contract.IAS 39 sets out many examples to help determine when this test is (and isnot) met.

Analysing contracts for potential embedded derivatives is one of the morechallenging aspects of IAS 39.

Classification of financial instruments

The way that financial instruments are classified under IAS 39 drives howthey are subsequently measured and where changes in measurement areaccounted for.

There are four classes of financial asset under IAS 39: available for sale,held to maturity, loans and receivables, and fair value through profit or loss.



The factors to take into account when classifying financial assets include:

• Are the cash flows arising from the instrument fixed or determinable? Does the instrument have a maturity date?

• Are the assets held for trading? Does management intend to hold the instruments to maturity?

• Is the instrument a derivative, or does it contain an embedded derivative?

• Is the instrument quoted on an active market?• Has management designated the instrument into a particular

classification at inception?

Financial liabilities are at fair value through profit or loss if they aredesignated as such (subject to various conditions), if they are held fortrading or if they are derivatives (except for a derivative that is a financialguarantee contract or a designated and effective hedging instrument).Otherwise they are classified as ‘other liabilities’.

Financial assets and liabilities are measured either at fair value or atamortised cost, depending on their classification. Changes are taken toeither the income statement or directly to equity.

An amendment to IAS 39, ‘Financial instruments: Recognition andmeasurement’, and IFRS 7, ‘Financial instruments: Disclosures’, waspublished in October 2008. It allows the reclassification of certain financialassets previously classified as ‘held for trading’ or ‘available for sale’ toanother category under limited circumstances. Various disclosures arerequired where a reclassification has been made. Derivatives and assetsdesignated as ‘at fair value through profit or loss’ under the fair value optionare not eligible for this reclassification. This amendment was effective forannual periods beginning or after 1 July 2008, although a subsequentamendment confirmed that any reclassifications made on or after 1 November 2008 should take effect only from the date of thereclassification and may not be backdated.

Financial liabilities and equity

The classification of a financial instrument by the issuer as either a liability(debt) or equity can have a significant impact on an entity’s apparentgearing (debt-to-equity ratio) and reported earnings. It could also affect theentity’s debt covenants.



The critical feature of debt is that under the terms of the instrument, theissuer is or can be required to deliver either cash or another financial asset tothe holder; it cannot avoid this obligation. For example, a debenture, underwhich the issuer is required to make interest payments and redeem thedebenture for cash, is a financial liability.

An instrument is classified as equity when it represents a residual interest inthe issuer’s assets after deducting all its liabilities, or put another way, whenthe issuer has no obligation under the terms of the instrument to deliver cashor other financial assets to another entity. Ordinary shares, or common stock,where all the payments are at the discretion of the issuer are examples ofequity of the issuer.

The classification of the financial instrument into either debt or equity isbased on the substance of the contractual arrangement of the instrument,rather than its legal form. This means, for example, that a redeemablepreference share, which is economically the same as a bond, is accountedfor in the same way as the bond. Therefore, the redeemable preference shareis treated as a liability rather than equity, even though legally it is a share ofthe issuer.

Other instruments may not be as straightforward. An analysis of the terms ofeach instrument in the light of the detailed classification requirements isnecessary, particularly as some financial instruments contain both debt andequity features. Such instruments, such as bonds that are convertible into afixed number of equity shares, are split into debt and equity (being the optionto convert) components.

The treatment of interest, dividends, losses and gains in the incomestatement follows the classification of the related instrument. If a preferenceshare is classified as debt, its coupon is shown as interest. However, thecoupon on an instrument that is treated as equity is shown as a distribution.

An amendment to IAS 32, ‘Financial instruments: Presentation’, and IAS 1,‘Presentation of financial statements’, was published in February 2008. Thisamendment ensures entities classify the following types of financialinstrument as equity, provided they have particular features and meetspecific conditions:



• Puttable financial instruments (for example, some shares issued by co-operative entities and some partnership interests).

• Instruments or components of instruments that impose on the entity anobligation to deliver to another party a pro rata share of the net assets ofthe entity only on liquidation (for example, some shares issued by limited-life entities).

This amendment is effective for annual periods beginning 1 January 2009; itis subject to EU endorsement.

Recognition and derecognition

Recognition

Recognition issues for financial assets and financial liabilities tend to bestraightforward. An entity recognises a financial asset or a financial liability atthe time it becomes a party to a contract.

Derecognition

Derecognition is the term used for ceasing to recognise a financial asset orfinancial liability on an entity’s balance sheet. These rules are more complex.

Assets

An entity that holds a financial asset may raise finance using the asset assecurity for the finance, or as the primary source of cash flows from which torepay the finance. The derecognition requirements of IAS 39 determinewhether the transaction is a sale of the financial assets (and therefore theentity ceases to recognise the assets) or whether finance has been securedon the assets (and the entity recognises a liability for any proceeds received).This evaluation might be straightforward. For example, it is clear with little orno analysis that a financial asset is derecognised in an unconditional transferof it to an unconsolidated third party, with no risks and rewards of the assetbeing retained. Conversely, derecognition is not allowed where an asset hasbeen transferred but substantially all the risks and rewards of the asset havebeen retained through the terms of the agreement. However, in many othercases, the analysis is more complex. Securitisation and debt factoring areexamples of more complex transactions where derecognition will needcareful consideration.



Liabilities

An entity may only cease to recognise (derecognise) a financial liability when itis extinguished – that is, when the obligation is discharged, cancelled orexpired, or when the debtor is legally released from the liability by law or bythe creditor agreeing to such a release.

Measurement of financial assets and liabilities

All financial instruments are measured initially at fair value under IAS 39. Thefair value of a financial instrument is normally the transaction price – that is,the amount of the consideration given or received. However, in somecircumstances, the transaction price may not be indicative of fair value. In such a situation, an appropriate fair value is determined using data from current observable transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

The measurement of financial instruments after initial recognition dependson their initial classification. All financial assets are measured at fair valueexcept for loans and receivables, held-to-maturity assets and, in rarecircumstances, unquoted equity instruments whose fair values cannot be measured reliably, or derivatives linked to and that must be settled by the delivery of such unquoted equity instruments that cannot be measured reliably.

Loans and receivables and held-to-maturity investments are measured atamortised cost. The amortised cost of a financial asset or financial liability ismeasured using the ‘effective interest method’.

Available-for-sale financial assets are measured at fair value, with changesin fair value recognised in other comprehensive income. For available-for-sale debt securities, interest is recognised in income using the ‘effectiveinterest method’. Dividends on available-for-sale equity securities arerecognised in income as the holder becomes entitled to them.

Derivatives (including separated embedded derivatives) are measured at fairvalue. All fair value gains and losses are recognised in profit or loss exceptwhere they qualify as hedging instruments in cash flow hedges.



Financial liabilities are measured at amortised cost using the effective interestmethod unless they are classified at fair value through profit or loss.

Financial assets and financial liabilities that are designated as hedged itemsmay require further adjustments under the hedge accounting requirements.

All financial assets, except those measured at fair value through profit orloss, are subject to review for impairment. If there is objective evidence thatsuch a financial asset may be impaired, the impairment loss is calculated andrecognised in profit or loss.

Hedge accounting

‘Hedging’ is the process of using a financial instrument (usually a derivative)to mitigate all or some of the risk of a hedged item. ‘Hedge accounting’changes the timing of recognition of gains and losses on either the hedgeditem or the hedging instrument so that both are recognised in profit or loss inthe same accounting period.

To qualify for hedge accounting, an entity (a) at the inception of the hedge,formally designates and documents a hedge relationship between aqualifying hedging instrument and a qualifying hedged item; and (b) both atinception and on an ongoing basis, demonstrates that the hedge is highlyeffective.

There are three types of hedge relationship:

• Fair value hedge – a hedge of the exposure to changes in the fair value ofa recognised asset or liability, or a firm commitment.

• Cash flow hedge – a hedge of the exposure to variability in cash flows ofa recognised asset or liability, a firm commitment or a highly probableforecast transaction.

• Net investment hedge – a hedge of the foreign currency risk on a netinvestment in a foreign operation.

For a fair value hedge, the hedged item is adjusted for the gain or lossattributable to the hedged risk. That element is included in the incomestatement where it will offset the gain or loss on the hedging instrument.



For a cash flow hedge, gains and losses on the hedging instrument, to theextent it is an effective hedge, are initially included in equity. They arereclassified to profit or loss when the hedged item affects the incomestatement. If the hedged item is the forecast acquisition of a non-financialasset or liability, the entity may choose an accounting policy of adjusting thecarrying amount of the non-financial asset or liability for the hedging gain orloss at acquisition.

Hedges of a net investment in a foreign operation are accounted for similarlyto cash flow hedges.

An amendment to IAS 39 was published in July 2008 regarding ‘eligiblehedged items’. It has made two significant changes. It prohibits designatinginflation as a hedgeable component of a fixed rate debt. It also prohibitsincluding time value in the one-sided hedged risk when designating optionsas hedges. This amendment is effective for accounting periods beginning onor after 1 July 2009 and is applied retrospectively in accordance with IAS 8,‘Accounting policies’; it is subject to EU endorsement.

IFRIC 16, ‘Hedges of a net investment in a foreign operation’, was alsopublished in July 2008. This interpretation clarifies that net investmenthedging relates to differences in functional currency not presentationcurrency, and that hedging instruments may be held anywhere in the group.

The requirements of IAS 21, ‘The effects of changes in foreign exchangerates’, do apply to the hedged item. This interpretation is effective for periodsbeginning on or after 1 October 2008; it is subject to EU endorsement.

Presentation and disclosure

There have been significant developments in risk management concepts andpractices in recent years. New techniques have evolved for measuring andmanaging exposures to risks arising from financial instruments. This, coupledwith the significant volatility experienced in the financial markets, hasincreased the need for more relevant information and greater transparencyabout an entity’s exposures arising from financial instruments and how thoserisks are managed. Financial statement users and other investors need suchinformation to make more informed judgements about risks that entities runfrom the use of financial instruments and their associated returns.



IFRS 7 sets out disclosure requirements that are intended to enable users toevaluate the significance of financial instruments for an entity’s financialposition and performance, and to understand the nature and extent of risksarising from those financial instruments to which the entity is exposed.

IFRS 7 does not just apply to banks and financial institutions. All entitiesthat have financial instruments are affected – even simple instruments suchas borrowings, accounts payable and receivable, cash and investments.

An amendment to IFRS 7 was published in March 2009. It forms part of theIASB’s response to the financial crisis and addresses the G20 conclusionsaimed at improving transparency and enhance accounting guidance. Theamendment increased the disclosure requirements about fair valuemeasurement and reinforced existing principles for disclosure about liquidityrisk. It introduced a three-level hierarchy for fair value measurementdisclosure and requires some specific quantitative disclosures for financialinstruments at the lowest level in the hierarchy. It also clarifies and enhancesexisting requirements for the disclosure of liquidity risk, primarily requiring aseparate liquidity risk analysis for derivative and non-derivative financialliabilities.

The amendment is effective for accounting periods starting on or after 1 January 2009; it is subject to EU endorsement. Comparatives are notrequired for the first year of application.



7 Foreign currencies – IAS 21, IAS 29

Many entities do business with overseas suppliers or customers, or haveoverseas operations. This gives rise to two main accounting issues:

• Some transactions (for example, those with overseas suppliers orcustomers) may be denominated in foreign currencies. Thesetransactions are expressed in the entity’s own currency (‘functionalcurrency’) for financial reporting purposes.

• An entity may have foreign operations – such as overseas subsidiaries,branches or associates – that maintain their accounting records in theirlocal currency. Because it is not possible to combine transactionsmeasured in different currencies, the foreign operation’s results andfinancial position are translated into a single currency, namely that inwhich the group’s consolidated financial statements are reported(‘presentation currency’).

The methods required for each of the above circumstances are summarisedbelow.

Expressing foreign currency transactions in entity’s functional currency

A foreign currency transaction is expressed in the functional currency usingthe exchange rate at the transaction date. Foreign currency balancesrepresenting cash or amounts to be received or paid in cash (‘monetaryitems’) are reported at the end of the reporting period using the exchangerate on that date. Exchange differences on such monetary items arerecognised as income or expense for the period. Non-monetary balancesthat are not re-measured at fair value and are denominated in a foreigncurrency are expressed in the functional currency using the exchange rate atthe transaction date. Where a non-monetary item is re-measured at fairvalue in the financial statements, the exchange rate at the date when fairvalue was determined is used.



Expressing foreign operations in the group’s currency

The financial statements of a foreign operation are translated into thegroup’s presentation currency. The assets and liabilities are translated at theclosing rate at the end of the reporting period. The income statement istranslated at exchange rates at the dates of the transactions or at theaverage rate if that approximates the actual rates. All resulting exchangedifferences are recognised as a separate component of equity.

The financial statements of a foreign operation that has the currency of ahyperinflationary economy as its functional currency are first restated inaccordance with IAS 29, ‘Financial reporting in hyperinflationary economies’.All components are then translated to the presentation currency at theclosing rate at the end of the reporting period.



8 Insurance contracts – IFRS 4

Insurance contracts are contracts where an entity accepts significantinsurance risk from another party (the policyholder) by agreeing tocompensate the policyholder if the insured event adversely affects thepolicyholder. The risk transferred in the contract must be insurance risk,which is any risk except for financial risk.

IFRS 4 applies to all issuers of insurance contracts whether or not the entityis legally an insurance company. It does not apply to accounting forinsurance contracts by policyholders. Accounting for insurance contractsissued by insurance and financial services companies can be complex anddiffers from country to country; it is not considered further here.

Measurement

IFRS 4 is an interim standard pending completion of Phase 2 of the IASB’sproject on insurance contracts. It allows entities to continue with theirexisting accounting policies for insurance contracts if those policies meetcertain minimum criteria. One of the minimum criteria is that the amount ofthe insurance liability is subject to a liability adequacy test. This testconsiders current estimates of all contractual and related cash flows. If theliability adequacy test identifies that that the insurance liability is inadequate,the entire deficiency is recognised in the income statement.

Accounting policies modelled on IAS 37, ‘Provisions, contingent liabilitiesand contingent assets’, are appropriate in cases where the insurer is not aninsurance company and where there is no specific local GAAP for insurancecontracts (or the local GAAP is directed at insurance companies).

Disclosure

Disclosure is particularly important for information relating to insurancecontracts, as insurers can continue to use local GAAP accounting policies.IFRS 4 has two main principles for disclosure. Insurers should disclose:

• Information that identifies and explains the amounts in its financialstatements arising from insurance contracts.

• Information that enables users of its financial statements to evaluate thenature and extent of risks arising from insurance contracts.




9 Revenue – IAS 18, IAS 11 and IAS 20

Revenue is measured at the fair value of the consideration received orreceivable. When the substance of a single transaction indicates that itincludes separately identifiable components, revenue is allocated to thesecomponents by reference to their fair values. It is recognised for eachcomponent separately by applying the recognition criteria below. Forexample, when a product is sold with a subsequent service, revenue isallocated initially to the product component and the service component; it isrecognised separately thereafter when the criteria for revenue recognition aremet for each component.

Revenue arising from the sale of goods is recognised when an entitytransfers the significant risks and rewards of ownership and gives upmanagerial involvement usually associated with ownership and control, if it isprobable that economic benefits will flow to the entity and the amount ofrevenue and costs can be measured reliably.

Revenue from the rendering of services is recognised when the outcome ofthe transaction can be estimated reliably. This is done by reference to thestage of completion of the transaction at the balance sheet date, usingrequirements similar to those for construction contracts. The outcome of atransaction can be estimated reliably when: the amount of revenue can bemeasured reliably; it is probable that economic benefits will flow to the entity;the stage of completion can be measured reliably; and the costs incurredand costs to complete can be reliably measured.

Examples of transactions where the entity retains significant risks andrewards of ownership and revenue is not recognised are when:

• The entity retains an obligation for unsatisfactory performance notcovered by normal warranty provisions.

• The receipt of revenue from a particular sale is contingent on the buyer inturn obtaining revenue from its sale of the goods.

• The buyer has the power to rescind the purchase for a reason specified inthe sales contract and the entity is uncertain about the probability ofreturn.



• When the goods are shipped subject to installation and that installation isa significant part of the contract.

Interest income is recognised using the effective interest rate method.Royalties are recognised on an accruals basis in accordance with thesubstance of the relevant agreement. Dividends are recognised when theshareholder’s right to receive payment is established.

Construction contracts – IAS 11

A construction contract is a contract specifically negotiated for theconstruction of an asset, or combination of assets, including contracts forthe rendering of services directly related to the construction of the asset(such as project managers and architects services). Such contracts aretypically fixed-price or cost-plus contracts.

Revenue and expenses on construction contracts are recognised using thepercentage-of-completion method. This means that revenue, expenses andtherefore profit are recognised gradually as contract activity occurs.

When the outcome of the contract cannot be estimated reliably, revenue isrecognised only to the extent of costs incurred that it is probable will berecovered; contract costs are recognised as an expense as incurred. Whenit is probable that total contract costs will exceed total contract revenue, theexpected loss is recognised as an expense immediately.

The IASB published IFRIC 15, ‘Agreements for construction of real estate’,in July 2008. This interpretation clarifies which standard (IAS 18, ‘Revenue’,or IAS 11, ‘Construction contracts’) should be applied to particulartransactions. It is likely to mean that IAS 18 will be applied to a wider rangeof transactions. This interpretation is effective for accounting periodsbeginning 1 January 2009; it is subject to EU endorsement.

Government grants – IAS 20

Government grants are recognised when there is reasonable assurance thatthe entity will comply with the conditions related to them and that the grantswill be received.



Grants related to income are recognised in the income statement over theperiods necessary to match them with the related costs that they areintended to compensate. The timing of such recognition in the incomestatement will depend on the fulfilment of any conditions or obligationsattaching to the grant.

Grants related to assets are either offset against the carrying amount of therelevant asset or presented as deferred income in the balance sheet. Theincome statement will be affected either by a reduced depreciation chargeor by deferred income being recognised as income systematically over theuseful life of the related asset.



10 Segment reporting – IFRS 8

The IASB issued IFRS 8, ‘Operating segments’, in November 2006 as part of convergence with US GAAP. IFRS 8 is similar to the US standardSFAS 131. It replaces IAS 14. It is effective for periods beginning on or after1 January 2009; earlier application is permitted.

All entities with listed or quoted equity or debt instruments or that are in theprocess of obtaining a listing or quotation of debt or equity instruments in apublic market are required to disclose segment information.

Operating segments are components of an entity, identified based oninternal reports on each segment that are regularly used by the entity’s chiefoperating decision-maker (CODM) to allocate resources to the segment andto assess its performance.

Operating segments are separately reported if they meet the definition of areportable segment. A reportable segment is an operating segment or groupof operating segments that exceed the quantitative thresholds set out in thestandard. An entity may, however, disclose any additional operatingsegment if it chooses to do so.

All reportable segments are required to provide a measure of profit andassets in the format viewed by the CODM, as well as disclosure of therevenue from customers for each group of similar products and services,revenue by geography and dependence on major customers. Other detaileddisclosures of performance and resources are required if the CODM reviewsthese amounts. A reconciliation of the totals of revenue, profit and loss,assets and other material items reviewed by the CODM to the primaryfinancial statements is required.



11 Employee benefits – IAS 19

Employee benefits accounting – for pensions in particular – is complex. Theliabilities in defined benefit pension plans are frequently material. They arelong term and difficult to measure, and this gives rise to difficulty inmeasuring the cost attributable to each year.

Employee benefits are all forms of consideration given or promised by anentity in exchange for services rendered by its employees. These benefitsinclude salary-related benefits (such as wages, profit-sharing, bonuses andcompensated absences, such as paid holiday and long-service leave),termination benefits (such as severance and redundancy pay) and post-employment benefits (such as retirement benefit plans). Share-basedpayments are addressed in IFRS 2.

Post-employment benefits include pensions, post-employment life insuranceand medical care. Pensions are provided to employees either throughdefined contribution plans or defined benefit plans.

Recognition and measurement for short-term benefits is straightforward,because actuarial assumptions are not required and the obligations are notdiscounted. However, long-term benefits, particularly post-employmentbenefits, give rise to more complicated measurement issues.

Defined contribution plans

Accounting for defined contribution plans is straightforward: the cost ofdefined contribution plans is the contribution payable by the employer forthat accounting period.

Defined benefit plans

Accounting for defined benefit plans is complex because actuarialassumptions and valuation methods are required to measure the balancesheet obligation and the expense. The expense recognised is notnecessarily the contributions made in the period.



The amount recognised on the balance sheet is the defined benefit obligationless plan assets adjusted for actuarial gains and losses (see ‘corridorapproach’ below).

To calculate the defined benefit obligation, estimates (actuarial assumptions)about demographic variables (such as employee turnover and mortality) andfinancial variables (such as future increases in salaries and medical costs) areinput into a valuation model. The benefit is then discounted to present valueusing the projected unit credit method. This normally requires the expertiseof an actuary.

Where defined benefit plans are funded, the plan assets are measured at fairvalue using discounted cash flow estimates if market prices are not available.Plan assets are tightly defined, and only assets that meet the definition ofplan assets may be offset against the plan’s defined benefit obligations – thatis, the net surplus or deficit is shown on the balance sheet.

The re-measurement at each balance sheet date of the plan assets and thedefined benefit obligation gives rise to actuarial gains and losses. There arethree permissible methods under IAS 19 for recognising actuarial gains andlosses:

• Under the OCI approach, actuarial gains and losses are recognisedimmediately in other comprehensive income.

• Under the ‘corridor approach’, any actuarial gains and losses that falloutside the higher of 10 per cent of the present value of the definedbenefit obligation or 10 per cent of the fair value of the plan assets (if any)are amortised over no more than the remaining working life of theemployees.

• Faster recognition, including immediate recognition in full, in profit andloss is allowed.

IAS 19 analyses the changes in the plan assets and liabilities into variouscomponents, the net total of which is recognised as an expense or income inprofit and loss. These components include:

• Current service cost (the present value of the benefits earned by activeemployees in the current period).

• Interest cost (the unwinding of the discount on the defined benefitobligation).



• Expected return on any plan assets (expected interest, dividends andcapital growth of plan assets).

• Actuarial gains and losses, to the extent they are recognised in profit andloss (see above).

• Past-service costs (the change in the present value of the plan liabilitiesrelating to employee service in prior periods arising from changes topost-employment benefits).

Past-service costs are recognised as an expense on a straight-line basisover the average period until the benefits become vested. If the benefits arealready vested, the past-service cost is recognised as an expenseimmediately. Gains and losses on the curtailment or settlement of a definedbenefit plan are recognised in profit and loss when the curtailment orsettlement occurs.

When plan assets exceed the defined benefit obligation creating a netsurplus, IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimumfunding requirements and their interaction’, provides guidance on assessingthe amount that can be recognised as an asset. It also explains how thepension asset or liability may be affected by a statutory or contractualminimum funding requirement.



12 Share-based payment – IFRS 2

Share-based payment transactions are transactions in which entities receivegoods or services as consideration for either:

• Equity instruments of the entity (or the entity’s parent or another entitywithin the same group) – ‘equity-settled share-based payment’; or

• Cash or other assets, where the amount is based on the price or value ofthe entity’s shares – ‘cash-settled share-based payment’.

The most common application is to employee share schemes, such asshare option schemes. However, entities sometimes also pay for otherexpenses such as professional fees, and for the purchase of assets, bymeans of share-based payment.

The accounting treatment under IFRS 2 is based on the fair value of theinstruments. The accounting can be difficult, due to the complex modelsthat need to be used to calculate the fair value of options and also due tothe variety and complexity of schemes. In addition, the standard requiresextensive disclosures. The result generally is to reduce reported profits,especially in entities that use share-based payment extensively as part oftheir remuneration strategy.

All transactions involving share-based payment are recognised as expensesor assets over any vesting period.

Equity-settled share-based payment transactions are measured at the grantdate fair value for employee services; and, for non-employee transactions,at the fair value of the goods or services received at the date on which theentity recognises the goods or services. If the fair value of the goods orservices cannot be estimated reliably – such as employee services andcircumstances in which the goods or services cannot be specificallyidentified – the entity uses the fair value of the equity instruments granted.Since the publication of IFRIC 8, ‘Scope of IFRS 2’, in January 2006,management needs to consider if there are any unidentifiable goods orservices received or to be received by the entity, as these also have to bemeasured in accordance with IFRS 2.



Equity-settled share-based payment transactions are not re-measured oncethe grant date fair value has been determined.

The treatment is different for cash-settled share-based paymenttransactions: cash-settled awards are measured at the fair value of theliability. The liability is re-measured at each balance sheet date and at thedate of settlement, with changes in fair value recognised in the incomestatement.



13 Taxation – IAS 12

IAS 12 only deals with taxes on income, comprising current tax anddeferred tax.

Current tax expense for a period is based on the taxable and deductibleamounts that will be shown on the tax return for the current year. An entityrecognises a liability in the balance sheet in respect of current tax expensefor the current and prior periods to the extent unpaid. It recognises an assetif current tax has been overpaid.

Current tax assets and liabilities for the current and prior periods aremeasured at the amount expected to be paid to (recovered from) thetaxation authorities, using the tax rates and tax laws that have been enactedor substantively enacted by the balance sheet date.

Tax payable based on taxable profit seldom matches the tax expense thatmight be expected based on pre-tax accounting profit. The mismatch canoccur because IFRS recognition criteria for items of income and expenseare different from the treatment of items under tax law.

Deferred tax accounting seeks to deal with this mismatch. It is based on thetemporary differences between the tax base of an asset or liability and itscarrying amount in the financial statements. For example, if an investmentproperty is revalued upwards but not sold, the revaluation creates atemporary difference (the carrying amount of the asset in the financialstatements is greater than the tax base of the asset), and the taxconsequence is a deferred tax liability.

Deferred tax is provided in full for all temporary differences arising betweenthe tax bases of assets and liabilities and their carrying amounts in thefinancial statements, except when the temporary difference arises from:

• Initial recognition of goodwill (for deferred tax liabilities only).• Initial recognition of an asset or liability in a transaction that is not a

business combination and that affects neither accounting profit nortaxable profit.

• Investments in subsidiaries, branches, associates and joint ventures, butonly where certain criteria apply.

33IFRS pocket guide 2009 33


Deferred tax assets and liabilities are measured at the tax rates that areexpected to apply to the period when the asset is realised or the liability issettled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted by the balance sheet date. Discounting of deferredtax assets and liabilities is not permitted.

The measurement of deferred tax liabilities and deferred tax assets reflectsthe tax consequences that would follow from the manner in which the entityexpects, at the balance sheet date, to recover or settle the carrying amountof its assets and liabilities. The expected manner of recovery for land withan unlimited life is always through sale. For other assets, the manner inwhich management expects to recover the asset (that is, through use orthrough sale or through a combination of both) should be considered ateach balance sheet date.

Management only recognises a deferred tax asset for deductible temporarydifferences to the extent that it is probable that taxable profit will beavailable against which the deductible temporary difference can be utilised.This also applies to deferred tax assets for unused tax losses carriedforward.

Current and deferred tax is recognised in profit or loss for the period, unlessthe tax arises from a business combination or a transaction or event that isrecognised outside profit or loss, either in other comprehensive income ordirectly in equity in the same or different period. The tax consequences thataccompany, for example, a change in tax rates or tax laws, a reassessmentof the recoverability of deferred tax assets or a change in the expectedmanner of recovery of an asset are recognised in profit or loss, except tothe extent that they relate to items previously charged or credited outsideprofit or loss.


14 Earnings per share – IAS 33

Earnings per share (EPS) is a ratio that is widely used by financial analysts,investors and others to gauge a company’s profitability and to value itsshares. EPS is normally calculated in the context of common shares of theentity. Earnings attributable to common shareholders are thereforedetermined by deducting from net income the earnings attributable toholders of more senior equity instruments.

An entity whose ordinary shares or potential ordinary shares are publiclytraded, or that are in the process of issuing such shares or potential sharesin public markets, is required to disclose both basic and diluted EPS withequal prominence in its separate or individual financial statements, or in itsconsolidated financial statements if it is a parent.

Basic EPS is calculated by dividing the profit or loss for the periodattributable to the equity holders of the parent by the weighted averagenumber of ordinary shares outstanding (including adjustments for bonus andrights issues).

Diluted EPS is calculated by adjusting the profit or loss and the weightedaverage number of ordinary shares by taking into account the conversion ofany dilutive potential ordinary shares. Potential ordinary shares are thosefinancial instruments and contracts that may result in issuing ordinary sharessuch as convertible bonds and options (including employee stock options).

Basic and diluted EPS for both continuing and total operations arepresented with equal prominence in the statement of comprehensive income– or in the separate income statement where one is presented – for eachclass of ordinary shares. Separate EPS figures for discontinued operationsare disclosed in the same statements or in the notes.





15 Intangible assets

An intangible asset is an identifiable non-monetary asset without physicalsubstance. The identifiable criterion is met when the intangible asset isseparable (that is, when it can be sold, transferred or licensed), or where itarises from contractual or other legal rights.

Separately acquired intangible assets

Separately acquired intangible assets are recognised initially at cost. Costcomprises the purchase price, including import duties and non-refundablepurchase taxes and any directly attributable costs of preparing the asset forits intended use. The purchase price of a separately acquired intangibleasset incorporates assumptions about the probable economic futurebenefits that may be generated by the asset.

Internally generated intangible assets

The process of generating an intangible asset is divided into a researchphase and a development phase. No intangible assets arising from theresearch phase may be recognised. Intangible assets arising from thedevelopment phase are recognised when the entity can demonstrate:

• Its technical feasibility.• Its intention to complete the developments.• Its ability to use or sell the intangible asset.• How the intangible asset will generate probable future economic benefits

(for example, the existence of a market for the output of the intangibleasset or for the intangible asset itself).

• The availability of resources to complete the development.• Its ability to measure the attributable expenditure reliably.

Any expenditure written off during the research or development phasecannot subsequently be capitalised if the project meets the criteria forrecognition at a later date.


The costs relating to many internally generated intangible items cannot becapitalised and are expensed as incurred. This includes research, start-upand advertising costs. Expenditure on internally generated brands,mastheads, customer lists, publishing titles and goodwill are not recognisedas intangible assets.

Intangible assets acquired in a business combination

If an intangible asset is acquired in a business combination, both theprobability and measurement criterion are always considered to be met. Anintangible will therefore always be recognised, regardless of whether it hasbeen previously recognised in the acquiree’s financial statements.

Subsequent measurement

Intangible assets are amortised unless they have an indefinite useful life.Amortisation is carried out on a systematic basis over the useful life of theintangible asset. An intangible asset has an indefinite useful life when, based on an analysis of all the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflowsfor the entity.

Intangible assets with finite useful lives are considered for impairment whenthere is an indication that the asset has been impaired. Intangible assets withindefinite useful lives and intangible assets not yet in use are tested annuallyfor impairment and whenever there is an indication of impairment.




16 Property, plant and equipment – IAS 16

Property, plant and equipment (PPE) is recognised when the cost of an assetcan be reliably measured and it is probable that the entity will obtain futureeconomic benefits from the asset.

PPE is measured initially at cost. Cost includes the fair value of theconsideration given to acquire the asset (net of discounts and rebates) andany directly attributable cost of bringing the asset to working condition for itsintended use (inclusive of import duties and non-refundable purchase taxes).

Directly attributable costs include the cost of site preparation, delivery,installation costs, relevant professional fees and the estimated cost ofdismantling and removing the asset and restoring the site (to the extent thatsuch a cost is recognised as a provision). Classes of PPE are carried athistorical cost less accumulated depreciation and any accumulatedimpairment losses (the cost model), or at a revalued amount less anyaccumulated depreciation and subsequent accumulated impairment losses(the revaluation model). The depreciable amount of PPE (being the grosscarrying value less the estimated residual value) is depreciated on asystematic basis over its useful life.

Subsequent expenditure relating to an item of PPE is capitalised if it meetsthe recognition criteria.

PPE may comprise parts with different useful lives. Depreciation is calculatedbased on each individual part’s life. In case of replacement of one part, thenew part is capitalised to the extent that it meets the recognition criteria ofan asset, and the carrying amount of the parts replaced is derecognised.

The cost of a major inspection or overhaul of an item occurring at regularintervals over the useful life of the item is capitalised to the extent that itmeets the recognition criteria of an asset. The carrying amounts of the partsreplaced are derecognised.

The IFRIC published IFRIC 18, ‘Transfer of assets from customers’, inJanuary 2009. It clarifies the accounting for arrangements where an item ofPPE that is provided by the customer is used to provide an ongoing service.The interpretation applies prospectively to transfers of assets from customers received on or after 1 July 2009; it is subject to EU endorsement.



Borrowing costs

Under IAS 23 (revised 2007), ‘Borrowing costs’, entities no longer have apolicy choice to capitalise or expense borrowing costs incurred that aredirectly attributable to the acquisition, production or construction of aqualifying asset. IAS 23 revised requires borrowing costs directly attributableto the acquisition, construction or production of a qualifying asset to becapitalised.

IAS 23 revised is effective for accounting periods beginning on or after 1 January 2009. Earlier application is permitted.



17 Investment property – IAS 40

Certain properties are classified as investment properties for financialreporting purposes, as the characteristics of these properties differsignificantly from owner-occupied properties. It is the current value of suchproperties and changes to those values that are relevant to users of financialstatements.

Investment property is property (land or a building, or part of a building orboth) held by an entity to earn rentals and/or for capital appreciation. Anyother properties are accounted for as property, plant and equipment (PPE) inaccordance with IAS 16, ‘Property, plant and equipment’, if they are held foruse in the production or supply of goods or services; or as inventory inaccordance with IAS 2, ‘Inventories’, if they are held for sale in the ordinarycourse of business. Owner-occupied property does not meet the definitionof investment property.

Initial measurement of an investment property is the fair value of itspurchase consideration plus any directly attributable costs. Subsequent toinitial measurement, management may choose as its accounting policyeither to carry investment properties at fair value or at cost. The policychosen is applied consistently to all the investment properties that the entity owns.

Fair value is the price at which the property could be exchanged betweenknowledgeable, willing parties in an arm’s length transaction. Changes in fairvalue are recognised in profit or loss in the period in which they arise.

The cost model requires investment properties to be carried at cost lessaccumulated depreciation and any accumulated impairment lossesconsistent with the treatment of PPE; the fair values of these properties isdisclosed in the notes.



18 Impairment of assets – IAS 36

Nearly all assets – current and non-current – are subject to an impairmenttest to ensure that they are not overstated on balance sheets.

The basic principle of impairment is that an asset may not be carried on thebalance sheet above its recoverable amount. Recoverable amount is definedas the higher of the asset’s fair value less costs to sell and its value in use.Fair value less costs to sell is the amount obtainable from a sale of an assetin an arm’s length transaction between knowledgeable, willing parties, lesscosts of disposal. Value in use requires management to estimate the futurecash flows to be derived from the asset and discount them using a pre-taxmarket rate that reflects current assessments of the time value of moneyand the risks specific to the asset.

All assets subject to the impairment guidance are tested for impairmentwhere there is an indication that the asset may be impaired. Certain assets(goodwill, indefinite lived intangible assets and intangible assets that are notyet available for use) are also tested for impairment annually even if there isno impairment indicator.

When considering whether an asset is impaired, both external indicators (forexample, significant adverse changes in the technological, market,economic or legal environment or increases in market interest rates) andinternal indicators (for example, evidence of obsolescence or physicaldamage of an asset or evidence from internal reporting that the economicperformance of an asset is, or will be, worse than expected) are considered.

Recoverable amount is calculated at the individual asset level. However, anasset seldom generates cash flows independently of other assets, and mostassets are tested for impairment in groups of assets described as cash-generating units (CGUs). A CGU is the smallest identifiable group of assetsthat generates inflows that are largely independent from the cash flows fromother CGUs.

The carrying value of an asset is compared to the recoverable amount(being the higher of value in use or fair value less costs to sell). An asset orCGU is impaired when its carrying amount exceeds its recoverable amount.Any impairment is allocated to the asset or assets of the CGU, with theimpairment loss recognised in the profit or loss.



Goodwill acquired in a business combination is allocated to the acquirer’sCGUs or groups of CGUs that are expected to benefit from the synergies ofthe business combination. However, the largest group of CGUs permittedfor goodwill impairment testing is the lowest level of operating segment, asdefined in IFRS 8 paragraph 5, before the aggregation permitted by IFRS 8,paragraph 12.



19 Lease accounting – IAS 17

A lease gives one party (the lessee) the right to use an asset over an agreedperiod of time in return for payment to the lessor. Leasing is an importantsource of medium- and long-term financing; accounting for leases can havea significant impact on lessees’ and lessors’ financial statements.

Leases are classified as finance or operating leases at inception, dependingon whether substantially all the risks and rewards of ownership transfer tothe lessee. Under a finance lease, the lessee has substantially all of the risksand reward of ownership. All other leases are operating leases. Leases ofland and buildings are considered separately under IFRS.

Under a finance lease, the lessee recognises an asset held under a financelease and a corresponding obligation to pay rentals. The lessee depreciatesthe asset.

The lessor recognises the leased asset as a receivable. The receivable ismeasured at the ‘net investment’ in the lease – the minimum leasepayments receivable, discounted at the internal rate of return of the lease,plus the unguaranteed residual which accrues to the lessor.

Under an operating lease, the lessee does not recognise an asset and leaseobligation. The lessor continues to recognise the leased asset anddepreciates it. The rentals paid are normally charged to the incomestatement of the lessee and credited to that of the lessor on a straight-linebasis.

Linked transactions with the legal form of a lease are accounted for on thebasis of their substance – for example, a sale and leaseback where theseller is committed to repurchase the asset may not be a lease in substanceif the ‘seller’ retains the risks and rewards of ownership and substantially thesame rights of use as before the transaction.

Equally, some transactions that do not have the legal form of a lease are insubstance leases if they are dependent on a particular asset that thepurchaser can control physically or economically.



20 Inventories – IAS 2

Inventories are initially recognised at cost. Cost of inventories includesimport duties, non-refundable taxes, transport and handling costs and any other directly attributable costs less trade discounts, rebates and similar items.

Inventories are valued at the lower of cost and net realisable value (NRV).NRV is the estimated selling price in the ordinary course of business, lessthe estimated costs of completion and estimated selling expenses.

IAS 2, ‘Inventories’, requires the cost for items that are not interchangeableor that have been segregated for specific contracts to be determined on anindividual-item basis. The cost of other items of inventory used is assignedby using either the first-in, first-out (FIFO) or weighted average cost formula.Last-in, first-out (LIFO) is not permitted. An entity uses the same costformula for all inventories that have a similar nature and use to the entity. Adifferent cost formula may be justified where inventories have a differentnature or use. The cost formula used is applied on a consistent basis fromperiod to period.



21 Provisions and contingencies – IAS 37

A liability is a ‘present obligation of the entity arising from past events, thesettlement of which is expected to result in an outflow from the entity ofresources embodying economic benefits’. A provision falls within thecategory of liabilities and is defined as ‘a liability of uncertain timing oramount’.

Recognition and initial measurement

A provision is recognised when: the entity has a present obligation totransfer economic benefits as a result of past events; it is probable (morelikely than not) that such a transfer will be required to settle the obligation;and a reliable estimate of the amount of the obligation can be made.

The amount recognised as a provision is the best estimate of theexpenditure required to settle the obligation at the balance sheet date,measured at the expected cash flows discounted for the time value ofmoney. Provisions are not recognised for future operating losses.

A present obligation arises from an obligating event and may take the formof either a legal obligation or a constructive obligation. An obligating eventleaves the entity no realistic alternative to settling the obligation. If the entitycan avoid the future expenditure by its future actions, it has no presentobligation, and no provision is required. For example, an entity cannotrecognise a provision based solely on the intent to incur expenditure atsome future date or the expectation of future operating losses (unless theselosses relate to an onerous contract).

An obligation does not generally have to take the form of a ‘legal’ obligationbefore a provision is recognised. An entity may have an established patternof past practice that indicates to other parties that it will accept certainresponsibilities and as a result has created a valid expectation on the part ofthose other parties that it will discharge those responsibilities (that is, theentity is under a constructive obligation).

If an entity has an onerous contract (the unavoidable costs of meeting theobligations under the contract exceed the economic benefits expected tobe received under it), the present obligation under the contract is recognisedas a provision. Impairments of any related assets are recognised beforemaking a provision.



Restructuring provisions

There are specific requirements for restructuring provisions. A provision isrecognised when there is: (a) a detailed formal plan identifying the mainfeatures of the restructuring; and (b) a valid expectation in those affectedthat the entity will carry out the restructuring by starting to implement theplan or by announcing its main features to those affected.

A restructuring plan does not create a present obligation at the balancesheet date if it is announced after that date, even if it is announced beforethe financial statements are approved. No obligation arises for the sale of anoperation until the entity is committed to the sale (that is, there is a bindingsale agreement).

The provision only includes incremental costs necessarily resulting from therestructuring and not those associated with the entity’s ongoing activities.Any expected gains on the sale of assets are not considered in measuring arestructuring provision.

Reimbursements

An obligation and any anticipated recovery are presented separately as aliability and an asset respectively; however, an asset can only be recognisedif it is virtually certain that settlement of the obligation will result in areimbursement, and the amount recognised for the reimbursement shouldnot exceed the amount of the provision. The amount of any expectedreimbursement is disclosed. Net presentation is permitted only in theincome statement.

Subsequent measurement

Management performs an exercise at each balance sheet date to identifythe best estimate of the expenditure required to settle the present obligationat the balance sheet date, discounted at an appropriate rate. The increase inprovision due to the passage of time is recognised as interest expense.



Contingent liabilities

Contingent liabilities are possible obligations whose existence will beconfirmed only on the occurrence or non-occurrence of uncertain futureevents outside the entity’s control, or present obligations that are notrecognised because: (a) it is not probable that an outflow of economicbenefits will be required to settle the obligation; or (b) the amount cannot bemeasured reliably.

Contingent liabilities are not recognised but are disclosed and described inthe notes to the financial statements, including an estimate of their potentialfinancial effect and uncertainties relating to the amount or timing of anyoutflow, unless the possibility of settlement is remote.

Contingent assets

Contingent assets are possible assets whose existence will be confirmedonly on the occurrence or non-occurrence of uncertain future events outsidethe entity’s control. Contingent assets are not recognised. When therealisation of income is virtually certain, the related asset is not a contingentasset; it is recognised as an asset.

Contingent assets are disclosed and described in the notes to the financialstatements, including an estimate of their potential financial effect if theinflow of economic benefits is probable.



22 Post-balance-sheet events and financial commitments –IAS 10

It is not generally practicable for preparers to finalise financial statementswithout a period of time elapsing between the balance sheet date and thedate on which the financial statements are authorised for issue. Thequestion therefore arises as to the extent to which events occurringbetween the balance sheet date and the date of approval (that is, ‘eventsafter the reporting period’) should be reflected in the financial statements.

Events after the reporting period are either adjusting events or non-adjustingevents. Adjusting events provide further evidence of conditions that existedat the balance sheet date – for example, determining after the year end theconsideration for assets sold before the year end. Non-adjusting eventsrelate to conditions that arose after the balance sheet date – for example,announcing a plan to discontinue an operation after the year end.

The carrying amounts of assets and liabilities at the balance sheet date areadjusted only for adjusting events or events that indicate that the going-concern assumption in relation to the whole entity is not appropriate.Significant non-adjusting post-balance-sheet events, such as the issue ofshares or major business combinations, are disclosed.

Dividends proposed or declared after the balance sheet date but before thefinancial statements have been authorised for issue are not recognised as aliability at the balance sheet date. Details of these dividends are, however,disclosed.

An entity discloses the date on which the financial statements wereauthorised for issue and the persons authorising the issue and, wherenecessary, the fact that the owners or other persons have the ability toamend the financial statements after issue.



23 Share capital and reserves

Equity, along with assets and liabilities, is one of the three elements used to portray an entity’s financial position. Equity is defined in the IASB’sFramework as the residual interest in the entity’s assets after deducting allits liabilities. The term ‘equity’ is often used to encompass an entity’s equityinstruments and reserves. Equity is given various descriptions in thefinancial statements. Corporate entities may refer to it as owners’ equity,shareholders’ equity, capital and reserves, shareholders’ funds andproprietorship. Equity includes various components with differentcharacteristics.

Determining what constitutes an equity instrument for the purpose of IFRSand how it should be accounted for falls within the scope of the financialinstrument standard IAS 32, ‘Financial instruments: Presentation’.

Different classes of share capital may be treated as either debt or equity, ora compound instrument with both debt and equity components. Equityinstruments (for example, issued, non-redeemable ordinary shares) aregenerally recorded at the proceeds of issue net of transaction costs. Equityinstruments are not re-measured after initial recognition.

Reserves include retained earnings, together with fair value reserves,hedging reserves, asset revaluation reserves and foreign currency translationreserves and other statutory reserves.

Treasury shares

Treasury shares are deducted from equity. No gain or loss is recognised inprofit or loss on the purchase, sale, issue or cancellation of an entity’s ownequity instruments.

Non-controlling interests

Non-controlling interests (previously termed ‘minority interests’) inconsolidated financial statements are presented as a component of equity,separately from the parent shareholders’ equity.



Disclosures

IAS 1 (revised), ‘Presentation of financial statements’, requires variousdisclosures. These include the total issued share capital and reserves,presentation of a statement of changes in equity, capital managementpolicies and dividend information.




24 Consolidated and separate financial statements – IAS 27

This section is based on IAS 27, ‘Consolidated and separate financialstatements’. This is applicable for 2008 and some 2009 financial statements.Revised requirements on consolidated and separate financial statements –IAS 27 (revised) – apply for annual periods beginning on or after 1 July 2009(see section 24A); it is subject to EU endorsement.

Consolidated financial statements are prepared in respect of a group, subjectto certain exceptions. All subsidiaries are consolidated. A subsidiary is anentity that is controlled by the parent. Control is the power to govern thefinancial and operating policies of an entity so as to obtain benefits from itsactivities. It is presumed to exist when the investor directly or indirectly holdsmore than 50 per cent of the investee’s voting power; this presumption maybe rebutted if there is clear evidence to the contrary. Control may also existwhere less than 50 per cent of the investee’s voting power is held and theparent has the power to control through, for example, the board of directors.

Consolidation of a subsidiary takes place from the date of acquisition. This isthe date on which control of the net assets and operations of the acquiree iseffectively transferred to the acquirer. A consolidation is prepared to showthe effect as if the parent and all the subsidiaries were one entity.Transactions within the group (for example, sales from one subsidiary toanother) are eliminated.

An entity with one or more subsidiaries (a parent) presents consolidatedfinancial statements unless all the following conditions are met:

• It is itself a subsidiary (subject to no objection from any shareholder). • Its debt or equity are not publicly traded.• It is not in the process of issuing securities to the public.• The ultimate or intermediate parent of the entity publishes IFRS

consolidated financial statements.

There are no exemptions if the group is small or if certain subsidiaries are ina different line of business.



From the date of acquisition, the parent (the acquirer) should incorporate intothe consolidated statement of comprehensive income the financialperformance of the acquiree and recognise in the consolidated balance sheetthe acquired assets and liabilities (at fair value), including any goodwill arisingon the acquisition.

A subsidiary held exclusively for disposal that meets the definition of anasset held for sale is not excluded from consolidation. It is measured andaccounted for under IFRS 5, ‘Non-current assets held for sale anddiscontinued operations’, at fair value less costs to sell. The investments insubsidiaries are carried at cost or as financial assets in accordance with IAS 39, in the separate (non-consolidated) financial statements of a parententity.

Special purpose entities

A special purpose entity (SPE) is an entity created to accomplish a narrow,well-defined objective. It may operate in a pre-determined way so that noother party has explicit decision-making authority over its activities afterformation. An entity consolidates an SPE when the substance of therelationship between the entity and the SPE indicates that the SPE iscontrolled by the entity. Control may arise at the outset through the pre-determination of the activities of the SPE or otherwise. An entity may bedeemed to control an SPE if it is exposed to the majority of risks andrewards incidental to its activities or its assets.



24A Consolidated and separate financial statements –

IAS 27 (revised)

IAS 27 ‘Consolidated and separate financial statements’, was revised andissued in January 2008. The revised standard is effective for annual periodsbeginning on or after 1 July 2009; it is subject to EU endorsement. Theprevious version of IAS 27 is addressed in section 24.

IAS 27 (revised) requires consolidated financial statements to be prepared inrespect of a group, subject to certain exceptions. All subsidiaries should beconsolidated. A subsidiary is an entity that is controlled by the parent.Control is the power to govern the financial and operating policies of anentity so as to obtain benefits from its activities. It is presumed to existwhen the investor directly or indirectly holds more than 50 per cent of theinvestee’s voting power; this presumption may be rebutted if there is clearevidence to the contrary. Control may also exist where less than 50 per centof the investee’s voting power is held and the parent has the power tocontrol through for example control of the board of directors.

Consolidation of a subsidiary takes place from the date of acquisition, whichis the date on which control of the net assets and operations of the acquireeis effectively transferred to the acquirer. A consolicated financial statementis prepared to show the effect as if the parent and all the subsidiaries wereone entity. Transactions within the group (for example, sales from onesubsidiary to another) are eliminated.

An entity with one or more subsidiaries (a parent) presents consolidatedfinancial statements, unless all the following conditions are met: it is itself asubsidiary (subject to no objection from any shareholder); its debt or equityare not publicly traded; it is not in the process of issuing securities to thepublic; and the ultimate or intermediate parent of the entity publishes IFRSconsolidated financial statements. There are no exemptions if the group issmall or if certain subsidiaries are in a different line of business.

From the date of acquisition, the parent (the acquirer) incorporates into theconsolidated statement of comprehensive income the financial performanceof the acquiree and recognises in the consolidated balance sheet theacquired assets and liabilities (at fair value), including any goodwill arisingon the acquisition (see section 25A on IFRS 3 (revised) for further guidancein determining goodwill).



A subsidiary held exclusively for disposal that meets the definition of anasset held for sale is not excluded from consolidation; it is measured andaccounted for under IFRS 5 at fair value less costs to sell.

A special purpose entity (SPE) is an entity created to accomplish a narrow,well-defined objective. It may operate in a pre-determined way so that noother party has explicit decision-making authority over its activities afterformation. An entity consolidates an SPE when the substance of therelationship between the entity and the SPE indicates that the SPE iscontrolled by the entity. Control may arise at the outset through the pre-determination of the activities of the SPE or otherwise. An entity may bedeemed to control an SPE if it is exposed to the majority of risks andrewards incidental to its activities or its assets.



25 Business combinations – IFRS 3

This overview is based on IFRS 3, ‘Business combinations’. This is availablefor 2008 and some 2009 financial statements. Revised requirements forbusiness combinations – IFRS 3 (revised) – apply for annual periodsbeginning on or after 1 July 2009 (see section 25A); if subject to EUendorsement.

A business combination is the bringing together of separate entities orbusinesses into one reporting entity. A business combination may bestructured in a variety of ways for tax, legal or other reasons. An acquirer isidentified for accounting purposes in all business combinations. Theacquirer is the entity that has obtained control of one or more other entitiesor businesses (the acquiree). Control is defined as the power to govern thefinancial and operating policies of an entity or business so as to obtainbenefits from its activities. A number of factors may influence which entityhas control. These include equity shareholding, control of the board andcontrol agreements. There is a presumption of control if an entity owns morethan 50 per cent of the equity shareholding in another entity.

The acquirer measures the cost of the combination at the acquisition date(the date on which it obtains control over the net assets of the acquiree).The cost of the combination includes cash and cash equivalents and the fairvalue of any non-cash consideration given, plus any costs directlyattributable to the acquisition. Any shares issued as part of theconsideration are fair valued. The market value of shares is used asevidence of the fair value. If any of the consideration is deferred, it isdiscounted to reflect its present value at the acquisition date.

A portion of the consideration may be contingent on the outcome of futureevents or the acquired entity’s performance (‘contingent consideration’).Contingent consideration that can be reliably estimated and where paymentis probable is recognised at fair value at the date of the businesscombination. Contingent consideration is adjusted against goodwill toreflect the actual outcome.



The cost of consideration, once established, is compared to the fair value ofthe acquiree’s identifiable assets (including intangible assets not previouslyrecognised), liabilities and contingent liabilities. The acquiree’s assets andliabilities are fair valued (that is, their value is determined by reference to anarm’s length transaction; the intention of the acquirer is not relevant). If theacquisition is for less than 100 per cent of the acquiree, there is a minorityinterest (also called ‘non-controlling interest’). The minority interestrepresents the portion of the fair value of the net identifiable assets of anentity not owned by the parent.

The difference between the cost of acquisition and the fair value of theidentifiable assets and liabilities represents goodwill. After recognising allintangibles, the goodwill balance represents synergies and certainunrecognised intangibles such as the entity’s workforce. Goodwill isrecognised as an asset and tested annually for impairment. If the fair value ofthe assets and liabilities acquired exceeds the cost of acquisition, thisdifference is recognised in profit and loss. This is likely to occur only in rarecircumstances – for example, where there has been a bargain purchase.


25A Business combinations – IFRS 3 (revised)

IFRS 3 ‘Business combinations’, was revised and issued in January 2008.The revised standard is effective for annual periods beginning on or after 1 July 2009; it is subject to EU endorsement. The previous version of IFRS 3is addressed in section 25.

A business combination is a transaction or event in which an acquirerobtains control of one or more businesses (‘acquiree(s)’). Control is definedas the power to govern the financial and operating policies of an entity orbusiness so as to obtain benefits from its activities. A number of factorsmay influence which entity has control, including: equity shareholding,control of the board and control agreements. There is a presumption ofcontrol if an entity owns more than 50 per cent of the equity shareholding inanother entity.

Business combinations occur in a variety of structures. IFRS focuses on thesubstance of the transaction, rather than the legal form. The overall result ofa series of transactions is considered if there are a number of transactionsamong the parties involved. For example, any transaction contingent on thecompletion of another transaction may be considered linked. Judgement isrequired to determine when transactions should be linked.

All business combinations are accounted for using the acquisition method.The acquisition method can be summarised in the following steps:

• Identify the acquirer.• Determine the acquisition date.• Recognise and measure the identifiable assets and liabilities and non-

controlling interest.• Recognise and measure the consideration transferred for the acquiree.• Recognise and measure goodwill or a gain from a bargain purchase.

The acquisition method looks at a business combination from theperspective of the acquirer – that is, the entity that obtains control overanother business. It first involves identifying the acquirer. The acquirermeasures the consideration, fair value assets and liabilities acquired,goodwill and any non-controlling interests as of the acquisition date (thedate on which it obtains control over the net assets of the acquiree).



The acquiree’s identifiable assets (including intangible assets not previouslyrecognised), liabilities and contingent liabilities are generally recognised attheir fair value. Fair value is determined by reference to an arm’s lengthtransaction; the intention of the acquirer is not relevant. If the acquisition isfor less than 100 per cent of the acquiree, there is a non-controlling interest.The non-controlling interest represents the equity in a subsidiary that is notattributable, directly or indirectly to the parent. The parent can elect tomeasure the non-controlling interest at its fair value or at its proportionateshare of the identifiable net assets.

The consideration of the combination includes cash and cash equivalentsand the fair value of any non-cash consideration given. Any shares issuedas part of the consideration are fair valued. If any of the consideration isdeferred, it is discounted to reflect its present value at the acquisition date,if the effect of discounting is material.

A portion of the consideration may be contingent on the outcome of futureevents or the acquired entity’s performance (‘contingent consideration’).Contingent consideration is also recognised at its fair value at the date ofacquisition. The accounting for contingent consideration after the date ofacquisition depends on whether it is classified as a liability (likely to be re-measured to fair value each reporting period through profit and loss) orequity (no re-measurement), using the guidance in IAS 32.

Goodwill is recognised for the future economic benefits arising from theother assets acquired that are not individually identified and separatelyrecognised. If the non-controlling interest is measured at its fair value,goodwill includes amounts attributable to the non-controlling interest. If thenon-controlling interest is measured at its proportionate share of identifiablenet assets, goodwill includes only amounts attributable to the controllinginterest – that is, the parent.

Goodwill is recognised as an asset and tested annually for impairment, ormore frequently if there is an indication of impairment.

In rare situations – for example, a bargain purchase as a result of adistressed sale – it is possible that no goodwill will result from thetransaction. Rather, a gain will be recognised.




26 Disposals of subsidiaries, businesses and non-current assets – IFRS 5

IFRS 5, ‘Non-current assets held for sale and discontinued operations’, isrelevant when any disposal occurs or is planned. This standard applies tonon-current assets (or disposal groups) whose value will be recoveredprincipally through sale rather than through continuing use. It does not applyto assets that are being scrapped, wound down or abandoned. A disposalgroup is a group of assets to be disposed of, by sale or otherwise, togetheras a group in a single transaction, and liabilities directly associated withthose assets that will be transferred in the transaction.

The non-current asset (or disposal group) is classified as ‘held for sale’ if isavailable for its immediate sale in its present condition and its sale is highlyprobable. A sale is ‘highly probable’ where: there is evidence of managementcommitment; there is an active programme to locate a buyer and completethe plan; the asset is actively marketed for sale at a reasonable price; andthe sale will normally be completed within 12 months from the date ofclassification.

Assets (or disposal groups) classified as held for sale are:

• Carried at the lower of the carrying amount and fair value less costs tosell.

• Not depreciated or amortised.• Presented separately on the face of the balance sheet.

A discontinued operation is a component of an entity that represents aseparate major line of business or geographical area that can bedistinguished operationally and financially and that the entity has disposed ofor classified as ‘held for sale’. It could also be a subsidiary acquiredexclusively for resale.

An operation is classified as discontinued at the date on which the operationmeets the criteria to be classified as held for sale or when the entity hasdisposed of the operation. There is no retrospective classification if thecriteria for that classification are not met until after the balance sheet date.



Discontinued operations are presented separately in the income statementand the cash flow statement. There are additional disclosure requirements inrelation to discontinued operations.

The date of disposal of a subsidiary or disposal group is the date on whichcontrol passes. The consolidated income statement includes the results of asubsidiary or disposal group up to the date of disposal; the gain or loss ondisposal is the difference between (a) the carrying amount of the net assetsplus any attributable goodwill and exchange/available for sale amounts heldin equity, and (b) the proceeds of sale.

60 IFRS pocket guide 2009 60


27 Associates – IAS 28

An associate is an entity in which the investor has significant influence, butwhich is neither a subsidiary nor a joint venture of the investor. Significantinfluence is the power to participate in the financial and operating policydecisions of the investee, but not to control those policies. It is presumed toexist when the investor holds at least 20 per cent of the investee’s votingpower. It is presumed not to exist when less than 20 per cent is held. Thesepresumptions may be rebutted.

Associates are accounted for using the equity method unless they meet thecriteria to be classified as ‘held for sale’ under IFRS 5, ‘Non-current assetsheld for sale and discontinued operations’. Under the equity method, theinvestment in the associate is initially carried at cost. It is increased ordecreased to recognise the investor’s share of the profit or loss of theassociate after the date of acquisition.

Investments in associates are classified as non-current assets andpresented as one line item in the balance sheet (inclusive of goodwill arisingon acquisition). Investments in associates are tested for impairment inaccordance with IAS 36, ‘Impairment of assets’, as single assets if there areimpairment indicators under IAS 39, ‘Financial instruments: Recognition andmeasurement’.

If an investor’s share of its associate’s losses exceeds the carrying amountof the investment, the carrying amount of the investment is reduced to nil.Recognition of further losses are discontinued, unless the investor has anobligation to fund the associate or the investor has guaranteed to supportthe associate.

In the separate (non-consolidated) financial statements of the investor, theinvestments in associates are carried at cost or as financial assets inaccordance with IAS 39.



28 Joint ventures – IAS 31

A joint venture is a contractual arrangement whereby two or more parties(the venturers) undertake an economic activity that is subject to joint control.Joint control is defined as the contractually agreed sharing of control of aneconomic activity.

Joint ventures fall into three categories: jointly controlled entities, jointlycontrolled operations and jointly controlled assets. The accountingtreatment depends on the type of joint venture.

A jointly controlled entity involves the establishment of a separate entity,which may be, for example, a corporation or partnership. Jointly controlledentities are accounted for under IAS 31, ‘Interest in joint ventures’, usingeither proportionate consolidation or equity accounting. SIC 13, ‘Jointlycontrolled entities – non-monetary contributions by venturers’, addressesnon-monetary contributions to a jointly controlled entity in exchange for anequity interest.

Jointly controlled operations and jointly controlled assets do not involve thecreation of an entity that is separate from the venturers themselves. In ajoint operation, each venturer uses its own resources and carries out its ownpart of a joint operation separately from the activities of the otherventurer(s). Each venturer owns and controls its own resources that it usesin the joint operation. Jointly controlled assets involve the joint ownership ofone or more assets.

Where an entity has an interest in jointly controlled operations or jointlycontrolled assets, it accounts for its share of the assets, liabilities, incomeand expenses and cash flows under the arrangement.


Other subjects

29 Related-party disclosures – IAS 24

Disclosures are required in respect of an entity’s transactions with relatedparties. Related parties include:

• Subsidiaries.• Fellow subsidiaries.• Associates.• Joint ventures.• The entity’s and its parent’s key management personnel (including close

members of their families).• Parties with control/joint control/significant influence over the entity

(including close members of their families, where applicable).• Post-employment benefit plans.

However, they exclude, for example, finance providers and governments inthe course of their normal dealings with the entity.

The name of the ultimate parent entity is disclosed if it is not mentionedelsewhere in information published with the financial statements. The namesof the immediate and the ultimate controlling parties (which could be anindividual or a group of individuals) are disclosed irrespective of whetherthere have been transactions with those related parties.

Where there have been related-party transactions, management disclosesthe nature of the relationship, the amount of transactions, and outstandingbalances and other elements necessary for a clear understanding of thefinancial statements (for example, volume and amounts of transactions,amounts outstanding and pricing policies). The disclosure is made bycategory of related parties and by major types of transaction. Items of asimilar nature may be disclosed in aggregate, except when separatedisclosure is necessary for an understanding of the effects of related-partytransactions on the reporting entity’s financial statements.

Disclosures that related-party transactions were made on terms equivalentto those that prevail for arm’s length transactions are made only if suchterms can be substantiated.

Other subjects


30 Cash flow statements – IAS 7

The cash flow statement is one of the primary statements in financialreporting (along with the statement of comprehensive income and thebalance sheet). It presents the generation and use of ‘cash and cashequivalents’ by category (operating, investing and finance) over a specificperiod of time. It provides users with a basis to assess the entity’s ability togenerate and utilise its cash.

Operating activities are the entity’s revenue-producing activities. Investingactivities are the acquisition and disposal of non-current assets (includingbusiness combinations) and investments that are not cash equivalents.Financing activities are changes in the equity and borrowings.

Management may present operating cash flows by using either the directmethod (gross cash receipts/payments) or the indirect method (adjusting netprofit or loss for non-operating and non-cash transactions, and for changesin working capital).

Cash flows from investing and financing activities are reported separatelygross (that is, gross cash receipts and gross cash payments) unless theymeet certain specified criteria.

The cash flows arising from dividends and interest receipts and paymentsare classified on a consistent basis and are separately disclosed under theactivity appropriate to their nature. Cash flows relating to taxation on incomeare classified and separately disclosed under operating activities unless theycan be specifically attributed to investing or financing activities.

The total that summarises the effect of the operating, investing andfinancing cash flows is the movement in the balance of cash and cashequivalents for the period.

Separate disclosure is made of significant non-cash transactions (such asthe issue of equity for the acquisition of a subsidiary or the acquisition of anasset through a finance lease). Non-cash transactions include impairmentlosses/reversals; depreciation; amortisation; fair value gains/losses; andstatement of comprehensive income charges for provisions.

Other subjects


Other subjects

31 Interim reports – IAS 34

There is no IFRS requirement for an entity to publish interim financialstatements. However, a number of countries either require or recommendtheir publication, in particular for public companies.

IAS 34, ‘Interim financial reporting’, applies where an entity publishes aninterim financial report in accordance with IFRS. IAS 34 sets out theminimum content that an interim financial report should contain and theprinciples that should be used in recognising and measuring thetransactions and balances included in that report.

Entities may either prepare full IFRS financial statements (conforming to therequirements of IAS 1) or condensed financial statements. Condensedreporting is the more common approach. Condensed financial statementsinclude a condensed balance sheet, a condensed income statement, acondensed cash flow statement, a condensed statement of changes inequity and selected note disclosures.

An entity generally uses the same accounting policies for recognising andmeasuring assets, liabilities, revenues, expenses and gains and losses atinterim dates as those to be used in the current-year annual financialstatements.

There are special measurement requirements for certain costs that can onlybe determined on an annual basis (for example, items such as tax that iscalculated based on a full-year effective rate), and the use of estimates inthe interim financial statements. An impairment loss recognised in aprevious interim period in respect of goodwill, or an investment in either anequity instrument or a financial asset carried at cost, is not reversed.

As a minimum, current period and comparative figures are disclosed asfollows:

• Balance sheet – as of the current interim period end with comparativesfor the immediately preceding year end.

• Income statement – current interim period, financial year to date andcomparatives for the same preceding periods (interim and year to date).


Other subjects

• Cash flow statement and statement of changes in equity – financial yearto date with comparatives for the same year to date period of thepreceding year.

• Explanatory notes.

IAS 34 does not mandate a list of specific disclosure requirements; insteadit sets out some criteria to determine what information should be disclosed.These include:

• Materiality to the overall interim financial statements.• Unusual or irregular items.• Changes since previous reporting periods that have a significant effect

on the interim financial statements (of the current or previous reportingfinancial year).

• Relevance to the understanding of estimates used in the interim financialstatements.

The overriding goal is to ensure that an interim financial report includes allinformation that is relevant to understanding an entity’s financial positionand performance during the interim period.


Other subjects

32 Service concession arrangements – SIC 29 and IFRIC 12

There is no specific IFRS that applies to public-to-private serviceconcession arrangements for delivery of public services. SIC 29, ‘Serviceconcession arrangements: Disclosures’, contains disclosure requirements inrespect of public-to-private service arrangements but does not specify howthey are accounted for. As a result, IFRIC issued an interpretation on serviceconcession arrangements in November 2006. The interpretation clarifieshow IFRS should be applied by a private sector entity in accounting forpublic-to-private service concession arrangements.

IFRIC 12 applies to public-to-private service concession arrangements inwhich the public sector body (the grantor) controls and/or regulates theservices provided with the infrastructure by the private sector entity (theoperator). The regulation also addresses to whom the operator shouldprovide the services and at what price. The grantor controls any significantresidual interest in the infrastructure.

As the infrastructure is controlled by the grantor, the operator does notrecognise the infrastructure as its property, plant and equipment; nor doesthe operator recognise a finance lease receivable for leasing the publicservice infrastructure to the grantor, regardless of the extent to which theoperator bears the risk and rewards incidental to ownership of the assets.

The operator recognises a financial asset to the extent that it has anunconditional contractual right to receive cash irrespective of the usage ofthe infrastructure.

The operator recognises an intangible asset to the extent that it receives aright (a licence) to charge users of the public service.

Under both the financial asset and the intangible asset models, the operatoraccounts for revenue and costs relating to construction or upgrade servicesin accordance with IAS 11, ‘Construction contracts’. The operatorrecognises revenue and costs relating to operation services in accordancewith IAS 18, ‘Revenue’. Any contractual obligation to maintain or restoreinfrastructure, except for upgrade services, is recognised in accordance withIAS 37, ‘Provisions, contingent liabilities and contingent assets’.


Other subjects

IFRIC 12 is applicable for accounting periods beginning on or after 1 January2008. Earlier application is permitted. The change in accounting policy isaccounted for retrospectively, except when this is impractical, in which casespecial transition rules apply.




33 Agriculture – IAS 41

Agricultural activity is defined as the managed biological transformation andharvest of biological assets (living animals and plants) for sale or forconversion into agricultural produce (harvested product of biological assets)or into additional biological assets.

All biological assets are measured at fair value less estimated costs to sell(referred to as ‘point of sale costs’ prior to 1 January 2009), with the changein the carrying amount reported as part of profit or loss from operatingactivities. Agricultural produce harvested from an entity’s biological assets ismeasured at fair value less estimated costs to sell at the point of harvest.

Costs to sell include commissions to brokers and dealers, levies byregulatory agencies and commodity exchanges, and transfer taxes andduties. Costs to sell exclude transport and other costs necessary to getassets to market.

The fair value is measured using an appropriate quoted price whereavailable. If an active market does not exist for biological assets or harvestedagricultural produce, the following may be used in determining fair value: themost recent transaction price (provided that there has not been a significantchange in economic circumstances between the date of that transaction andthe balance sheet date); market prices for similar assets, with adjustments toreflect differences; and sector benchmarks, such as the value of an orchardexpressed per export tray, bushel or hectare, and the value of cattleexpressed per kilogram of meat. When any of this information is notavailable, the entity uses the present value of the expected net cash flowsfrom the asset discounted at a current market-determined rate.



34 Retirement benefit plans – IAS 26

Financial statements for retirement benefit plans prepared in accordance withIFRS should comply with IAS 26, ‘Accounting and reporting by retirementbenefit plans’.

For a defined contribution plan, the report includes:

• A statement of net assets available for benefits.• A statement of changes in net assets available for benefits.• A summary of significant accounting policies.• A description of the plan and the effect of any changes in the plan during

the period.• A description of the funding policy.

For a defined benefit plan, the report includes:

• Either a statement that shows the net assets available for benefits, theactuarial present value of promised retirement benefits and the resultingexcess or deficit, or a reference to this information in an accompanyingactuarial report.

• A statement of changes in net assets available for benefits.• A cash flow statement.• A summary of significant accounting policies.• A description of the plan and the effect of any changes in the plan during

the period.

The report also explains the relationship between the actuarial present valueof promised retirement benefits and the net assets available for benefits, andthe policy for the funding of promised benefits. Investments held by allretirement plans (whether defined benefit or defined contribution) are carriedat fair value.



70

35 Extractive industries – IFRS 6

IFRS 6, ‘Exploration for and evaluation of mineral resources’, addresses thefinancial reporting for the exploration for and evaluation of mineralresources. It does not address other aspects of accounting by entitiesengaged in the exploration for and evaluation of mineral reserves (such asactivities before an entity has acquired the legal right to explore or after thetechnical feasibility and commercial viability to extract resources have beendemonstrated). Activities outside the scope of IFRS 6 are accounted foraccording to the applicable standards (such as IAS 16, ‘Property, plant andequipment’, IAS 37, ‘Provisions, contingent liabilities and contingent assets’,and IAS 38, ‘Intangible assets’.)

The accounting policy adopted for the recognition of exploration andevaluation assets should result in information that is relevant and reliable. Asa concession, certain further rules of IAS 8, ‘Accounting policies, changes inaccounting estimates and errors’, need not be applied. This permitscompanies in this sector to continue, for the time being, to apply policiesthat were followed under national GAAP that would not comply with therequirements of IFRS. The accounting policy may be changed only if thechange makes the financial statements more relevant and no less reliable, ormore reliable and no less relevant – in other words, if the new accountingpolicy takes it closer to the requirements in the IASB’s Framework.

Exploration and evaluation assets are initially measured at cost. They areclassified as tangible or intangible assets, according to the nature of theassets acquired. Management applies that classification consistently.

After recognition, management applies either the cost model or therevaluation model to the exploration and evaluation assets, based on IAS 16, ‘Property, plant and equipment’, or IAS 38, ‘Intangible assets’,according to nature of the assets. As soon as technical feasibility andcommercial viability are determined, the assets are no longer classified asexploration and evaluation assets.



The exploration and evaluation assets are tested for impairment when factsand circumstances suggest that the carrying amounts may not be recovered.The assets are also tested for impairment before reclassification out ofexploration and evaluation. The impairment is measured, presented anddisclosed according to IAS 36, ‘Impairment of assets’, except thatexploration and evaluation assets are allocated to cash-generating units orgroups of cash-generating units no larger than a segment.

Management discloses the accounting policy adopted, as well as the amountof assets, liabilities, income and expense and investing cash flows arisingfrom the exploration and evaluation of mineral resources.


Index by standard and interpretation

Standards Page

IFRS 1 3

IFRS 2 30

IFRS 3 54

IFRS 3 56

IFRS 4 22

IFRS 5 58

IFRS 6 70

IFRS 7 11

IFRS 8 26

IAS 1 5

IAS 2 43

IAS 7 63

IAS 8 9

IAS 10 47

IAS 11 24

IAS 12 32

IAS 16 37

IAS 17 42

IAS 18 23

IAS 19 27

IAS 20 24

IAS 21 20

IAS 23 38

IAS 24 62

IAS 26 69

IAS 27 50

IAS 27 52

First-time adoption of International Financial Reporting Standards

Share-based payment

Business combinations

Business combinations (revised)

Insurance contracts

Non-current assets held for sale and discontinued operations

Exploration for and evaluation of mineral resources

Financial instruments: Disclosures

Operating segments

Presentation of financial statements (revised)

Inventories

Cash flow statements

Accounting policies, changes in accounting estimates and errors

Events after the balance sheet date

Construction contracts

Income taxes

Property, plant and equipment

Leases

Revenue

Employee benefits

Accounting for government grants and disclosure of government assistance

The effects of changes in foreign exchange rates

Borrowing costs (revised)

Related-party disclosures

Accounting and reporting by retirement benefit plans


Consolidated and separate financial statements (revised)


Index by standard and interpretation (continued)

Standards Page

IAS 28 60

IAS 29 20

IAS 31 61

IAS 32 11

IAS 33 34

IAS 34 64

IAS 36 40

IAS 37 44

IAS 38 35

IAS 39 11

IAS 40 39

IAS 41 68

Interpretations

IFRIC 12 66

IFRIC 14 29

IFRIC 15 24

IFRIC 16 18

IFRIC 18 37

Investment in associates

Financial reporting in hyperinflationary economies

Interests in joint ventures

Financial instruments: presentation

Earnings per share

Interim financial reporting

Impairment of assets

Provisions, contingent liabilities and contingent assets

Intangible assets

Financial instruments: Recognition and measurement

Investment property

Agriculture

Service concession arrangements

IAS-19 The limit on a defined benefit asset, minimum funding requirements and their interaction

Agreements for the construction of real estate

Hedges of a net investment in a foreign operation

Transfer of assets from customers


IFRS pocket guide 2009 is designed for the information of readers. While every effort hasbeen made to ensure accuracy, information contained in this publication may not becomprehensive or may have been omitted which may be relevant to a particular reader.In particular, this booklet is not intended as a study of all aspects of InternationalFinancial Reporting Standards and does not address the disclosure requirements foreach standard. The booklet is not a substitute for reading the Standards when dealingwith points of doubt or difficulty. No responsibility for loss to any person acting orrefraining from acting as a result of any material in this publication can be accepted byPricewaterhouseCoopers. Recipients should not act on the basis of this publicationwithout seeking professional advice.

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