IFRS Update Forprofit

1

• IFRS Update For-profit

2
Overview of presentation

• a recap of the major issues
• lessons learned so far
• case studies and
• preparing your first set of accounts under the
  new standards

3
Structure of framework

• IFRSs will form the 1-99 series ie AASB1 IFRS1
• IASs will form the 100 999 series ie AASB 138
  IAS 38
• Existing standards not for retraction will form
  the 1000 series ie AASB 1031 AASB 1031
  'materiality'
• Consequential changes series by year i.e. 2004-1,
  2005-1 etc.
• AASB 1048

4
Key dates December Y/E
5
Key dates June Y/E
6
Main requirements of AASB 1

• First set of A-IFRS accounts
• Recognition
• Derecognition
• Reclassifications
• Disclosures
• Exemptions

7
Scope

• First financial report
• Interim financial report
• Explicit statement

8
Case study 1
9
Key definitions

• Date of transition to A-IFRS
• Deemed cost

10
Recognition and measurement

• Opening B/S
• Accounting policies
• Current A-IFRS standards
• Recognition
• Derecognition
• Reclassificaton

11
Exemptions from other A-IFRS

• Business combinations
• Retrospective application
• AASB 121
• Derecognition
• Goodwill
• Retained earnings
• Deemed cost

12
Exemptions from other A-IFRS

• Value of goodwill
• Adjustments
• Contingencies
• Impairment

13
Exemptions from other A-IFRS

• Deemed cost
• Cost
• Revalued GAAP amount
• Fair value
• PPE
• Investment properties
• Intangibles

14
Exemptions from other A-IFRS

• Employee benefits
• Defined benefit plans
• Corridor approach
• Cumulative actuarial gains/losses
• Cumulative translation differences
• Deemed to be zero
• Subsequent exclusions

15
Exemptions from other A-IFRS

• Decommissioning and restoration
• UIG interpretation 1
• Measurement of liability
• Present value of liability
• Accumulated depreciation

16
Case study 2
17
Case study 2 - solution
18
Presentation and disclosure

• Comparative information
• Exemptions
• AASB 132, AASB 139, AASB 6, AASB 4, AASB 1023 and
  AASB 1038
• Previous GAAP
• Disclose basis of preparation
• Disclose main adjustments
• Date of transition

19
Presentation and disclosure

• Reconciliations
• Equity
• Date of transition
• End of last GAAP period
• Profit and loss
• Impairment losses

20
Presentation and disclosure

• AASB 108
• Designation of financial assets and financial
  liabilities
• Fair value
• Deemed cost
• Disclosures

21
AASB 102 Inventories

• Cost of inventories
• Trade discounts and rebates
• Subsequent measurement of inventories
• Lower of cost and NRV

22
AASB 108 Accounting Policies, changes in
Accounting estimates errors

• Voluntary changes
• Prior period errors
• Accounting estimates

23
AASB 114 Segment Reporting

• The dominant source and nature of an entitys
  risks and returns shall govern whether its
  primary segment reporting format will be business
  segments or geographical segments
• If the entitys risks and rates of return are
  affected predominantly by differences in the
  products and services it produces, its primary
  format for reporting segment information shall be
  business segments, with secondary information
  reported geographically.
• Similarly, if the entitys risks and rates of
  return are affected predominantly by the fact
  that it operates in different countries or other
  geographical areas, its primary format for
  reporting segment information shall be
  geographical segments, with secondary information
  reported for groups of related products and
  services.

24
AASB 114 Segment Reporting

• An entitys business and geographical segments
  for external reporting purposes shall be those
  organisational units for which information is
  reported to the board of directors and to the
  chief executive officer for the purpose of
  evaluating the units past performance and for
  making decisions about future allocations of
  resources.

25
AASB 114 Segment Reporting

• A business segment or geographical segment shall
  be identified as a reportable segment if a
  majority of its revenue is earned from sales to
  external customers and
• its revenue from sales to external customers and
  from transactions with other segments is 10 per
  cent or more of the total revenue, external and
  internal, of all segments or
• its segment result, whether profit or loss, is 10
  per cent or more of the combined result of all
  segments in profit or the combined result of all
  segments in loss, whichever is the greater in
  absolute amount or
• its assets are 10 per cent or more of the total
  assets of all segments.

26
AASB 114 Segment Reporting

• If total external revenue attributable to
  reportable segments constitutes less than 75 per
  cent of the total consolidated or entity revenue,
  additional segments shall be identified as
  reportable segments, even if they do not meet the
  10 per cent thresholds, until at least 75 per
  cent of total consolidated or entity revenue is
  included in reportable segments.

27
AASB 114 Segment Reporting

• What to report?
• Revenue
• Assets
• Liabilities
• Depreciation and amortisation
• Results

28
AASB 114 Segment Reporting

• Secondary segment information
• Assets
• Liabilities
• Depreciation and amortisation
• Results

29
AASB 120 Government grants

• AASB 120.7 and 12 requires government grants to
  be recognised as income on a systematic basis
  over the periods necessary to match them with the
  related costs which they are intended to
  compensate.

30
Main requirements of AASB 116

• prescribes requirements for recognition and
  measurement at recognition
• prescribes measurement after recognition, and
  derecognition of PPE assets
• prescribes requirements for depreciation of PPE
  assets
• requires that all PPE assets be subjected to the
  requirements of AASB 136 Impairment of Assets
  and
• requires disclosures about PPE.

31
Differences between AASB 116 and existing
standards

• Tangible assets
• Revaluations
• individual assets
• Deferred settlement
• discounted to P.V
• cash price equivalent
• Ceasing to revalue

32
Case study 3
33
Case study solution Profit entity
34
Case study solution Not-for-profit entity
35
Key definitions

• PPE
• Recoverable amount
• Residual value
• Useful life

36
Scope

• Excludes
• AASB 5
• AASB 140
• AASB 141 and
• AASB 6.

37
Recognition

• Criteria
• probable ad
• reliable.
• Spare parts
• consumables
• Unit of measure
• Measurement at recognition

38
Case study 4
39
Recognition

• Elements of cost
• purchase price
• costs directly attributable to bringing the asset
  to the location and condition necessary for it to
  be capable of operating in the manner intended by
  management and
• initial estimate of the costs of dismantling and
  removing the item and restoring the site on which
  it is located.

40
Recognition

• Measurement of cost
• cash price equivalent
• deferred payment
• excess recorded as interest
• AASB 123

41
Subsequent costs

• Servicing
• Repairs and maintenance

42
Case study 5
43
Measurement after recognition

• Cost model
• Revaluation model
• regularity

44
Case study 6
45
Measurement after recognition

• Classes of assets
• land
• land and buildings
• machinery
• ships
• aircraft
• motor vehicles
• furniture and fixtures and
• office equipment.

46
Measurement after recognition

• Revaluation increases and decreases
• classes of assets
• increments
• decrements and
• offsets.

47
Case study 7
48
Case study 7 - solution

• Original depreiaction 1m/20 years 50,000 p.a.
• Current depreciation 1.35m/18 years 75,000
  p.a.
• Difference 25,000 p.a.

49
Depreciation

• Each part of an item of PPE with a cost that is
  significant in relation to the total cost of the
  item shall be depreciated separately
• Depreciable amount
• Depreciable period

50
Depreciation

• Review of residual value and useful life
• AASB 108
• Depreciation method
• Review of depreciation method

51
Case study 8
52
Derecognition

• The carrying amount of an item of PPE shall be
  derecognised
• on disposal or
• when no future economic benefits are expected
  from its use or disposal.
• Treatment of gain/loss

53
Disclosures

• Class of PPE
• measurement basis
• depreciation methods
• useful lives
• carrying amounts
• reconciliations

54
Disclosures

• Other disclosures
• restrictions
• construction expenses
• contractual commitments
• compensation

55
Disclosures

• AASB 108
• Revaluations
• date
• assumptions
• calculation of fair values
• carrying amount under cost model

56
Case study 9
57
Case study 9 - solution

• Frequency of revaluations
• Assess at each reporting date
• external indicators and
• internal indicators.

58
Assets removed from PPE

• Investment properties
• definition
• construction of investment properties
• initial recognition
• subsequent measurement
• Software costs

59
Assets removed from PPE

• AASB 5
• definition
• measurement
• depreciation
• presentation

60
AASB 123 Borrowing Costs

• Benchmark treatment
• Alternative treatment
• Borrowing costs that are directly attributable to
  the acquisition, construction or production of a
  qualifying asset shall be capitalised as part of
  the cost of that asset. The amount of borrowing
  costs eligible for capitalisation shall be
  determined in accordance with this Standard.

61
AASB 124 Related Party Disclosures

• Excludes
• NFP public sector entities
• Replaces AAS 22
• Key management personnel
• are those persons having authority and
  responsibility for planning, directing and
  controlling the activities of the entity,
  directly or indirectly, including any director
  (whether executive or otherwise) of that entity.

62
AASB 124 Related Party Disclosures

• An entity shall 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 payment.

63
AASB 124 Related Party Disclosures

• Related party transaction disclosures include
• the amount of the transactions
• the amount of outstanding balances and
• their terms and conditions, including whether
  they are secured, and the nature of the
  consideration to be provided in settlement and
• details of any guarantees given or received
• provisions for doubtful debts related to the
  amount of outstanding balances and
• the expense recognised during the period in
  respect of bad or doubtful debts due from related
  parties.

64
AASB 117

• Straight lining operating leases
• Make good provisions

65
Case study 10
66
Case study 10 (a) - solution
67
Case study 10 (b) - solution
68
AASB 117 make good provisions

• AASB 137 requires a provision for make good costs
  shall be recognised when
• an entity has a present obligation (legal or
  constructive) as a result of a past event
• it is probable that an outflow of resources
  embodying economic benefits will be required to
  settle the obligation and
• a reliable estimate can be made of the amount of
  the obligation.

69
Financial statement impact
70
Main requirements of AASB 112

• Distinguishes between current tax and deferred
  tax
• Balance Sheet approach
• Temporary differences are differences between the
  tax base and carrying value
• Deferred tax liabilities (DTLs) are recognised
  for all taxable temporary differences.
• Deferred tax assets (DTAs) are recognised for
  deductible temporary differences.

71
Main requirements of AASB 112

• Exceptions apply
• Recognition criteria
• Applicable tax rates
• Prohibits discounting of deferred tax assets and
  liabilities.

72
Case study 11
73
Case study 11 Solution (a)
74
Case study 11 Solution (b)
75
Differences between AASB 112 and AASB 1020 (1989)

• Applicable since December 1989
• Substantial conceptual gap between income
  statement and balance sheet approach
• Timing differences no longer exist.

76
Case study 12
77
Case study 12 Solution (a)
78
Case study 12 Solution (b)
79
Case study 12 Solution (c)
80
Differences between AASB 112 and AASB 1020 (1999)

• AASB 1020 (1999) applicable since 1 July 2002 but
  postponed due to IFRS.
• AASB 1020 (1999) generally more prescriptive but
  AASB 112 has more extensive disclosure
  requirements
• Balance sheet approach
• Asset revaluations
• Recognition criteria

81
Case study 13
82
Case study 13 Solution
83
Case study 13 Solution (cont)
84
Definitions

• Tax base of an asset or liability is the amount
  attributed to that asset or liability for tax
  purposes.
• Tax base of an asset is amount that will be
  deductible for tax purposes against any taxable
  economic benefits from that asset.

85
Definitions

• Tax base of a liability is carrying value less
  any amount that will be deductible for tax
  purposes in future periods.

86
Deductible temporary differences

• Arises where carrying value of asset is less than
  its tax base.
• DTAs must be recognised for all deductible
  temporary differences, except
• initial recognition of an asset or liability
• investments in subsidiaries branches

87
Deductible temporary differences

• Tax losses and temporary differences recognised
  only to the extent that it is probable that
  taxable profit will be available against which
  the loss can be utilised
• Entities with a history of tax losses require
• convincing evidence that losses will not recur
  or
• convincing evidence of future taxable profit.

88
Taxable temporary differences

• Arises when the carrying amount of an asset
  exceeds its tax base.
• DTLs must be recognised for all taxable temporary
  differences, except
• initial recognition of goodwill
• initial recognition of some assets or liabilities
• investments in subsidiaries branches and the like.

89
Business Combinations

• Carrying value determined by recognising fair
  value of assets and liabilities
• Temporary differences arise when tax bases differ
  from fair values
• No deferred tax recognised on goodwill
• Goodwill balancing figure

90
Unused tax losses and credits

• Unused tax losses and tax credits may be
  recognised as a DTA provided it is probable there
  will be future taxable profit to use the losses
  or credits against
• Entities with a history of recent tax losses
• Criteria for assessing the probability of future
  taxable profit

91
Unrecognised DTAs

• An entity should review, at each reporting date,
  the extent to which previously unrecognised DTAs
  have now become probable
• If it is now probable future taxable income will
  allow the DTA to be recovered the DTA should be
  recognised

92
Measurement

• Current tax assets and liabilities should be
  measured using the tax rates and laws that have
  been enacted or substantively enacted
• DTAs and DTLs should be measured at the tax rates
  expected to apply
• Discounting of DTAs and DTLs is prohibited

93
Items direct to equity

• Both current and deferred tax should be charged
  or credited directly to equity if they result
  from items that are credited or charged directly
  to equity
• Examples

94
Case study 14
95
Case study 14 Solution (a)
96
Case study 14 Solution (b)
97
Case study 14 Solution (c)
98
Offset

• Entities shall offset DTAs and DTLs only if
• there is a legally enforceable right to do so
  and
• amounts are levied from the same tax authority.

99
Disclosures

• Tax expense (income) must be presented on the
  face of the income statement
• Major components of tax expense (income) shall be
  disclosed separately
• Additional disclosures
• accounting policy
• details of temporary differences
• disclosure of DTA not recognised
• disclosure of DTA recognised where historical
  losses

100
Taxable temporary differences

• Examples
• Income statement
• Balance sheet
• Fair value adjustments and revaluations
• Business combinations

101
Deductible temporary differences

• Examples
• Income statement
• Fair value adjustments and revaluations
• Business combinations

102
No temporary differences

• Examples

103
Practical considerations

• Tax consolidation regime
• UIGs
• Tax base of an asset
• Tax base of a liability
• Fundamental principle

104
AASB 119 Employee provisions

• Short-term v long-term
• Sick leave
• Accumulating
• Non-accumulating
• Accounting for
• Short-term benefits
• Long-term benefits

105
AASB 119 Example

• An entity has 100 employees, who are each
  entitled to five working days of paid sick leave
  for each year. Unused sick leave may be carried
  forward for one calendar year. Sick leave is
  taken first out of the current years entitlement
  and then out of any balance brought forward from
  the previous year (a LIFO basis). At 31 December
  20X1, the average unused entitlement is two days
  per employee. The entity expects, based on past
  experience which is expected to continue, that 92
  employees will take no more than five days of
  paid sick leave in 20X2 and that the remaining
  eight employees will take an average of six and a
  half days each.

106
AASB 119 Defined benefit supn

• Corridor approach
• All actuarial gains/losses
• Past service cost
• Example end of case studies

107
AASB 131 Interests in JVs

• Joint control is
• the contractually agreed sharing of control over
  an economic activity and exists only when the
  strategic financial and operating decisions
  relating to the activity require the unanimous
  consent of the parties sharing control (the
  venturers).
• A joint venture is
• a contractual arrangement whereby two or more
  parties undertake an economic activity that is
  subject to joint control.

108
AASB 131 Interests in JVs

• Interests in jointly controlled operations - a
  venturer shall recognise in its financial
  statements
• the assets that it controls and the liabilities
  that it incurs and
• the expenses that it incurs and its share of the
  income that it earns from the sale of goods or
  services by the joint venture.

109
AASB 131 Interests in JVs

• In respect of its interest in jointly controlled
  assets, a venturer shall recognise in its
  financial statements
• its share of the jointly controlled assets,
  classified according to the nature of the assets
• any liabilities that it has incurred
• its share of any liabilities incurred jointly
  with the other venturers in relation to the joint
  venture
• any income from the sale or use of its share of
  the output of the joint venture, together with
  its share of any expenses incurred by the joint
  venture and
• any expenses that it has incurred in respect of
  its interest in the joint venture.

110
AASB 131 Interests in JVs

• A venturer shall recognise its interest in a
  jointly controlled entity using the equity
  method.

111
Main requirements of AASB 136

• Ensures assets are not carried at amounts in
  excess of their recoverable amounts
• Concept of cash-generating units
• Impairment indicators
• Finite and indefinite useful lives
• Treatment of goodwill

112
Differences between AASB 136 and AASB 1010

• AASB 136 applies to all assets
• Impairment indicators
• Discounted cash flows

113
Key definitions

• Active market
• Cash-generating unit
• Recoverable amount

114
Asset impairment

• Annual testing for
• indefinite lives
• not yet available for use and
• goodwill.
• Impairment indicators
• External sources
• Internal sources

115
Recoverable amount

• Net fair value
• Value in use
• Cash-generating unit
• Useful life

116
Formula

• Recoverable Amount Higher of
• Net Fair Value
• or
• Value in Use

117
Impairment loss

• Generally recognised in PL
• Depreciation/amortisation charge adjusted
• Liability?

118
Cash-generating units

• Where an asset belongs to a cash-generating unit
  and there is an indication it is impaired the
  entity shall determine the recoverable amount of
  the cash-generating unit to which the entity
  belongs

119
Case study 15
120
Goodwill

• Allocated to a cash-generating unit
• Apportioned to the asset or part of the unit sold

121
Timing of impairment tests

• Annual
• Where impairment indicators exist

122
Other

• Treatment of corporate assets
• Impairment losses for cash-generating units
• Goodwill
• Other assets

123
Case study 16
124
Case Study 16 - Solution
125
Reversing impairment losses

• Indicators
• Individual assets
• Cash-generating units

126
Case study 17
127
Case Study 17 - Solution
128
Case Study 17 Solution contd
129
Reversing impairment losses

• Goodwill

130
Disclosures

• More extensive than AASB 1010!

131
Conclusion

• First Time Adoption
• Determining Cash Generating Units
• Calculating Value in Use

132
AASB 138 - Intangibles

• Prohibition on internally generated brands,
  mastheads etc.
• Revaluation only with reference to an active
  market
• Treatment of RD

133
First time adoption of AASB 7

• 1 Jan 2007
• Early adoption
• Comparatives

134
Main requirements of AASB 7

• Presentation and disclosure requirements for
  financial instruments including
• significance on an entitys financial position
  and performance and
• qualitative and quantitative information about
  exposure to risks.

135
Scope

• The Standard applies to all types of financial
  instruments, both recognised and unrecognised,
  except
• AASB 127, AASB 128 and AASB 131
• AASB 119
• AASB 3
• AASB 4 and
• AASB 2.
• Application to different entities.

136
AASB 7 Vs AASB 132

• AASB 7 will supersede the disclosure requirements
  of AASB 130 and AASB 132
• enhanced balance sheet and income statement
  disclosures
• both quantitative and qualitative disclosures
  required
• parent entity disclosures

137
Definitions

• Credit risk
• Currency risk
• Interest rate risk
• Liquidity risk
• Market risk
• Other price risk

138
Key requirements of AASB 7

• Balance sheet
• financial assets at fair value through profit or
  loss
• held-to-maturity investments
• loans and receivables
• available-for-sale financial assets
• financial liabilities at fair value through
  profit or loss and
• financial liabilities measured at amortised cost.

139
Key requirements of AASB 7

• Income statement disclosures for
• loan or receivable (or group of loans or
  receivables) at fair value through profit or
  loss and
• financial liability at fair value through profit
  or loss.

140
Key requirements of AASB 7

• Reclassifications
• Derecognition
• Collateral
• Defaults and breaches

141
Key requirements of AASB 7

• Income statement disclosures for financial
  instruments
• net gains or net losses
• total interest income and total interest expense
• fee income and expense
• interest income on impaired financial assets and
• the amount of any impairment loss for each class
  of financial asset.

142
Key requirements of AASB 7

• Hedge accounting
• a description of each type of hedge
• a description of the financial instruments
  designated as hedging instruments and their fair
  values at the reporting date
• the nature of the risks being hedged
• fair value of hedges and
• Hedge ineffectiveness in PL.

143
Key requirements of AASB 7

• Qualitative disclosures
• Credit risk
• Liquidity risk
• Market risk

144
First time adoption of AASB 132

• 1 Jan 2005
• Early adoption
• Comparatives

145
Main requirements of AASB 132

• clarifying the liability and equity
  classification of financial instruments
• prescribing conditions under which assets and
  liabilities may be set-off and
• requiring disclosure of fair value for each class
  of financial assets and financial liabilities.

146
Scope

• The Standard applies to all types of financial
  instruments, both recognised and unrecognised,
  except
• AASB 127, AASB 128 and AASB 131
• AASB 119
• AASB 3
• AASB 4 and
• AASB 2.

147
Differences between AASB 132 and 1033

• Converting instruments
• securities that vary with changes in their fair
  value, but conversion is not mandatory and
• resetting preference shares.
• In-substance defeasance
• Fair value disclosures
• Puttable financial instruments

148
Differences between AASB 132 and 1033

• Fair value and reliability
• Derivative disclosures
• Interest rate disclosures
• Fourth approach
• weighted average rates or a range of rates may be
  presented for each class of financial instrument

149
Key definitions

• Financial instrument
• Financial asset
• Financial liability
• Equity instrument

150
Liabilities and Equity

• the instrument is an equity instrument if, and
  only if
• 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 unfavourable to the issuer.

151
Liabilities and Equity (cont.)

• If the instrument will or may be settled in the
  issuers own equity instruments, it is
• a non-derivative that includes no contractual
  obligation for the issuer to deliver a variable
  number of its own equity instruments or
• a derivative that will be settled only by the
  issuer exchanging a fixed amount of cash or
  another financial asset for a fixed number of its
  own equity instruments.

152
Case study 18
153
Settlement options

• When a derivative financial instrument gives one
  party a choice over how it is settled (e.g. the
  issuer or the holder can choose settlement net in
  cash or by exchanging shares for cash), it is a
  financial asset or a financial liability unless
  all of the settlement alternatives would result
  in it being an equity instrument.

154
Case study 19
155
Compound financial instruments

• The issuer of a non-derivative financial
  instrument shall evaluate the terms of the
  financial instrument to determine whether it
  contains both a liability and an equity
  component. Such components shall be classified
  separately as financial liabilities, financial
  assets or equity instruments in accordance with
  the substance of the contractual arrangement and
  the definitions of a financial liability.

156
Compound financial instruments Example

• 2,000 convertible bonds.
• The bonds have a three-year term, and are issued
  at par with a face value of CU1,000 per bond,
  giving total proceeds of CU2,000,000.
• Interest is payable annually in arrears at a
  nominal annual interest rate of 6 per cent.
• Each bond is convertible at any time up to
  maturity into 250 ordinary shares.
• When the bonds are issued, the prevailing market
  interest rate for similar debt without conversion
  options is 9 per cent.

157
Compound financial instruments Example
158
Other issues

• Treasury shares
• Interest, Dividends, Losses and Gains
• Offsetting a Financial Asset and a Financial
  Liability
• legally enforceable right to set off the
  recognised amounts and
• intention either to settle on a net basis, or to
  realise the asset and settle the liability
  simultaneously.

159
AASB 132 Disclosures

• Refer detailed notes and AASB 7 discussion

160
First time adoption of AASB 139

• 1 Jan 2005
• Early adoption
• Comparatives
• Initial values
• Grandfather rules

161
Main requirements of AASB 139

• The Standard establishes principles for
  recognising and measuring financial assets and
  financial liabilities including derivatives and
  certain embedded derivatives

162
Contents of AASB 139

• Measurement accounting for financial assets
  liabilities
• Derecognition of financial assets liabilities
• Derivatives embedded derivatives
• Hedge accounting

163
Differences to existing standards

• AASB 139 does not supersede any equivalent
  Australian Accounting
• Standard

164
Scope

• The Standard applies to all types of financial
  instruments, both recognised and unrecognised,
  except
• AASB 127, AASB 128 and AASB 131
• AASB 119
• AASB 3
• AASB 4 and
• AASB 2.

165
Key Definitions AASB 139

• Derivative
• Firm commitment
• Forecast transaction
• Hedge effectiveness
• Amortised cost
• Effective interest method

166
Amortised cost and effective interest method

• Example
• A 1M 3 year bond with a coupon rate of 6 is
  purchased 1 July 2005 at 5 discount, yield of
  7.9 calculated as follows

167
Solution
168
Categories of financial instruments

• On recognition of financial instruments they are
  to be classified into one of the following
• - held for trading (HFT)
• - held to maturity (HTM)
• - loans receivables
• - available for sale (AFS)

169
Categories of financial instruments

• Classification determines method of measurement
  movement recognition

170
Held for trading (HFT)

• HFT defined as
• - acquired or incurred principally for the
  purpose of selling or repurchasing it in the near
  term
• - part of portfolio that are managed together
  for which there is evidence of recent pattern of
  short term profit taking
• - a derivative (except hedging instrument)

171
Held for trading (HFT)

• Financial asset or liability designated when
  initially recognised to be carried at fair value
  except those equity instruments without an active
  market
• Measured at fair value with changes in fair value
  taken to profit or loss
• Classification irreversible

172
Held to maturity (HTM)

• HTM's are defined as non derivative financial
  assets with fixed or determinable payments
  fixed maturity that an entity has the intention
  of holding to maturity other than
• - instruments designated to be held at fair
  value on recognition fair value movement taken
  to P/L
• - instruments designated as for sale
• - loans receivables

173
Held to maturity (HTM)

• Measured at amortised cost subject to impairment

174
Loans receivables

• Are non-derivative financial assets with fixed or
  determinable payments that are not quoted other
  than
• - those for immediate or near term sale which
  are classified for trading or designated on
  recognition to carried at fair value with
  movements recognised in P/L

175
Loans receivables

• - those designated for sale
• - interest in a mutual fund or similar
• Measured at amortised cost, subject to impairment

176
Available for sale (AFS)

• Non derivative financial assets designated
  available for sale or not classified in other
  categories
• Measured at fair value with change in value
  recognised directly in equity

177
Available for sale (AFS)

• On derecognition related amount in equity is
  transferred to P/L
• Most losses brought to account in P/L immediately

178
Case study 20
179
Case study 20 solution (a)
180
Case study 20 solution (b) sale
181
Case study 20 solution (b) cont.
182
Case study 20 discussion issues

• Invested in a number of different shares?
• Invested in non-listed shares?

183
Other issues

• Term deposits?
• Cash Management accounts?

184
2005-4

• Application date
• Fair value through profit and loss restricted,
  must result in more relevant information because
  either
• significantly reduces a measurement or
  recognition inconsistency or
• performance is evaluated on a fair value basis

185
Impairment

• Specific guidance of indicators of impairment of
  financial assets
• Indicators include
• - breach of contract such as default or
  delinquency
• - lender granting concessions
• - probable bankruptcy of borrower
• - disappearance of active market
• - adverse change in status of borrower

186
Impairment

• Can adjust carrying value directly or via
  allowance reverse same way
• Impairment losses must be based on objective
  evidence
• Effect of disallowing general provisions e.g.
  against doubtful debts
• Assessment on collective basis

187
Debtor provisioning

• Highglo Ltd has a policy of providing for 2 of
  debtors as doubtful
• Glolow has a policy of providing the following
  percentage of debtors as doubtful
• Over 90 days 20
• 60-90days 10
• 30-60 days 5
• 0-30 days 0

188
Case study 21
189
Case study 21 discussion issues

• Bond with a yearly dedn 2.5
• Reliable measurement of expected repayment is
  possible

190
Case study 22
191
Action points

• establish procedures to identify all financial
  instruments and inventory all instruments noting
  terms and conditions
• consider classifications
• consider whether entity intends to designate an
  initial recognition as at fair value through P/L
• consider systems to classify fair value account

192
Action points

• consider knowledge resources needed for fair
  value accounting
• assess impact on hedging strategies,
  documentation monitoring
• related systems changes
• create checklists for checking for existence of
  embedded derivatives

193
IFRS accounts Income Statement
194
IFRS accounts Income Statement (cont)
195
IFRS accounts Balance Sheet
196
IFRS accounts Balance Sheet
197
IFRS accounts Changes in Equity
198
IFRS accounts Cash Flow
199
IFRS accounts Cash Flow
200
Questions?