Why Paragraph 17(e) of IAS 16 was Revised ?

In May 2020, the International Accounting Standards Board (IASB) issued the standard of Property, Plant and Equipment - Proceeds before Intended Use, as the amendments to IAS 16 Property, Plant and Equipment,. The amendments prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the assets for its intended use. Instead, a company will recognize such sales proceeds and related cost in profit or loss.

As described in the section of "Amendments to the Basis for Conclusions on IAS 16 Property, Plant and Equipment" of  May 2020 Amendments to IAS 16, before the 2020 amendment, paragraph 17(e) of IAS 16 specified that directly attributable costs included the costs of testing whether an asset was functioning properly, after deducting the net proceeds from selling items produced while bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The Board received a request asking whether :

1. the proceeds specified in paragraph 17(e) related only to items produced while testing; and
2. an entity was required to deduct from the cost of an item of property, plant and equipment any such proceeds that exceeded the costs of testing

As explained in paragraph BC16B, the Board's research indicated that different entities had applied the requirements in paragraph 17(e) differently. Some entities deducted only proceeds from selling items produced while testing; others deducted the proceeds of all sales until an asset was in the location and condition necessary for it to be capable of operating in the manner intended by management (ie available for use). For some entities, the proceeds deducted from the cost of an item of property, plant and equipment could be significant and could exceed the costs of testing.

After considering the findings in paragraph BC16B, the Board decided to amend paragraph 17 to prohibit an entity from deducting from the cost of an item of property, plant and equipment the proceeds from selling items produced before that asset is available for use (proceeds before intended use). 

The Amendments to IAS 16 :  Property, Plant and Equipment - Proceeds before Intended Use, which was issued in May 2020 shall be applied by entity for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted. If an entity applies the amendments for an earlier period, it shall disclose that fact (HRD) ***

Nature of Accounting Estimates and its Risk to an Audit

ISA 540 (Revised) describes that accounting estimates vary widely in nature and are required to be made by management when the monetary amounts cannot be directly observed. The measurement of these monetary amounts is subject to estimation uncertainty, which reflects inherent limitations in knowledge or data. These limitations give rise to inherent subjectivity and variation in the measurement outcomes. The process of making accounting estimates involves selecting and applying a method using assumptions and data, which requires judgment by management and can give rise to complexity in measurement. The effects of complexity, subjectivity or other inherent risk factors on the measurement of these monetary amounts effects their susceptibility to misstatement.

Followings are the examples of accounting estimates related to classes of transactions, account balances and disclosures :

• Inventory obsolescence
• Depreciation of property and equipment
• Valuation of infrastructure assets
• Valuation of financial instruments
• Outcome of pending litigation
• Provision for expected credit losses
• Valuation of insurance contract liabilities
• Warranty obligations
• Employee retirement benefits liabilities
• Share-based payments
• Fair value of assets or liabilities acquired in a business combination, including the determination of goodwill and intangible assets
• Impairment of long-lived assets or property or equipment held for disposal
• Non-monetary exchanges of assets or liabilities between independent parties
• Revenue recognized for long-term contracts

Although ISA 540 (Revised) applies to all accounting estimates, the degree to which an accounting estimate is subject to estimation uncertainty will vary substantially. The nature, timing and extent of the risk assessment and further audit procedures required by ISA 540 (Revised) will vary in relation to the estimation uncertainty and the assessment of the related risks of material misstatement. For certain accounting estimates, estimation uncertainty may be very low, based on their nature, and the complexity and subjectivity involved in making them may also be very low. For such accounting estimates, the risk assessment procedures and further audit procedures required by ISA 540 (Revised) would not be expected to be extensive. When estimation uncertainty, complexity or subjectivity are very high, such procedures would be expected to be much more extensive. ISA 540 (Revised) provides guidance on how the requirements of ISA 540 (Revised) can be scaled (HRD) ***

WHY was the change of ISA 540, Auditing Accounting Estimates ?

The International Standard on Auditing (ISA) 540 deals with the auditor's responsibilities relating to accounting estimates and related disclosures in an audit of financial statements. Specifically, it includes requirements and guidance that refer to, or expand on, how ISA 315 (Revised), ISA 330, ISA 450, ISA 500 and other relevant ISAs are to be applied in relation to accounting estimates and related disclosures. It also includes requirements and guidance on the evaluation of misstatements of accounting estimates and related disclosures, and indicators of possible management bias.

In its At a Glance publication in October 2018 prepared by the staff, IAASB announced the revised version of ISA 540 which effective for the audit of financial statements for periods beginning on or after December 15, 2019.

Concerning the requirement to revise ISA 540, the IAASB explains that,

Changes to financial reporting standards have increased the importance and visibility of accounting estimates to users of financial statements. The previous version of ISA 540 was written before recent changes in accounting for expected credit losses and revised standards dealing with insurance contracts, revenue recognition and leases. These changes, along with recurring audit inspection findings criticizing the quality of audits of accounting estimates, led to the need for the IAASB to address this challenging area to improve audit quality.

The increasingly complex business environment and change in accounting practices means that auditors need a more robust approach to identifying, assessing and responding to risks of material misstatement for accounting estimates and related disclosures. The enhancements in ISA 540 (Revised) are aimed at keeping pace with the changing market.

Further, the IAASB assesses that the risk assessment is a critical part of every audit. ISA 540 (Revised) includes an enhanced risk assessment specifically tailored to accounting estimates that builds on the risk assessment required by ISA 315 (Revised). The inherent risk factors of estimation uncertainty, complexity and subjectivity play a central role in the revised risk assessment and throughout ISA 540 (Revised).

ISA 540 (Revised) also notes that there may be other inherent risk factors, including susceptibility to misstatement due to management bias or fraud (HRD) *** 

Why Bearer Plants was taken out from the scope of IAS 41 ?

Prior to the 2014 amendments, IAS 41 required all biological assets related to agricultural activity to be measured at fair value less costs to sell (read also : Biological Assets and Bearer Plants, what is the difference between them ?).

Later, in June 2014 the IASB board issued Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) which amended the scope of IAS 16 to include bearer plants. While IAS 41 Agriculture applies to the produce growing on the bearer plants. The amendments define a bearer plant and require bearer plants to be accounted for as property, plant and equipment in accordance with IAS 16.

As discussed in the amendments to the Basis for Conclusions on IAS 16 Property, Plant and Equipment, stakeholders told the Board that they think the fair value measurement is not appropriate for mature bearer biological assets such as oil palms and rubber trees because they are no longer undergoing significant biological transformation as defined in IAS 41 for the biological assets in relation to the agricultural activity. The use of mature bearer biological assets such as those is seen by many as similar to that of manufacturing. Consequently, they said that a cost model should be permitted for those bearer biological assets (bearer plants such as oil palms and rubber trees), because it is permitted for property, plant and equipment. Further, they also said that they had concerns about the cost, complexity and practical difficulties of fair value measurements of bearer biological assets in the absence of markets for those assets, and about the volatility from recognising  changes in the fair value less costs to sell in profit or loss. Furthermore, they asserted that investors, analysts and other users of financial statements adjust the reported profit or loss to eliminate the effects of changes in the fair values of these bearer biological assets.

Most respondents who cited agriculture in their responses to the Board’s 2011 Agenda Consultation raised concerns in relation to fair value measurement of plantations, for example oil palm and rubber trees plantation, and favoured a limited-scope project for these bearer biological assets to address the concerns as mentioned above. Only a small number of respondents favoured a broader consideration of IAS 41 or a Post-implementation Review, or said that there is no need to amend IAS 41.

Before the limited-scope project for bearer biological assets was added to its work programme, the Board was monitoring the work undertaken by the Asian-Oceanian Standard-Setters Group (AOSSG), primarily by the Malaysian Accounting Standards Board (MASB), on a proposal to remove some bearer biological assets from the scope of IAS 41 and account for them in accordance with IAS 16. Those proposals were discussed several times by national standard-setters, the Board’s Emerging Economies Group (EEG) and the IFRS Advisory Council. Feedback from these meetings indicated strong support for the AOSSG/MASB proposals and for the Board to start a limited-scope project for bearer biological assets.

In September 2012, the Board decided to add to its agenda a limited-scope project for bearer biological assets, with the aim of considering whether the account for some or all of them as property, plant and equipment, thereby permitting use of  a cost model.  Later, the Board decided that it had received sufficient information to develop an ED from work performed by the MASB, meetings of national standard-setters, feedback from preparers on the 2011 Agenda Consultation and user outreach performed by staff. Furthermore, the project was expected to result in limited changes that were sought by both users and preparers of financial statements. Consequently, the Board decided that the project could proceed without a Discussion Paper and developed and ED that was issued in June 2013, and finally, in June 2014 the accounting standard of Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) was published by the IASB. Entities are required to apply the amendments for annual periods beginning on or after 1 January 2016. Earlier application is permitted (HRD).

Definition of Agricultural Activity based on IAS 41

IAS 41 Agriculture governs the accounting treatment, financial statement presentation and disclosures related to AGRICULTURE ACTIVITY.

IAS 41 defines Agriculture Activity as the management by an entity of the BIOLOGICAL TRANSFORMATION and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets.

Biological Transformation comprises the process of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset. A biological asset is a living animal or plant.

Agriculture activity covers a diverse range of activities; for example, raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture and aquaculture (including fish farming)

The above stated agriculture activities have certain common features :

1. Capability to change. Living animals and plants are capable of biological transformation;
2. Management of change. Management facilities biological transformation by enhancing, or at least stabilising, conditions necessary for the process to take place (for example, nutrient levels, moisture, temperature, fertility, and light). Such management distinguishes agricultural activity from other activities. For example, harvesting from unmanaged sources (such as ocean fishing and deforestation) is not agricultural activity; and
3. Measurement of change. The change in quality (for example, genetic merit, density, ripeness, fat cover, protein content, and fibre strength) or quantity (for example, progeny, weight, cubic metres, fibre length or diameter, and number of buds) brought about by biological transformation or harvest is measured and monitored as a routine management function.

Biological transformation results in the following types of outcomes :

1. asset changes through (i) growth (an increase in quantity or improvement in quality of an animal or plant), (ii) degeneration (a decrease in the quantity or deterioration in quality of an animal or plant), or (iii) procreation (creation of additional living animals or plants); or
2. production of agricultural produce such as latex, tea leaf, wool, and milk.

Agriculture activities are distinguished by the fact that management facilitates and manages biological transformation and is capable of measuring the change in the quality and quantity of biological assets (HRD).

Biological Assets and Bearer Plants, what is the difference between them ?

IAS 41 Agriculture regulates the accounting treatment for biological assets, except for bearer plants, and for agricultural produce at the point of harvest.

Based on IAS 41, a biological asset is a living animal or plant controlled by the entity as a result of past events. Control may be through ownership or through another type of legal arrangement. Further, IAS 41 also defines biological transformation as the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.

Biological assets are the principal assets of agricultural activities, and they are held for their transformative potential. This results in two major types of outcomes; the first may involve asset changes – as through growth or quality improvement, degeneration or procreation. The second involves the creation of separable products initially qualifying as agricultural produce.

A biological asset shall be measured on initial recognition and at the end of each reporting period at its FAIR VALUE LESS COSTS TO SELL. Agricultural produce harvested from an entity’s biological assets shall be measured at its FAIR VALUE LESS COSTS TO SELL AT THE POINT OF HARVEST. Such measurements is the cost at that date when applying IAS 2 Inventories or another applicable standard. A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises.

On 30 June 2014, the IASB issued Agriculture : Bearer Plants (Amendments to IAS 16 and IAS 41) which changed the accounting treatment for biological assets that meet the definition of BEARER PLANTS. Based on the amendments, bearer plants will now be within the scope of the IAS 16 and will be subject to all of the requirements therein. This includes the ability to choose between the COST MODEL and the REVALUATION MODEL for the subsequent measurement. Agricultural produce growing on bearer plants will remain within the scope of the IAS 41 Agriculture, i.e as a biological asset.

All of the following criteria as defined in the standard need to be met for a biological asset to be considered as a bearer plant. A bearer plant is defined as a living plant that : (a) is used in the production or supply of agricultural produce; (b) is expected to bear produce for more than one period; and (c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

The following are not bearer plants :

• plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
• plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for example, trees that are cultivated both for their fruit and their lumber); and
• annual crops (for example, maize and wheat)

When bearer plants are no longer used to bear produce they might be cut down and sold as scrap, for example, for use as firewood. Such incidental scrap would not prevent the plant from satisfying the definition of a bearer plant.

The measurement requirements for bearer plants should be as follows :

• before maturity, bearer plants must be measured at their accumulated cost, similar to the accounting treatment for a self-constructed item of plant and equipment before it is available for use; and
• after the bearer plant is mature, entities have a policy choice to measure the bearer plants using either the cost model or the revaluation model

(HRD)

Determining whether an ENTITY is an INVESTMENT ENTITY (exception to Consolidation)

On 31 October 2012, the IASB published Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), providing an exception to the consolidation requirements in IFRS 10 for INVESTMENT ENTITIES.

The amendments define an investment entity and introduce an exception to consolidating particular subsidiaries for investment entities. These amendments require a parent that is an investment entity to measure those subsidiaries at FAIR VALUE through Profit or Loss in accordance with IFRS 9 Financial Instruments instead of consolidating those subsidiaries in its consolidated and separate financial statements. In addition, the amendments also introduce new disclosure requirements related to investment entities in IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements.

Under IFRS 10 Consolidated Financial Statements, reporting entities were required to consolidate all investee that they control (i.e. all subsidiaries). Preparers and users of financial statements have suggested that consolidating the subsidiaries of investment entities does not result in useful information for investors. Rather, reporting all investments, including investments in subsidiaries, at fair value, provides the most useful and relevant information.

Para.27 of the amendments states that :

A parent shall determine whether it is an INVESTMENT ENTITY. An investment entity is an entity that :

1. obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
2. commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
3. measures and evaluates the performance of substantially all of its investments on a fair value basis.

Para.28 further states that :

In assessing whether it meets the definition described in paragraph 27, an entity shall consider whether it has the following typical characteristics of an investment entity :

1. it has more than one investment
2. it has more than one investor
3. it has investors that are not related parties of the entity; and
4. it has ownership interests in the form of equity or similar interests

The absence of any of these typical characteristic does not necessarily disqualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics provides additional disclosure required by paragraph 9A of IFRS 12 Disclosure of Interests in Other Entities.

In facts and circumstances indicate that there are changes to one or more of the three elements that make up the definition of an investment entity, as described in paragraph 27, or the typical characteristics of an investment entity, as described in paragraph 28, a parent shall reassess whether it is an investment entity.

A parent that either ceases to be an investment entity or become an investment entity shall account for the change in its status PROSPECTIVELY from the date at which the change in status occurred.

An Investment Entity shall not consolidate its subsidiaries. Instead, an investment entity shall measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 (HRD).

Clarifications to IFRS 15 regarding Revenue from Contracts with Customers

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers.

Following the discussions conducted at meetings of the Transition Resource Group (TRG), which was set up jointly by the IASB and the US FASB to support companies in implementing the new revenue Standard after it was issued in May 2014, further on 30 July 2015 the IASB published for public consultation some proposed clarifications to and transition reliefs for IFRS 15 Revenue from Contracts with Customers.

The Exposure Draft proposes to clarify :

• how to identify the performance obligations in a contract;
• how to determine whether a party involved in a transaction is the PRINCIPAL (responsible for providing the goods or services) or the AGENT (responsible for arranging for the goods or services to be provided to the customer); and
• how to determine whether a licence provides the customer with a right access or a right to use the entity’s intellectual property.

In Questions for Respondents part, concerning the Question 1 – Identifying performance obligations, it states that IFRS 15 requires an entity to assess the goods or services promised in a contract to identify the performance obligations in that contract. An entity is required to identify performance obligations on the basis of promised goods or services that are distinct. To clarify the application of the concept of ‘distinct’, the IASB is proposing to amend the Illustrative Examples accompanying IFRS 15. In order to achieve the same objective of clarifying when promised goods or services are distinct, the FASB has proposed to clarify the requirements of the new revenue Standard and add illustrations regarding the identification of performance obligations. The FASB’s proposals include amendments relating to promised goods or services that are immaterial in the context of a contract, and an accounting policy election relating to shipping and handling activities that the IASB is not proposing to address. The reasons for the IASB’s decisions are explained in paragraph BC7-BC25 of the ED.

Regarding the Principal versus Agent considerations as concerned in Question 2, the ED states further that when another party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine whether it is the PRINCIPAL in the transaction or the AGENT. To do so, an entity assesses whether it controls the specified goods or services before they are transferred to the customer. To clarify the application of the CONTROL principle, the IASB is proposing to amend paragraphs B34-B38 of IFRS 15, amend Examples 45-48 accompanying IFRS 15 and add Examples 46A and 48A. The FASB has reached the same decisions as the IASB regarding the application of the control principle when assessing whether an entity is a principal or an agent, and is expected to propose amendments to Topic 606 that are the same as (or similar to) those included in this ED in this respect. The reasons for the Boards’ decisions are explained in paragraphs BC26-BC56.

In addition, the IASB also proposes two reliefs to aid the transition to the new revenue standard.

The IASB is seeking comments on this ED by 28 October 2015.

IFRS 15 regarding Revenue from Contracts with Customers, reasons for issuing the IFRS

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers. IFRS 15 provides a comprehensive framework for recognising revenue from contracts with customers.

Reasons for issuing the IFRS

Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. However, previous revenue recognition requirements in IFRS differed from those in US GAAP and both sets of requirements were in need of improvement. Previous revenue recognition requirements in IFRS provided limited guidance, and, consequently, the two main revenue recognition Standards, IAS 18 Revenue and IAS 11 Construction Contracts, could be difficult to apply to complex transactions. In addition, IAS 18 provided limited guidance on many important revenue topics such as accounting for multiple-element arrangements. In contrast, US GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions.

Accordingly, the IASB and the US national standard-setter, the FASB initiated a joint project to clarify the principles for recognising revenue and to develop a common revenue standard for IFRS and US GAAP that would :

1. remove inconsistencies and weaknesses in previous revenue requirements;
2. provide a more robust framework for addressing revenue issues;
3. improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;
4. provide more useful information to users of financial statements through improved disclosure requirements; and
5. simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

IFRS 15, together with Topic 606 that was introduced into the FASB Accounting Standards Codification by Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606), completes the joint effort by the IASB and the FASB to meet those objectives and improve financial reporting by creating a common revenue recognition standard for IFRS and US GAAP.

IFRS 15 will be effective for annual reporting periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies this Standard earlier, it shall disclose the fact.

IFRS 15 supersedes the following Standards :

1. IAS 11 Construction Contracts;
2. IAS 18 Revenue;
3. IFRIC 13 Customer Loyalty Programmes;
4. IFRIC 15 Agreements for the Construction of Real Estate;
5. IFRIC 18 Transfer of Assets from Customers; and
6. SIC-31 Revenue-Barter Transactions Involving Advertising Services

Latest, on 22 July 2015 the IASB issued a press release letter which confirmed a one-year deferral of effective date of IFRS 15 to 1 January 2018.

The revenue Standard was issued jointly by the IASB and the US Financial Accounting Standards Board (FASB) in May 2014 with an effective date of 1 January 2017. Both Boards have now confirmed a one-year deferral of the effective date. Companies applying IFRS continue to have the option to apply the Standard earlier if they wish to do so.

The proposed amendments to IAS 1, replacing the word ‘Discretion’ with ‘Right’

The International Accounting Standards Board (IASB) has published on 10 February 2015 the Exposure Draft of proposed amendments to IAS 1 Presentation of Financial Statements to clarify the criteria for the classification of a LIABILITY as either CURRENT or NON-CURRENT.

The proposals clarify that classification of liabilities as either current or non-current is based on the RIGHTS that are existence at the END OF THE REPORTING PERIOD. In order to make this clear, the IASB proposes :

1. replacing ‘DISCRETION’ in paragraph 73 of the Standard with ‘RIGHT’ to align it with the requirements of paragraph 69(d) of the Standard;
2. making it explicit in paragraph 69(d) and 73 of the Standard that only rights in place AT THE REPORTING DATE should affect the classification of a liability; and
3. deleting ‘UNCONDITIONAL’ from paragraph 69(d) of the Standard so that ‘an unconditional right’ is replaced by ‘a right’

The IASB also proposes making clear the link between the settlement of the liability and the outflow of resources from the entity by adding that settlement ‘refers to the transfer to the counterparty of cash, equity instruments, other assets or services’ to paragraph 69 of the Standard.

The IASB further proposes that guidance in the Standard should be reorganised so that similar examples are grouped together.

Finally, the IASB proposes that retrospective application should be required and that early application should be permitted.

Comments on the proposals in this Exposure Draft (to be received by 10 June 2015) should be submitted using one of the following methods :

• Electronically, by visiting the ‘Comment on a proposal’ page, which can be found at : go.ifrs.org/comment
• Email, by sending to : commentletters@ifrs.org
• Postal, by addressing to : IFRS Foundation, 30 Cannon Street, London EC4M 6XH, United Kingdom

Please click this link to access the Exposure Draft

Classifying Liability as CURRENT or NON-CURRENT

IAS 1 Presentation of Financial Statements states that an entity shall present current and non-current LIABILITIES as separate classification in its Statement of Financial Position except when a presentation based on liquidity provides information that is reliable and more relevant.

Paragraph 69 of IAS 1 states that an entity shall classify a liability as CURRENT when :

1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period; or
4. it does not have an unconditional right to defer settlement of the liability for at least 12 months  after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification

An entity shall classify ALL OTHER LIABILITIES as NON-CURRENT.

Some current liabilities, as stated within paragraph 70, such as trade payables and some accruals for employee and other operating costs, are part of the WORKING CAPITAL used in the entity’s NORMAL OPERATING CYCLE. An entity classifies such operating items as current liabilities even if they are due to be settled more than 12 months after the reporting period. The same normal operating cycle applies to the classification of an entity’s assets and liabilities. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 (twelve) months.

Further, paragraph 72 states that an entity classifies its financial liabilities as current when they are due to be settled within 12 months after the reporting period, even if :

1. the original term was for a period longer than 12 months, and
2. an agreement to refinance, or to reschedule payments, on a long-term basis is completed AFTER THE REPORTING PERIOD and before the financial statements are authorised for issue

If an entity expects, and has the DISCRETION, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility, it classifies the obligation as NON-CURRENT, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as CURRENT.

When an entity breaches a provision of a long-term loan arrangement ON or BEFORE the END OF REPORTING PERIOD with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, AFTER THE REPORTING PERIOD and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least 12 months after that date.

However, an entity shall classify the liability as non-current if the lender agreed BY THE END of the REPORTING PERIOD to provide a period of grace ending at least 12 months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

Latest, paragraph 76 of IAS 1 states that in respect of loans classified as CURRENT LIABILITIES, if the following events occur between the end of the reporting date and the date the financial statements are authorised for issue, those events are DISCLOSED as NON-ADJUSTING EVENTS in accordance with IAS 10 Events after the Reporting Period :

• refinancing on a long-term basis;
• rectification of a breach of a long-term loan arrangement; and
• the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement ending at least 12 months after the reporting period

NOTE : On 10 February 2015 the IASB has published the Exposure Draft of Proposed Amendments to IAS 1 to clarify the criteria for the classification of a Liability as either Current or Non-current (HRD).

IASB Issued Narrow-scope Amendments to IFRS 10 & IAS 28

Previously, on 13 December 2012, IASB published for public comment ED/2012/6 Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture (Proposed Amendments to IFRS 10 and IAS 28) (click here for the document). This Exposure Draft proposed narrow-scope amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) to address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in dealing with the sale or contribution of a subsidiary. The main consequence of the proposed amendments is that a full gain or loss would be recognized on the loss of control of a business (whether it is housed in a subsidiary or not), including cases in which the investors retains joint control of, or significant influence over, the investee.

Within the ED, it said that the IASB proposed to amend IAS 28 (2011) so that :

1. the current requirements for the partial gain or loss recognition for transactions between an investor and its associate or joint venture only apply to the gain or loss resulting from the sale or contribution of assets that do not constitute a business, as defined in IFRS 3 Business Combinations; and
2. the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture is recognized in full.

The IASB also proposed to amend IFRS 10 so that the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture is recognized only to the extent of the unrelated investors’ interests in the associate or joint venture. The consequence is that a full gain or loss would be recognized on the loss of control of a subsidiary that constitutes a business, including cased in which the investor retains joint control of, or significant influence over, the investee.

Later, on 11 September 2014, IASB issued narrow-scope amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011).

The amendments will be effective from annual periods commencing on or after 1 January 2016.

Subscribers to eIFRS can download the document of Sale or Contribution of Assets between an investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) from eIFRS

AMENDMENTS to IAS 27 Separate Financial Statements

Current IAS 27 Separate Financial Statements requires an entity to account for its investments in Subsidiaries, Joint Ventures and Associates either at COST or in accordance with IFRS 9 Financial Instruments in the entity’s SEPARATE Financial Statements.

Prior to the revision in 2003 of IAS 27 Consolidated and Separate Financial Statements and IAS 28 Investments in Associates, the Equity method was one of the options available to an entity to account for its investments in subsidiaries and associates in the entity’s separate financial statements. In 2003, the Equity method was removed from the options and the IASB decided to require the use of COST or IAS 39 Financial Instruments : Recognition and Measurement for all investments in subsidiaries, jointly controlled entities and associates included in the separate financial statements.

Further, in their responses to the IASB’s 2011 Agenda Consultation, some respondents said that:

1. the laws of some countries require listed companies to present separate financial statements prepared in accordance with local regulations;
2. those local regulations require the use of the equity method to account for investments in subsidiaries, joint ventures and associates; and
3. in most cases, the use of the equity method would be the only difference between the separate financial statements prepared in accordance with IFRSs and those prepared in accordance with local regulations.

Those respondents strongly supported the inclusion of the Equity method as one of the options for measuring investments in subsidiaries, joint ventures and associates in the separate financial statements of an entity.

In May 2012, the IASB decided to consider restoring the option to use the EQUITY method of accounting in separate financial statements.

Later, on 2 December 2013, the IASB published for public comment the Exposure Draft : Equity Method in Separate Financial Statements (Proposed amendments to IAS 27). The proposed amendments to IAS 27 would allow entities to use the Equity method to account for investments in subsidiaries, joint ventures and associates in their separate (parent only) financial statements.

Under the proposals, an entity would be permitted to account for its investments either :

1. at Cost; or
2. in accordance with IFRS 9; or
3. using the Equity method.

And, finally, on 12 August 2014, IASB published Equity Method in Separate Financial Statements (Amendments to IAS 27). The amendments to IAS 27 will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.

Subscribers to eIFRS can download the file from : eIFRS webpage

FINAL Version of IFRS 9, Financial Instruments

The IASB published the final version of IFRS 9 Financial Instruments in July 2014. The final version of IFRS 9 brings together the Classification and Measurement, Impairment and Hedge Accounting phases of the IASB’s project to replace IAS 39 Financial Instruments : Recognition and Measurement.

IFRS 9 is built on a logical, single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. Built upon this is a forward-looking expected credit loss model that will result in more timely recognition of loan losses and is a single model that is applicable to all financial instruments subject to impairment accounting.

In addition, IFRS 9 addresses the so-called ‘own credit’ issue, whereby banks and others book gains through profit or loss as a result of the value of their own debt falling due to a decrease in credit worthiness when they have elected to measure that debt at fair value.

The Standard also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment.

As disclosed within the IFRS.org Press Release dated 24 July 2014, the package of improvements introduced by IFRS 9 includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting.

The IASB has previously published versions of IFRS 9 that introduced new classification and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). The July 2014 publication represents the final version of the Standard, replaces earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments : Recognition and Measurement.

The new Standard of IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.

Following is the link to : Project Summary of IFRS 9 Financial Instruments (July 2014)

START-UP Costs, how to record them ?

HOW to record Start-Up Costs arising from a new operation activities ? Should this type of cost be treated as Intangible Assets based on IAS 38 ?

Referring to IAS 38, the standard requires an entity to recognize an Intangible Asset, whether purchased or self-created (at cost), if, and only if :

1. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
2. the cost of the asset can be measured reliably

An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.

Read also my previous post : Recognition Criteria of Intangible Asset

Paragraph 68 of IAS 38 states that expenditure on an intangible item shall be recognized as an EXPENSE when it is incurred unless :

1. it forms part of the cost of an intangible asset that meets the recognition criteria (as stated above)
2. the item is acquired in a business combination and cannot be recognized as an intangible asset. If this is the case, it forms part of the amount recognized as goodwill at the acquisition date.

Further, paragraph 69 gives examples of the types of cost that are indistinguishable from the costs of developing the business as a whole and that should, therefore, be EXPENSED when it is incurred. The kind of such costs are include :

1. expenditure on START-UP activities (ie START-UP COSTS), unless this expenditure is included in the cost of an item of property, plant and equipment in accordance with IAS 16. Start-up costs may consist of establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (ie Pre-Opening Costs) or expenditures for starting new operations or launching new products or processes (ie Pre-Operating Costs);
2. expenditure on training activities;
3. expenditure on advertising and promotional activities (including mail order catalogues);
4. expenditure on relocating or reorganizing part or all of an entity.

From the above explanations, it is clear that START-UP Cost has to be EXPENSED as incurred.

Following is the illustrated example of Start-Up Cost excerpted from Intermediate Accounting - Kieso, Weygandt, Warfield :

U.S-based Hilo Beverage Company decides to construct a new plant in Brazil. This represents Hilo’s first entry into the Brazilian market. Hilo plans to introduce the company’s major U.S brands into Brazil, on a locally produced basis. The following costs might be involved :

1. Travel-related costs; costs related to employee salaries; and costs related to feasibility studies, accounting, tax, and government affairs
2. Training of local employees related to product, maintenance, computer systems, finance, and operations
3. Recruiting, organizing, and training related to establishing a distribution network

Hilo Beverage Company should EXPENSE all these start-up costs  as incurred.

The same accounting treatment as Start-Up Cost, the Initial Operating Losses incurred in the start-up of a business also may not be capitalized (HRD).

Determine the USEFUL LIVES of Intangible Assets

IAS 38 regarding Intangible Assets defines USEFUL LIFE as :

1. the period over which an asset is expected to be available for use by an entity; or
2. the number of production or similar units expected to be obtained from the asset by an entity

Further, IAS 38 requires an entity to assess whether the useful life of an intangible asset is FINITE or INDEFINITE and, if finite, the length of, or number of production or similar units constituting, that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

IAS 38 contains guidance on factors to be taken into account when estimating useful life of an intangible asset, which includes :

1. Expected usage by the entity of the asset and whether it could be managed efficiently by another management team;
2. The typical product life cycle for the asset and published information about useful lives of similar assets that are used in a similar way. This might include comparison with useful lives disclosed in the financial statements of companies that have a similar business using similar assets;
3. Technical, technological, commercial or other types of obsolescence;
4. The stability of the industry in which the asset operates and changes in market demand for the products or services from or related to the asset;
5. Expected actions by actual or potential competitors;
6. The level of maintenance required to maintain the asset’s operating capability and whether management intends to perform that level of maintenance;
7. The period for which the entity has control of the asset and any legal or similar limits on the asset’s use, including for example, expiry dates of leases or licences or geographical restrictions;
8. Whether the asset’s useful life is dependent on the useful life of other assets of the entity. For example, use of a trademark or brand may cease if production of the goods represented by the trademark or brand is discontinued.

An Intangible Asset that is determined to have an INDEFINITE USEFUL LIFE is not amortized. While, assets having a FINITE USEFUL LIFE must be amortized over the useful life, and this may be done in any of the usual ways (pro rata over time, over units of production, etc.). If control over the future economic benefits from an intangible asset is achieved through legal rights for a finite period, then the useful life of the intangible asset should not exceed the period of legal rights, unless the legal rights are renewable and the renewal is a virtual certainty. Thus, as a practical matter, the shorter legal life will set the upper limit for an amortization period in most cases.

There are illustrative examples in IAS 38 that cover assessing of the useful life of intangible assets, which include the Customer Lists, Patents, Copyrights, and also Renewable License Rights. Please refer to IAS 38 for further explanation.

The Useful Life of a finite life intangible asset should be reviewed at least at each financial year end. Changes in useful lives should be accounted for as changes in estimates in accordance with IAS 8.

Where an intangible asset is not being amortized because its useful life is considered to be indefinite, an entity should carry out a review in each accounting period to confirm whether or not events and circumstances still support the assumption of an indefinite life. If they don’t, the change from the indefinite to finite useful life should be accounted for as a change in estimate under IAS 8 (HRD).

Sources :

1. Manual of Accounting, IFRS 2014 – Vol.2 (PwC)
2. Wiley, 2013 Interpretation and Application of IFRS
3. www.ifrs.org

IASB published ED/2014/1 Disclosure Initiative (Proposed Amendments to IAS 1)

On 25 March 2014, the IASB has published for public comment an Exposure Draft outlining proposed amendments to IAS 1 regarding Presentation of Financial Statements. The amendments proposed have resulted mainly from the IASB’s Disclosure Initiative (pages 8-21 of the ED).

The amendments to IAS 1 arising from the Disclosure Initiative aim to make narrow-focus amendments that will clarify some of its presentation and disclosure requirements to ensure entities are able to use judgement when applying the Standard. The amendments respond to concerns that the wording of some of the requirements in IAS 1 may have prevented the use of such judgement.

The proposed amendments as follows :

Materiality and Aggregation

The IASB proposes to amend the materiality requirements in IAS 1 to emphasis that :

1. entities shall not aggregate or disaggregate information in a manner that obscures useful information;
2. the materiality requirements apply to the statement(s) of profit or loss and other comprehensive income, statement of financial position, statement of cash flows and statements of changes in equity and to the notes; and
3. when a Standard requires a specific disclosure, the resulting information shall be assessed to determine whether it is material and consequently whether presentation or disclosure of that information is warranted

Information to be presented in the Statement of Financial Position or the Statement(s) of Profit or Loss and Other Comprehensive Income

The IASB proposes to amend the requirements for presentation in the statement of financial position and in the statement(s) of profit or loss and other comprehensive income by :

1. clarifying that the presentation requirements for line items may be fulfilled by disaggregating a specific line item; and
2. introducing requirements for an entity when presenting subtotals in accordance with paragraphs 55 and 85 of IAS 1

Notes Structure

The IASB proposes to amend the requirements regarding the structure of the notes by :

1. emphasising that the understandability and comparability of its financial statements should be considered by an entity when deciding the systematic order for the notes; and
2. clarifying that entities have flexibility as to the systematic order for the notes, which does not need to be in the order listed in paragraph 114 of IAS 1

Disclosure of Accounting Policies

The IASB proposes to remove the guidance in paragraph 120 of IAS 1 for identifying a significant accounting policy, including removing potentially unhelpful examples.

Comments on this ED of IAS 1 is expected to be received by 23 July 2014.

CLICK here to get the attached ED of IAS 1

Changes to LEASE Accounting, What Are the MAIN PROPOSALS?

As mentioned before in my post “Latest Changes for Lease Accounting”, on 16 May 2013, the IASB and the FASB published for public comment a revised ED outlining proposed changes to the accounting for LEASES. The proposal aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations and the risks to which it is exposed from entering into leasing transactions.

In detail, the core principle of the proposed requirements is that an entity should recognize assets and liabilities arising from a lease. This represents an improvement over existing leases requirements, which do not require lease assets and lease liabilities to be recognized by many lessees.

In accordance with that principle, a lessee would recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term.

The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset.

For most leases of assets other than property (for example, equipment, aircraft, cars, trucks), a lessee would classify the lease as a Type A lease and would do the following :

1. recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments; and
2. recognized the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset.

For most leases of property (i.e land and/or a building or part of a building), a lessee would classify the lease as a Type B lease and would do the following :

1. recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments; and
2. recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.

Similarly, the accounting applied by a lessor would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset.

For most leases of assets other than property, a lessor would classify the lease as a Type A lease and would do the following :

1. derecognize the underlying asset and recognize a right to receive lease payments (the lease receivable) and a residual asset (representing the rights the lessor retains relating to the underlying asset);
2. recognize the unwinding of the discount on both the lease receivable and the residual asset as interest income over the lease term; and
3. recognize any profit relating to the lease at the commencement date.

For most leases of property, a lessor would classify the lease a a Type B lease and would apply an approach similar to existing operating lease accounting in which the lessor would do the following :

1. continue to recognize the underlying asset; and
2. recognize lease income over the lease term, typically on a straight-line basis.

When measuring assets and liabilities arising from a lease, a lessee and a lessor would exclude most variable lease payments. In addition, a lessee and a lessor would include payments to be made in optional periods only if the lessee has a significant economic incentive to exercise an option to extend the lease, or not to exercise an option to terminate the lease.

For leases with a maximum possible term (including any options to extend) of 12 months or less, a lessee and a lessor would be permitted to make an accounting policy election, by class of underlying assets, to apply simplified requirements that would be similar to existing operating lease accounting.

An entity would provide disclosures to meet the objective of enabling users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.

On transition, a lessee and a lessor would recognize and measure leases at the beginning of the earliest period presented using either a modified retrospective approach or a full retrospective approach (HRD).

Read Also :

1. FASB-IASB Propose Major Changes to Lease Accounting
2. New Accounting Proposal on Leasing Portends Big Changes

Latest Changes for LEASE Accounting

On 16 May 2013, the International Accounting Standards Board (IASB) and the US based Financial Accounting Standards Board (FASB) published for public comment a revised Exposure Draft (ED) outlining proposed changes to the accounting for leases. The proposal aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations and the risks to which it is exposed from entering into leasing transactions.

Background of the Changes

The existing accounting model for leases under IFRS and US GAAP requires lessees and lessors to classify their leases as either FINANCE Leases or OPERATING Leases and account for those leases differently. For example, it does not require lessees to recognize assets and liabilities arising from operating leases, but it does require lessees to recognize  assets and liabilities arising from finance leases.

Further, the IASB and the FASB initiated a joint project to improve the financial reporting of leasing activities under IFRS and US GAAP in the light of criticisms that the existing accounting model for leases fails to meet the needs of users of financial statements by developing a revised draft standard on LEASES. The boards developed the proposals in this revised ED after considering responses to their Discussion Paper titled Leases : Preliminary Views, which was issued in March 2009, and the IASB’s initial ED Leases and the proposed FASB Accounting Standards Update, Leases (Topic 840), which were issued in August 2010.

In particular :

1. many, including the US Securities and Exchange Commission (SEC) in its report on off-balance-sheet activities issued in 2005 and a number of academic studies published over the past 15 years, have recommended that changes be made to the existing lease accounting requirements to ensure greater transparency in financial reporting and to better address the needs of users of financial statements. Many users often adjust the financial statements to capitalize a lessee’s operating leases. However, the information available in the notes to the financial statements is often insufficient for users to make reliable adjustments to a lessee’s financial statements. The adjustments made can vary significantly depending on the assumptions made by different users.
2. the existence of two very different accounting models for leases in which assets and liabilities associated with leases are not recognized for most leases, but are recognized for others, means that transactions that are economically similar can be accounted for very differently. That reduces comparability for users and provides opportunities to structure transactions to achieve a particular accounting outcome.
3. some users have also criticized the existing requirements for lessors because they do not provide adequate information about a lessor’s exposure to credit risk (arising from a lease) and exposure to asset risk (arising from its retained interest in the underlying asset), particularly for leases of assets other than property that are currently classified as operating leases.

The boards decided to address those criticisms by developing  a new approach to lease accounting that requires an entity to recognize assets and liabilities for the rights and obligations created by leases. The new approach would require a lessee to recognize assets and liabilities for all leases with a maximum possible term (including any options to extend) of more than 12 months.

This approach should result in a more faithful representation of  a lessee’s financial position and, together with enhanced disclosures, greater transparency of a lessee’s financial leverage.

The new approach also proposes changes to lessor accounting that, in the board’s view, would more accurately reflect the leasing activities of different lessors.

Who would be affected by the proposals?

The proposed requirements would affect any entity that enters into a lease, with some specified scope exemptions. The proposed requirements would supersede IAS 17 Leases (and related interpretations) in IFRSs and the requirements in Topic 840, Leases, (and related Subtopics) of the FASB Accounting Standards Codification.

The ED is open for comments until 13 September 2013.

The ED of this proposed changes of lease accounting can be downloaded from here : www.ifrs.org

The Objective and Scope of IAS 12, INCOME TAXES

The OBJECTIVE of IAS 12 is to prescribe the accounting treatment for INCOME TAXES.

The principal issue in accounting for income taxes is how to account for the CURRENT and FUTURE tax consequences of :

1. the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in an entity’s statement of financial position; and
2. transactions and other events of the current period that are recognized in an entity’s financial statements.

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, IAS 12 requires an entity to recognize a DEFERRED TAX LIABILITY (DEFERRED TAX ASSET), with certain limited exceptions.

IAS 12 requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognized in PROFIT OR LOSS, any related tax effects are ALSO RECOGNIZED in PROFIT OR LOSS. For transactions and other events recognized OUTSIDE PROFIT OR LOSS (either in OTHER COMPREHENSIVE INCOME or DIRECTLY IN EQUITY), any related tax effects are also recognized OUTSIDE PROFIT OR LOSS (either in other comprehensive income or directly in equity, respectively).  Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising in that business combination or the amount of the bargain purchase gain recognized.

IAS 12 also deals with the recognition of DEFERRED TAX ASSET arising from UNUSED TAX LOSSES or UNUSED TAX CREDITS, the presentation of income taxes in the financial statements and the disclosure of information relating to income taxes.

IAS 12 shall be applied in accounting for income taxes, which include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such withholding taxes, which are payable by a subsidiary, associate or joint venture on a distribution to the reporting entity.

This standard does not deal with the methods of accounting for government grants or investment tax credits. However, this Standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits (HRD).