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