IFRS Training

1

• IFRS Training
• November 2005

2
Objective of Training

• Focus on 01/01/2005 IFRS improvements
• Teaching of IFRS basics for those with limited
  IFRS experience
• Refresher of basics for those with significant
  IFRS experience
• Advanced technical component to assist those with
  experience and to provide issue recognition for
  those with limited experience

3
Course Outline

• Focus on the following standards
• IAS 39/32 financial instruments
• IAS 21 foreign currencies
• IAS 24 related parties
• IAS 8 accounting policies, estimates, errors
• IAS 10 events after the balance sheet date
• IAS 1 presentation of financial statements
• IAS 27 consolidated financial statements

4
IFRS - Structure

• GAAP (accounting side) versus GAAS (auditing
  side)
• Separate boards for each the acct and audit side
• IFRS includes the IAS 1 to IAS 41 and IFRS 1 to
  7
• IFRS includes the SICs and IFRICs
• IFRS guidance notes and basis for conclusions
• Global impact of IFRS

5
The objectives of Financial Statements
Main objective of FS Provide information on
financial position, performance and changes in
financial position for the users Main
characteristic Decision usefulness Qualitati
ve Understandability Comparability characteristic
s Relevance Reliability
Constraints Timeliness Cost-benefit
balance True and Fair View
6
The Components of Financial Statements

• The components of the financial statements
  include
• Balance Sheet
• Income Statement
• Statement of changes in equity
• Cash Flow Statements
• Notes
• Any other information presented outside the
  financial statements is outside the scope of IFRS

7
Financial Instruments

• A financial instrument - contract that gives rise
  to a financial asset of one entity and a
  financial liability or equity instrument of
  another entity.
• A financial asset is any asset that is
• (a) cash
• (b) an equity instrument of another entity
• (c) a contractual right
• (i) to receive cash or another financial asset
  from another entity or
• to exchange financial assets or financial
  liabilities with another entity under conditions
  that are potentially favourable to the entity
• d) Derivatives and non-derivatives on an
  entitys own shares

8
Financial Instruments

• A financial liability is any liability that is
• (a) a contractual obligation
• (i) to deliver cash or another financial asset to
  another entity or
• (ii) to exchange financial assets or financial
  liabilities with another entity under conditions
  that are potentially unfavourable to the entity
  or
• (b) And certain derivative/non-derivative
  contracts that will or may be settled in the
  entitys own equity instruments

9
Financial Instrument

• An equity instrument is any contract that
  evidences a residual interest in the assets of an
  entity after deducting all of its liabilities.

10
Update IAS 39 Financial Instruments
Recognition and Measurement

• Recognition / Measurement (not
  presentation/disclosure)
• Old categories Held-to-Maturity (HTM) /
  Originated Loans/ Trading / Available-for-Sale
  (AFS)
• Fundamental approach to accounting for financial
  instruments has not changed significant focus
  remains on fair value
• Changes deal with selected matters such as
  derecognition, when financial assets and
  financial liabilities may be measured at fair
  value, how to assess impairment, how to determine
  fair value and some aspects of hedge accounting
• Disclosure requirements moved to IAS 32

11
Update IAS 39 Financial Instruments
Recognition and Measurement Scope Changes

• Financial guarantee contracts are within the
  scope of IAS 39, provided that they are not
  insurance contracts as defined by IFRS 4
  Insurance Contracts
• Scope exclusion for loan commitments i.e.
  commitment to provide a loan at a below-market
  interest rate will generally be measured in
  accordance with IAS 37 Provisions/Contingencies
• IAS 39 includes contracts to buy or sell a
  non-financial item if it can be settled net in
  cash or another financial instrument, unless the
  entity entered into the contract and continues to
  hold the contract for the purpose of
  receipt/delivery in accordance with then entitys
  expected requirements

12
Update IAS 39 Financial Instruments
Recognition and Measurement Definition Changes

• Category of originated loans/receivables
  changed to simply loans and receivables
• Resolves issues such as a bank purchasing a loan
  and not designating a HTM
• Resolves issues such as when an entity acquires
  a primary debt issuance and wants to use FV
  accounting

13
Update IAS 39 Financial Instruments
Recognition and Measurement Fair Value Option

• An entity may designate any financial asset or
  financial liability on INITIAL recognition as one
  to be measured at fair value, with changes in
  fair value recognized in profit and loss (change
  in 06)
• An entity is precluded from reclassifying
  financial instruments into or out of this
  category
• The option under the old IAS 39 to recognize in
  profit or loss any gains or losses on AFS
  financial assets has been eliminated as this
  option is now redundant with the new fair value
  option category
• Impact for fund industry re electing to use
  fair value option on initial recognition versus
  trading category

14
Update IAS 39 Financial Instruments
Recognition and Measurement Derecognition

• Key concepts are risk/rewards and secondly,
  control
• Concept of transfer introduced
• Financial asset is derecognised when a) an
  entity has transferred a financial asset and b)
  the transfer qualifies for derecognition
• Derecognition of a financial liability when,
  and only when, it is extinguished i.e. when the
  obligation specified in the contract is
  discharged or cancelled or expires impact for
  banking clients
• Impact is mainly with the operating companies in
  US/Europe

15
Update IAS 39 Financial Instruments
Recognition and Measurement How to determine
Fair Value

• Objective is to establish what the transaction
  price would have been on the measurement date in
  an arms length exchange motivated by normal
  business considerations
• Valuation techniques a) incorporate all factors
  that market participants would consider in
  setting a price and b) is consistent with
  accepted economic methodologies for pricing
  financial instruments
• Entity needs to use estimates and assumptions
  that are consistent with available information
  about the estimates and assumptions that market
  participants would use in setting a price

16
Update IAS 39 Financial Instruments
Recognition and Measurement How to determine
Fair Value

• Best estimate of fair value at initial
  recognition of a financial instrument that is not
  quoted in an active market is the transaction
  price unless the fair value of the instrument is
  evidenced by other observable market transactions
  or is based on a valuation technique whose
  variables include only data from observable
  markets (no day 1 profits)
• Fair value of a liability with a demand feature,
  eg a demand deposit, is not less than the amount
  payable on demand, discounted from the first date
  that the amount could be required to be paid

17
Update IAS 39 Financial Instruments
Recognition and Measurement Why is Fair Value
Important

• All financial assets MAY be measured at fair
  value
• All financial assets must be measured at fair
  value, except loans and receivables which shall
  be measured at amortized cost using the effective
  interest method HTM investments which shall be
  measured at amortized cost using the effective
  interest rate method investments in equity
  instruments that do not have a quoted market
  price in an active market AND whose fair value
  cannot be reliably measured (rare) therefore,
  almost always equity investments must be at fair
  value

18
Update IAS 39 Financial Instruments
Recognition and Measurement Impairment

• All financial assets except those measured at
  fair value through profit or loss are subject to
  review for impairment clears one of the nuances
  for fund investments in old IAS 39

19
Update IAS 39 Financial Instruments
Recognition and Measurement Impairment

• Impairment loss is recognized only when it has
  been incurred.
• Guidance on what events provide objective
  evidence of impairment for investments in equity
  instruments
• Guidance on how to evaluate impairment that is
  inherent in a group of loans, receivables or
  held-to-maturity investments, but cannot yet be
  identified with any individual financial asset in
  the group
• Asset individually assessed for impairment and
  found to be impaired should not be included in a
  group of assets that are collectively assessed
  for impairment

20
Update IAS 39 Financial Instruments
Recognition and Measurement Impairment

• Asset that has been individually assessed for
  impairment and found not to be individually
  impaired should be INCLUDED in a collective
  assessment of impairment
• When an entity performs a collective assessment
  of impairment, an entity groups assets by similar
  credit risk characteristics that are indicative
  of the debtors ability to pay all amounts due
  according to the contractual terms
• Contractual cash flows and historical loss
  experience provide basis for estimating expected
  cash flows. Historical loss experience rates
  must be adjusted for relevant observable data
  that reflect current economic environment

21
Update IAS 39 Financial Instruments
Recognition and Measurement Impairment

• Impairment loss should never be recognized on
  the initial recognition of an asset
• Impairment losses on AFS equity instruments
  cannot be reversed through profit or loss, ie any
  subsequent increase in fair value is recognized
  in equity

22
IAS 39 - Impairment

• Objective evidence of impairments includes
  several factors
• Significant financial difficulty of the issuer
• Breach of contract, such as default or
  delinquency of interest/principal
• The lender providing concessions that would not
  otherwise be provided
• Probable that the borrower will enter bankruptcy
  or fin reorg
• Disappearance of an active market b/c of
  financial difficulty

23
IAS 39 Impairment

• Other factors include
• Observable data indicating a measurable decrease
  in the estimated future cash flows from a group
  of financial assets since the initial recognition
  of those assets, although the decrease cannot yet
  be identified with the individual financial
  assets, such as adverse changes in the payment
  status of borrowers in the group (i.e. increase
  in delayed payments increased number of credit
  card borrowers who have reached their limits
  only paying minimums) or national or local
  economic conditions that correlate with defaults
  on the assets in the group

24
IAS 39 Impairment

• Credit downgrade is not, of itself, evidence of
  impairment
• A decline in the fair value of a financial asset
  below its cost is not necessarily evidence of
  impairment i.e. declines due to increases in REAL
  interest rates
• A significant or prolonged decline in the fair
  value of an investment in an equity instrument
  below its cost is also objective evidence of
  impairment

25
Update IAS 39 Financial Instruments
Recognition and Measurement Hedging

• Permits fair value hedge accounting to be used
  more readily for a portfolio hedge of interest
  rate risk the hedged item to be designated as an
  amount of a currency rather than as individual
  assets
• Example would be a group of fixed rates loans
• Not for currency hedging, as both sides normally
  would flow through the PL

26
IAS 39 Scope

• Excludes interests in subsidiaries, associates
  and joint ventures refer to IAS 27/28 and 31
  respectively
• Generally excludes rights and obligations under
  leases refer to IAS 17
• Rights and obligations under employee benefit
  plans refer to IAS 19
• Rights and obligations under an insurance
  contract as defined in IFRS 4
• Also excludes certain loan commitments business
  combination related instruments and share based
  payments (stock options)

27
IAS 39 Basics

• Four categories of financial instruments
• Financial asset or financial liability at fair
  value through profit or loss must meet the
  following conditions held for trading or upon
  initial recognition it is designated by the
  entity as at fair value through profit or loss
• To classify as Trading means the instrument is
  acquired or incurred principally for the purpose
  of selling or repurchasing it in the near term
  or is part of a portfolio of identified financial
  instruments that are managed together and for
  which there is evidence of a recent actual
  pattern of short-term profit-taking or is a
  derivative

28
IAS 39 Basics

• Held-to-Maturity investments - non derivative
  financial assets with fixed or determinable
  payments and fixed maturity that an entity has
  the positive intention and ability to hold to
  maturity, other than those designated as at fair
  value through profit or loss those that the
  entity designates as AFS and those that meet the
  definition of loans and receivables
• two year penalty re tainting when more than an
  insignificant amount of HTM investments are sold
  or reclassified, except if such sales or
  reclassifications are so close to
  maturity/payback, or are attributable to an
  isolated event that is beyond the entitys
  control, is non-recurring and could not have been
  reasonably anticipated by the entity

29
IAS 39 basics

• Loans and receivables are non-derivative
  financial assets with fixed or determinable
  payments that are not quoted in an active market,
  other than those classified as trading, at fair
  value through profit/loss, or AFS
• AFS are those non-derivative financial assets
  that are designated as AFS or are not classified
  as loans, HTM or at FV through profit and loss
• Banks equity portfolio / bond portfolio
• Funds investments

30
IAS 39 Reclassifications from categories of
financial instruments

• As a result of a change in intention or ability,
  it is no longer appropriate to classify an
  investment as held to maturity, it shall be
  reclassified as AFS and remeasured at fair value
  and the difference between its carrying amount
  and fair value shall be accounted for in equity
• Tainting impact

31
IAS 39 Financial Instruments

• Need to be careful identifying embedded
  derivatives
• An embedded derivative shall be separated from
  the host contract and accounted for as a
  derivative under IAS 39 if a) the economic
  characteristics and risks of the embedded
  derivatives are not closely related to the
  economic characteristics and risks of the host
  contract and b) a separate instrument with the
  same terms as the embedded derivative would meet
  the definition of a derivative and c) the
  combined instrument is not measured at fair value
  with changes in fair value recognized in profit
  or loss

32
IAS 39 - Derivatives

• Definition of a derivative a financial
  instrument or other contract with all three of
  the following characteristics
• its value changes in response to the change in a
  specific interest rate, financial instrument
  price, commodity price, fx rate, etc.
• it requires no initial net investment or an
  initial net investment that is smaller than would
  be required for other types of contracts that
  would be expected to have a similar response to
  changes in market factors
• it is settled at a future date
• Example interest rate swap call option, etc.

33
IAS 39 - Hedging

• Hedging involves three main items hedged item,
  hedged risk and hedging instrument
• Cash flow hedging and fair value hedging i.e.
  swapping a variable interest rate for a fixed
  swapping a fixed rate for variable
• Contemporaneous document of hedging strategy at
  inception to quality for hedge accounting
• Hedge effectiveness testing

34
Criteria for hedge accounting
Risk Management Strategy Policy

• Formal Documentation
• Risk management strategy and objective
• Hedge type
• Hedged risk
• Hedged item
• Hedging instrument
• Method for assessing effectiveness
• Prospective
• Retrospective

Expectation of High Effectiveness Reliable
Measure of Effectiveness
35
Effectiveness testing
The hedge is expected to beand has been highly
effective
At reporting date
At inception
Prospective Test
X
X
AND
RetrospectiveTest
X
36
Examples of methods to test effectiveness

• Critical terms
• Dollar offset
• Regression analysis

37
Three types of hedges

38
Three types of hedges

Exposure to changes in fair value Attributable to
particular risk Recognised asset or liability or
firm commitment
Fixed interest rate assets/liabilities Assets/liab
ilities in foreign currencies Commodity
inventory Equity investments Firm commitments
39
Accounting for a fair value hedge
Profit or loss
Changes in the fair value of the derivative
Profit or loss
Changes in the fair value of the hedged item
attributable to the hedged risk
Ineffectiveness
40
Three types of hedges

Exposure to variability in cash
flows Attributable to particular risk Associated
with recognised asset or liability or highly
probable forecasted transaction
Variable interest rate assets/liabilities Highly
probable forecast transactions FX risk of firm
commitments
41
Accounting for a cash flow hedge
Changes in fair value of the hedging instrument
attributable to the hedged risk
Equity
Effective portion
Profit or Loss
Ineffective portion
42
Three types of hedges

Translation exposure to fx risk of foreign
operations Can include monetary items that is
part of the net investment (Quasi
equity) Presentation currency only
Accounted for as a cash flow hedge No recycling
until the disposal of the foreign operation
43
Discontinuance
Criteria for hedge accounting no longer
met (documentation, effectiveness testing)
The hedging instrument expires, is sold,
terminated or exercised
Revocation of the designation (managements
decision)
Prospective discontinuance of the hedge
44
IAS 39 - Hedging

• Careful re HTM investments designated as hedged
  items for interest rate risk given intent to
  hold the investment until maturity without regard
  to changes in the fair values or cash flows

45
Summary

• Hedge accounting can be achieved
• Requires hard work but reduces volatility in
  the PL
• Effectiveness must be assessed prospectively
  and retrospectively
• Derivatives will always be at fair value
• Fair value hedges changes the accounting for
  the hedged item
• Cash flow hedges the effective portion of the
  fair value change deferred in equity

46
IAS 32 Financial Instruments Disclosure and
Presentation

• All standards have certain disclosure
  requirements
• Main presentation and disclosure standard for
  financial instruments is IAS 32 Financial
  Instruments Disclosure and Presentation
• Key changes will impact Hedge Fund clients
• Redeemable Preference Shares are liabilities

47
IAS 32 Financial Instruments Disclosure and
Presentation

• Objective of revising IAS 32 was to reduce
  complexity by clarifying and adding guidance,
  eliminating internal inconsistencies and
  incorporating into the standard various SICs and
  IAS 39 implementation guidance
• It is considered a limited revision, although
  the effects are significant for fund industry
• Also deals with classification of derivatives
  based on an entitys own shares and moved IAS 39
  financial instrument disclosures into this
  standard
• In 2007 IFRS 7 takes effects and will include
  all disclosures

48
IAS 32 Financial Instruments Disclosure and
Presentation

• Main principle to IAS 32 is that a financial
  instrument is an equity instrument if, and only
  if, both conditions are met a) the instrument
  includes no contractual obligation to deliver
  cash or another financial asset to another
  entity or to exchange financial assets or
  financial liabilities with another entity under
  conditions that are potentially unfavorable to
  the issuer and b) the instrument will or may be
  settled in the issuers own equity provided that
  it is a non-derivative..
• In addition, when an issuer has an obligation to
  purchase its own shares for cash or another
  financial asset, there is a liability for the
  amount that the issuer is obliged to pay

49
IAS 32 Financial Instruments Disclosure and
Presentation

• IAS 32 revised incorporates the guidance
  previously proposed in draft SIC 34,
  consequently, a financial instrument that gives
  the holder the right to put the instrument back
  to the issuer for cash or another financial asset
  (i.e. a puttable instrument) is a financial
  liability of the issuer
• Result certain entities such as hedge funds
  will have no equity
• Illustrative f/s for hedge funds provide
  guidance

50
IAS 32 Financial Instruments Disclosure and
Presentation

• New disclosure requirements include the
  following
• Information about the use of valuation
  techniques, including the sensitivities of fair
  value estimates to significant valuation
  assumptions
• Information about the assets retained in
  transactions that do not qualify for
  derecognition in their entirety
• Carrying amounts of financial assets and
  financial liabilities that are classified as held
  for trading AND those designated by the entity
  upon initial recognition as financial assets and
  financial liabilities at fair value through
  profit or loss impact for funds

51
IAS 32 Financial Instruments Disclosure and
Presentation

• Additional disclosure requirements
• The amount of the change in fair value of a
  financial liability designated as at fair value
  through profit or loss that is not attributable
  to changes in a benchmark interest rate impact
  for funds

52
IAS 32 Update

• Scope reminder IAS 32 does not deal with those
  types of financial instruments as covered by IAS
  27/28/31 unless those standards require
  inclusion in IAS 39
• Also excluded are employee benefit plans,
  contingent consideration as part of a business
  combination, insurance contracts

53
IAS 32 Update

• Financial assets and liabilities are offset and
  the net amount reported in the balance sheet when
  there is a legally enforceable right to offset
  the recognized amounts and there is an intention
  to settle on a net basis, or realize the asset
  and settle the liability simultaneously.

54
Balance Sheet presentationCurrent vs. Non-current

• Current asset
• Expected to be realised in, or intended for sale
  or consumption in the, entitys normal operating
  cycle
• Held primarily for trading purposes
• Expected to be realised within 12 months after
  the balance sheet date
• Unrestricted cash or cash equivalent

• Current liability
• Expected to be settled in the entitys normal
  operating cycle
• Held primarily for trading purposes
• Due to be settled within 12 months after the
  balance sheet date
• There is no unconditional right to defer
  settlement of the liability

55
Balance Sheet presentationCurrent vs. Non-current

• Changes in IAS1/IAS10 revised
• Current/non-current classification is now
  mandatory, except when the liquidity order is
  more relevant
• Post balance sheet refinancing agreements are no
  longer adjusting events
• Breaches of loan covenants Post balance sheet
  waivers are non-adjusting events

56
Income Statement Presentation issuesGeneral
guidelines for presentation

• No required format, limited minimum line items
• Operating profit is no longer required
• No extraordinary items
• Split of profit and loss attributable to
  minority interest and parents equity holders is
  now required
• Expenses are classified either by function or
  by nature

57
Income Statement Presentation issuesFunction and
nature Common crimes

• Most companies present expenses by function, and
• There is often a mixing of functional and natural
  presentation
• Presentation of significant items on the face
• Subtotals
• Non-GAAP Measures
• Breakdown of expenses by nature is often not
  presented

58
Income Statement Presentation issuesFunction and
nature When is mixing possible?

• The breakdown of expenses by nature is presented
  in the notes
• The proposed presentation on the face is not
  misleading and
• The presentation is applied consistently and the
  methods are described in the accounting policies

59
Income Statement Presentation issuesSubtotals

• Gross Profit is not a required, but an
  encouraged disclosure
• If Operating profit is presented, IAS1R.BC13
  should be considered.
• Subtotal for recurring/non recurring items
  within Operating Profits
• Other subtotals (Operating profit before )
• EBITDA

60
Income Statement Presentation issuesOther issues

• Order of presentation
• A recommended format is described in IAS1R.91
  and 92.
• Share of results of associates
• Use of Other category
• Consistent use of the Cost of Sales category
  with revenue

61
Cash Flow StatementCash and cash equivalents

• Cash equivalents are short term, highly liquid
  investments that are readily convertible into
  cash and are subject to insignificant risk of
  changes in value IAS7.6
• Watch out for
• Short term is usually three months
• Equity investments should be excluded, impact
  for MMF
• Restricted cash
• Presentation of cash equivalents in the Balance
  Sheet

62
DisclosuresSignificant changes in disclosure
requirements for IAS 1 revised

• Disclosure of judgments in applying accounting
  policies i.e. functional currency financial
  instrument classifications, etc.
• Disclosure of assumptions about sources of
  estimation uncertainties at balance sheet date

63
DisclosuresCommon crimes with disclosure

• Accounting policies
• Financial instruments related disclosures
• Fair Value of assets and liabilities
• Financial risk management policies
• Segment reporting
• Expenses by nature
• Related party disclosures

64
Summary

• IAS1 does not have too many specific
  requirements on presentation, but that does not
  mean a free choice.
• Look at the Framework whether the information as
  presented meets the objectives of the Financial
  Statements
• Practices under local GAAP or industry practices
  might not be accepted under IFRS
• Be conservative on what can be presented on the
  face
• If you are in doubt, consult!

65
IAS 21 The Effects of Changes in Foreign Currency
Rates

• Incorporates SIC 19 Reporting Currency
  Measurement and Presentation of Financial
  Statements under IAS 21/29 and SIC 30 Reporting
  Currency Translation from Measurement Currency
  to Presentation Currency
• Reason for revision to provide additional
  guidance on the translation method and on
  determining the functional and presentation
  currencies.
• No fundamental changes have occurred

66
IAS 21 The Effects of Changes in Foreign Currency
Rates

• Scope change to exclude fx derivatives moved
  to IAS 39 and material on hedge accounting has
  been moved to IAS 39
• Notion of reporting currency has been replaced
  with two notions functional currency/presentation
  currency
• Functional currency - the currency of the
  primary economic environment in which the entity
  operates. Functional currency is now used in
  place of measurement currency as per SIC 19,
  because it is the more commonly used term, but
  with essentially the same meaning
• Presentation currency currency in which the
  f/s are presented

67
IAS 21 The Effects of Changes in Foreign Currency
Rates

• Functional Currency
• 9. The primary economic environment in which an
  entity operates is normally the one in which it
  primarily generates and expends cash. An entity
  considers the following factors in determining
  its functional currency
• (a) the currency
• (i) that mainly influences sales prices for goods
  and services (this will often be the currency in
  which sales prices for its goods and services are
  denominated and settled) and
• (ii) of the country whose competitive forces and
  regulations mainly determine the sales prices of
  its goods and services.
• (b) the currency that mainly influences labour,
  material and other costs of providing goods or
  services (this will often be the currency in
  which such costs are denominated and settled).

68
IAS 21 The Effects of Changes in Foreign Currency
Rates

• 10. The following factors may also provide
  evidence of an entitys functional currency
• (a) the currency in which funds from financing
  activities (ie issuing debt and equity
  instruments) are generated.
• (b) the currency in which receipts from operating
  activities are usually retained.

69
IAS 21 The Effects of Changes in Foreign Currency
Rates

• Standard give greater emphasis than SIC 19 gave
  to the currency of the economy that determines
  the pricing of transactions, as opposed to the
  currency in which transactions are denominated
• Key point to remember an entity does not have
  a free choice of functional currency it is what
  it is

70
IAS 21 The Effects of Changes in Foreign Currency
Rates

• Change in functional currency is accounted for
  prospectively (unless it is an error)
• Impact on corresponding figures
• Change in functional currency must be dictated
  by circumstances if not retrospective
  impacts!
• Standard permits an entity to present its
  financial statements in any currency and as such
  must follow the translation rules regarding the
  translation of its results/financial position
  from its functional currency into a presentation
  currency
• Asset/Liabilities are translated at closing
  year end rates, while income/expenses are
  translated at actual/average rates

71
IAS 21 The Effects of Changes in Foreign Currency
Rates

• Functional currency of a hyperinflationary
  economy significant guidance to adhere to
• Revised standard now includes most of the
  required disclosures as under SIC 30
• Must disclose when there has been a change in
  functional currency and the reasons for the
  change
• Impact for funds / banking clients fx on AFS
  monetary securities (i.e. investments in RPS
  i.e. hedge fund)

72
IAS 24 Related Party Disclosures

• Objective of this revision is to reduce or
  eliminate alternatives, redundancies and
  conflicts within the Standard, to deal with some
  convergence issues and to make other improvements
• Key is that an entitys financial statements
  should contain the disclosures necessary to draw
  attention to the possibility that the financial
  position and profit or loss may have been
  affected by the existence of related parties and
  by transactions and outstanding balances with
  them. The fundamental approach to related party
  disclosures has not changed.

73
IAS 24 Related Parties - Definition

• A party is related to an entity if
• a) directly or indirectly through one or more
  intermediaries, the party controls, is
  controlled by, or is under common control with,
  the entity (this includes parents, subs, fellow
  subs/sisters) has an interest in the entity that
  gives it significant influence over the entity
  or has joint control over the entity
• b) the party is an associate of the entity
• c) The party is a joint venture in which the
  entity is a venturer
• d) the party is a member of the key management
  personnel of the entity or its parent

74
IAS 24 Related Party Disclosures - Definition

• e) The party is a close member of the family of
  any individual referred to above
• f) The party is an entity that is controlled,
  jointly controlled or significantly influenced
  by, or for which significant voting power in such
  entity resides with, directly or indirectly, any
  individual referred to above
• g) The party is a post employment benefit plan
  for the benefit of employees of the entity, or
  any entity that is a related party of the entity

75
IAS 24 Related Party Disclosures

• Standard requires disclosure of the compensation
  of key management personnel big implications
  for our clients
• Key management personnel is defined as those
  persons having authority and responsibility for
  planning, directing and controlling the
  activities of the entity, directly or indirectly,
  including any director of that entity
• Must disclose key management personnel
  compensation in total and for each of the
  following categories short term employee
  benefits post employment benefits other long
  term benefits termination benefits and share
  based payments

76
IAS 24 Related Party Disclosures

• Related party to include those which are close
  members of the family of an individual
• Added disclosures include
• Outstanding balances with related parties
  together with their terms and conditions,
  including whether they are secured
• Details of any guarantees given or received
• Provisions for doubtful debts
• The settlement of liabilities on behalf of the
  entity or by the entity on behalf of another party

77
IAS 24 Related Party Disclosures

• Entity to disclose that the terms of related
  party transactions are equivalent to those that
  prevail in arms length transactions only if such
  terms can be substantiated
• Other disclosure include
• The amounts of transactions and outstanding
  balances with respect to related parties / no
  longer required to disclose proportions of
  transactions/balances
• Related party bad debt expense
• Classification of amounts due to/from related
  parties into different categories of related
  parties

78
IAS 24 Related Party Disclosures

• Must disclose the name of the entitys parent
  and, if different, the ultimate controlling
  party. If neither of these two parties produces
  financial statements available for public use,
  the name of the next most senior parent that does
  so is required
• Key concept to remember is that items of a
  similar nature may be disclosed in aggregate
  except when separate disclosure is necessary for
  an understanding of the effects of related party
  transactions on the financial statements of the
  entity.

79
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• Main objectives of the changes were as follows
• To remove the allowed alternative to
  retrospective application of voluntary changes in
  accounting policies and retrospective restatement
  to correct prior period errors
• To eliminate the concept of fundamental error
• To articulate the hierarchy of guidance to which
  management refers, whose applicability it
  considers when selecting accounting policies in
  the absence of Standards and Interpretations
• To define material omissions or misstatements,
  and describe how to apply the concept of
  materiality when applying accounting policies and
  correcting errors

80
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• Requirements for the selection and application
  of accounting policies in the previous version of
  IAS 1 Presentation of Financial Statements have
  been transferred to the Standard.
• The standard stipulates that accounting policies
  in IFRS need not be applied when the effect of
  applying them is immaterial this complements the
  statement in IAS 1 that disclosures required by
  IFRS need not be made if the information is
  immaterial
• Important to note that the financial statements
  do not comply with IFRS if they contain material
  errors
• Material prior period errors are to be corrected
  retrospectively in the first set of f/s
  authorized for issue after their discovery

81
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• Revised IAS 8 requires retrospective application
  of voluntary changes in accounting policies and
  retrospective restatement to correct prior period
  errors
• Inclusion of impracticality criterion for
  exemption from changing comparative information
  when changes in accounting policies are applied
  retrospectively and prior period errors are
  corrected
• Standard now includes a definition of
  impracticality and guidance on its interpretation
• When it is impracticable to determine cumulative
  effect at the beginning of the current period of
  a new acct policy or prior period errors
  prospective treatment acceptable from earliest
  date

82
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• Elimination of concept of fundamental errors
• Revised standard requires rather than encourages
  disclosure of an impending change in accounting
  policy when an entity has yet to implement a new
  Standard or Interpretation that has been issued
  but not yet come into effect.
• It also requires more detailed disclosures of
  the amounts of adjustments resulting from
  changing accounting policies or correcting prior
  period errors disclosures must be made for each
  financial statement line item affected
• Presentation requirements for profit/loss for
  the period moved to IAS 1

83
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• More focus on consistency an entity selects
  and applies its accounting policies consistently
  for similar transactions, other events and
  conditions, unless a standard or interpretation
  specifically requires or permits categorization
  of items for which different policies may be
  appropriate
• Effects of changes in estimates accounted for
  prospectively in profit/loss, unless they should
  be included in carrying amount of the related
  asset/liab or equity in the period of the change

84
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• Accounting standard IAS 8 renamed from Net
  Profit or Loss for the Period, Fundamental Errors
  and Changes in Accounting Policies
• This standard does not cover first time adoption
  of IFRS see IFRS 1

85
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• Changes in estimates are not considered errors
• IFRS hierarchy as follows
• IFRS
• IAS
• IFRIC or SIC

86
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

• Material defined as follows omissions or
  misstatements of items are material if they could
  individually or collectively, influence the
  economic decisions of users taken on the basis of
  the financial statements. Materiality depends on
  the size and nature of the omission or
  misstatement judged in the surrounding
  circumstances. The size or nature of the item,
  or a combination of both, could be the
  determining factor.

87
IAS 8 Other Definitions

• Prior period errors are omissions from, and
  misstatements in, the entitys financial
  statements for one or more prior periods arising
  from a failure to use, or misuse of, reliable
  information that
• (a) was available when financial statements for
  those periods were authorised for issue and
• (b) could reasonably be expected to have been
  obtained and taken into account in the
  preparation and presentation of those financial
  statements.
• Such errors include the effects of mathematical
  mistakes, mistakes in applying accounting
  policies, oversights or misinterpretations of
  facts, and fraud.

88
IAS 8 Other Definitions

• Retrospective application is applying a new
  accounting policy to transactions, other events
  and conditions as if that policy had always been
  applied.
• Retrospective restatement is correcting the
  recognition, measurement and disclosure of
  amounts of elements of financial statements as if
  a prior period error had never occurred.

89
IAS 8 Other Definitions

• Impracticable Applying a requirement is
  impracticable when the entity cannot apply it
  after making every reasonable effort to do so.
  For a particular prior period, it is
  impracticable to apply a change in an accounting
  policy retrospectively or to make a retrospective
  restatement to correct an error if
• (a) the effects of the retrospective application
  or retrospective restatement are not
  determinable
• (b) the retrospective application or
  retrospective restatement requires assumptions
  about what managements intent would have been in
  that period or

90
IAS 8 Definitions

• (c) the retrospective application or
  retrospective restatement requires significant
  estimates of amounts and it is impossible to
  distinguish objectively information about those
  estimates that
• (i) provides evidence of circumstances that
  existed on the date(s) as at which those amounts
  are to be recognised, measured or disclosed and
• (ii) would have been available when the financial
  statements for that prior period were authorised
  for issue

91
IAS 8 Other Definitions

• Prospective application of a change in accounting
  policy and of recognising the effect of a change
  in an accounting estimate, respectively, are
• (a) applying the new accounting policy to
  transactions, other events and conditions
  occurring after the date as at which the policy
  is changed and
• (b) recognising the effect of the change in the
  accounting estimate in the current and future
  periods affected by the change.

92
IAS 8 Update

• Changes in Accounting Policies
• An entity shall change an accounting policy only
  if the change
• (a) is required by a Standard or an
  Interpretation or
• (b) results in the financial statements providing
  reliable and more relevant information about the
  effects of transactions, other events or
  conditions on the entitys financial position,
  financial performance or cash flows.

93
IAS 8 Update

• Users of financial statements need to be able to
  compare the financial statements of an entity
  over time to identify trends in its financial
  position, financial performance and cash flows.
  Therefore, the same accounting policies are
  applied within each period and from one period to
  the next unless a change in accounting policy
  meets one of the above criteria.

94
IAS 10 Events After the Balance Sheet Date

• The Main Changes
• The main change from the previous version of IAS
  10 was a limited clarification of paragraphs 12
  and 13 (paragraphs 11 and 12 of the previous
  version of IAS 10). As revised, those paragraphs
  state that if an entity declares dividends after
  the balance sheet date, the entity shall not
  recognise those dividends as a liability at the
  balance sheet date.

95
IAS 10 Events After the Balance Sheet Date

• The objective of this Standard is to prescribe
• (a) when an entity should adjust its financial
  statements for events after the balance sheet
  date and
• (b) the disclosures that an entity should give
  about the date when the financial statements were
  authorised for issue and about events after the
  balance sheet date.
• The Standard also requires that an entity should
  not prepare its financial statements on a going
  concern basis if events after the balance sheet
  date indicate that the going concern assumption
  is not appropriate.

96
IAS 10 Events After the Balance Sheet Date

• The following terms are used in this Standard
  with the meanings specified
• Events after the balance sheet date are those
  events, favourable and unfavourable, that occur
  between the balance sheet date and the date when
  the financial statements are authorised for
  issue.

97
IAS 10 Events After the Balance Sheet Date

• Two types of events can be identified
• (a) those that provide evidence of conditions
  that existed at the balance sheet date (adjusting
  events after the balance sheet date) and
• (b) those that are indicative of conditions that
  arose after the balance sheet date (non-adjusting
  events after the balance sheet date).

98
IAS 10 Events After the Balance Sheet Date

• Dividends
• If an entity declares dividends to holders of
  equity instruments (as defined in IAS 32
  Financial Instruments Disclosure and
  Presentation) after the balance sheet date, the
  entity shall not recognise those dividends as a
  liability at the balance sheet date.

99
IAS 10 Events After the Balance Sheet Date

• If dividends are declared (ie the dividends are
  appropriately authorised and no longer at the
  discretion of the entity) after the balance sheet
  date but before the financial statements are
  authorised for issue, the dividends are not
  recognised as a liability at the balance sheet
  date because they do not meet the criteria of a
  present obligation in IAS 37. Such dividends are
  disclosed in the notes in accordance with IAS 1
  Presentation of Financial Statements.

100
IAS 10 Update

• Non-adjusting Events after the Balance Sheet Date
• If non-adjusting events after the balance sheet
  date are material, nondisclosure could influence
  the economic decisions of users taken on the
  basis of the financial statements. Accordingly,
  an entity shall disclose the following for each
  material category of non-adjusting event after
  the balance sheet date
• (a) the nature of the event and
• (b) an estimate of its financial effect, or a
  statement that such an estimate cannot be made.

101
IAS 1 Presentation of Financial Statements

• For IAS 1, the Boards main objectives were
• (a) to provide a framework within which an entity
  assesses how to present fairly the effects of
  transactions and other events, and assesses
  whether the result of complying with a
  requirement in a Standard or an Interpretation
  would be so misleading that it would not give a
  fair presentation
• (b) to base the criteria for classifying
  liabilities as current or noncurrent solely on
  the conditions existing at the balance sheet
  date
• (c) to prohibit the presentation of items of
  income and expense as extraordinary items

102
IAS 1 Presentation of Financial Statements

• (d) to specify disclosures about the judgements
  management has made in the process of applying
  the entitys accounting policies, apart from
  those involving estimations, that have the most
  significant effect on the amounts recognised in
  the financial statements and
• (e) to specify disclosures about key sources of
  estimation uncertainty at the balance sheet date
  that have a significant risk of causing a
  material adjustment to the carrying amounts of
  assets and liabilities within the next financial
  year.
• The Board did not reconsider the fundamental
  approach to the presentation of financial
  statements contained in IAS 1.

103
IAS 1 Presentation of Financial Statements

• Fair Presentation and Departures from IFRSs
• IN6. The Standard includes guidance on the
  meaning of present fairly and emphasises that
  the application of International Financial
  Reporting Standards (IFRSs) is presumed to result
  in financial statements that achieve a fair
  presentation.

104
IAS 1 Presentation of Financial Statements

• The Standard requires an entity, in the extremely
  rare circumstances in which management concludes
  that compliance with a requirement in a Standard
  or an Interpretation would be so misleading that
  it would conflict with the objective of financial
  statements set out in the Framework for the
  Preparation and Presentation of Financial
  Statements, to depart from the requirement unless
  departure is prohibited by the relevant
  regulatory framework. In either case, the entity
  is required to make specified disclosures.

105
IAS 1 Revisions

• Classification of Assets and Liabilities
• The Standard requires an entity to present assets
  and liabilities in order of liquidity only when a
  liquidity presentation provides information that
  is reliable and is more relevant than a
  current/non-current presentation.
• The Standard requires a liability held primarily
  for the purpose of being traded to be classified
  as current.

106
IAS 1 Revisions

• Presentation and Disclosure
• The Standard requires the following disclosures
• (a) the judgements, apart from those involving
  estimations (see (b) below), management has made
  in the process of applying the entitys
  accounting policies that have the most
  significant effect on the amounts recognised in
  the financial statements (eg managements
  judgement in determining whether financial assets
  are held-to-maturity investments) and
• (b) the key assumptions concerning the future,
  and other key sources of estimation uncertainty
  at the balance sheet date, that have a
  significant risk of causing a material adjustment
  to the carrying amounts of assets and liabilities
  within the next financial year.

107
IAS 1

• The following disclosures required by the
  previous version of the Standard have been
  omitted
• (a) the results of operating activities, and
  extraordinary items, as line items on the face of
  the income statement. The revised Standard
  prohibits disclosure of extraordinary items in
  financial statements.
• (b) the number of an entitys employees.

108
IAS 1 Revisions

• The Standard also requires disclosure, on the
  face of the statement of changes in equity, of
  net income for the period (including amounts
  recognised directly in equity), showing
  separately the amounts attributable to equity
  holders of the parent and to minority interest.
• Income statement should end with profit for the
  year as certain items of traditional net
  income are recognized directly in equity i.e. FV
  changes on AFS securities

109
IAS 1 Other requirements

• An entity whose financial statements comply with
  IFRSs shall make an explicit and unreserved
  statement of such compliance in the notes.
  Financial statements shall not be described as
  complying with IFRSs unless they comply with all
  the requirements of IFRSs.
• Inappropriate accounting policies are not
  rectified either by disclosure of the accounting
  policies used or by notes or explanatory material.

110
IAS 1 Other Requirements

• When the presentation or classification of items
  in the financial statements is amended,
  comparative amounts shall be reclassified unless
  the reclassification is impracticable. When
  comparative amounts are reclassified, an entity
  shall disclose
• (a) the nature of the reclassification
• (b) the amount of each item or class of items
  that is reclassified and
• (c) the reason for the reclassification.

111
IAS 1 Requirements

• An entity shall disclose the following, if not
  disclosed elsewhere in information published with
  the financial statements
• (a) the domicile and legal form of the entity,
  its country of incorporation and the address of
  its registered office (or principal place of
  business, if different from the registered
  office)
• (b) a description of the nature of the entitys
  operations and its principal activities and
• (c) the name of the parent and the ultimate
  parent of the group.

112
IAS 27 Consolidated F/S and Acct for Investment
in Subsidiaries

• Scope
• The Standard applies to accounting for
  investments in subsidiaries, jointly controlled
  entities and associates in the separate financial
  statements of a parent, a venturer or investor.
  Therefore, the title of the Standard was amended.

113
IAS 27 Consolidated F/S and Acct for Investment
in Subsidiaries

• Exemptions from Consolidating Investments in
  Subsidiaries
• The Standard modifies the exemption from
  preparing consolidated financial statements.
  Paragraph 8 in the previous version of IAS 27
  (now paragraph 10) was amended so that a parent
  need not present consolidated financial
  statements if
• (a) the parent is itself a wholly-owned
  subsidiary, or the parent is a partially-owned
  subsidiary of another entity and its other
  owners, including those not otherwise entitled to
  vote, have been informed about, and do not object
  to, the parent not preparing consolidated
  financial statements
• (b) the parent's debt or equity instruments are
  not traded in a public market (a domestic or
  foreign stock exchange or an over-the-counter
  market, including local and regional markets)

114
IAS 27 Consolidated F/S and Acct for Investment
in Subsidiaries

• (c) the parent did not file, nor is it in the
  process of filing, its financial statements with
  a securities commission or other regulatory
  organisation for the purpose of issuing any class
  of instruments in a public market and
• (d) the ultimate or any intermediate parent of
  the parent produces consolidated financial
  statements available for public use that comply
  with International Financial Reporting Standards.

115
IAS 27 Consolidated F/S and Acct for Investment
in Subsidiaries

• Temporary control
• The Standard does not require consolidation of a
  subsidiary acquired when there is evidence that
  control is intended to be temporary. However,
  there must be evidence that the subsidiary is
  acquired with the intention to dispose of it
  within twelve months and that management is
  actively seeking a buyer. In addition, the words
  "in the near future" were replaced with the words
  "within twelve months". When a subsidiary
  previously excluded from consolidation is not
  disposed of within twelve months it must be
  consolidated as from the date of acquisition
  unless narrowly specified circumstances apply.

116
IAS 27 Consolidated F/S and Acct for Investment
in Subsidiaries

• The Standard stipulates that the requirement to
  consolidate investments in subsidiaries applies
  to venture capital organisations, mutual funds,
  unit trusts and similar entities. This was added
  for clarification.
• An entity is not permitted to exclude from
  consolidation an entity it continues to control
  simply because that entity is operating under
  severe long-term restrictions that significantly
  impair its ability to transfer funds to the
  parent. Control must be lost for exclusion to
  occur.

117
IAS 27 Consolidated F/S and Acct for Investment
in Subsidiaries

• Consolidation Procedures
• Potential voting rights
• The Standard requires an entity to consider the
  existence and effect of potential voting rights
  currently e