Second Wave of IFRS

January 2009

A. F. FERGUSON & C O.
Chartered Accountants
A member firm of  
Agenda
Revisions/New standards
• IAS 1 (revised), Presentation of Financial Statements
• IAS 23 (revised), Borrowing Costs
• Consolidation − IFRS 3 (revised), IAS 27 (revised)
• Segment reporting − IFRS 8
• Cost of investment − IAS 27 and IFRS 1 amendment
• Financial instruments
• Share-based payment − IFRS 2
‘Credit crunch’ Amendment
• Reclassification of financial assets -IAS 39 & IFRS 7
IFRIC update
• Customer Loyalty Programmes – IFRIC 13
• Limit on defined benefit asset – IFRIC 14
• Construction contracts − IFRIC 15
• Hedges of a Net Investment in a Foreign Operation – IFRIC 16
• Distributions of non-cash assets to owners – IFRIC 17
2008 Improvements
2009 Improvements (EDs)
Third wave of IFRS – major ongoing projects
January 2009
Slide 2
IAS 1 (revised), Presentation of Financial Statements

January 2009
Slide 3
(revised), Presentation of Financial Statements
General requirements
• Effective for annual periods beginning on or after January 2009
• Consequential amendments to other IASs and IFRSs
• Part of a larger joint project of the IASB and the FASB
• Phase “A” similar to the requirements of FASB Statement 130
- IAS 1 clarifies the presentation of transactions with owners
and the performance of the entity.
• Phase “B” discussion paper issued in 4Q 2008
• Under phase “B”, B/S, P/L & CF would be divided into 5 sections
i.e Business, Financing, Income taxes, Discontinued operations
and Equity. Business would comprise of Operating and investing
activities.
• Expected date of issuance of phase B : 2011

January 2009
Slide 4
IAS 1 (revised), Presentation of Financial Statements
Components of Financial Statements

Balance sheet renamed as the ‘Statement of financial position’

Cash flow statement is renamed as the ‘Statement of cash flows’
P&L is renamed as ‘Statement of Comprehensive Income’ to be
presented in a
1. Single statement (a statement of comprehensive income)
2. Two statements (an income statement & a statement of other
comprehensive statement), separately from owner changes in
equity
The statement of other comprehensive income under the ‘two-
statement’ approach is the same as the ‘statement of recognised
income and expense (SORIE)’.
January 2009
Slide 5
(revised), Presentation of Financial Statements
Statement of Other Comprehensive Income-What is included?

Gain/loss recognised directly in equity (net of tax)

• Gain on revaluation of land and building
• Unrealised gain/loss on AFS financial assets
• Actuarial gain/loss on retirement benefit plans
• Currency translation differences
• Gain/loss on cash flow hedges

January 2009
Slide 6
(revised), Presentation of Financial Statements
Reporting owner changes

• All changes in equity arising from transactions with owners and

associated tax impact in Statement Of Changes In Equity (SOCIE)
• Components of income and expense and associated tax impact
out of SOCIE
• Dividends per share to be presented in SOCIE or in notes

January 2009
Slide 7
(revised), Presentation of Financial Statements
Other matters

Retrospective application of adjustments (IAS 8)

• Three balance sheets are now required including the beginning of
the comparative period
Other
• “Reclassification adjustments”- e.g. recycling AFS reserve at
disposal should be disclosed with the related income tax

January 2009
Slide 8
Statement of Comprehensive Income

January 2009
Slide 9
Statement of Comprehensive Income

January 2009
Slide 10
Statement of Comprehensive Income

January 2009
Slide 11
Reclassification of items included in Statement of Other
Comprehensive Income

January 2009
Slide 12
IAS 23 (revised), Borrowing Costs

January 2009
Slide 13
IAS 23 (revised), Borrowing Costs

Overview
• Issued in March 2007
• Part of IASB/FASB short-term convergence project
• Revisions primarily concerned with eliminating the option
to expense borrowing costs
• Enhances comparability and overall improvement in
financial reporting
• Effective for annual periods beginning on or after
January 1, 2009
• Earlier application is permitted

January 2009
Slide 14
IAS 23 (revised), Borrowing Costs
Highlights:

• Removal of allowed alternative treatment for immediate

recognition of borrowing cost expense relating to qualifying
asset.

• Capitalization of Borrowing Cost as a compulsory treatment.

• The cost of an asset will in future include all costs incurred in

getting the asset ready for use or sale.

January 2009
Slide 15
IAS 23 (revised), Borrowing Costs
General requirements

Capitalise borrowing costs directly attributable to the acquisition, construction

or production of a qualifying asset
directly attributable
- borrowing costs that could have been avoided if expenditures on the qualifying
assets had not been made
- costs of general borrowings used to obtain qualifying assets by applying
capitalisation rate to the expenditures on the asset
capitalisation rate
- weighted average borrowing costs, other than cost of specific borrowings
qualifying asset
- asset that takes substantial* period of time to get ready for intended use

* Not a defined period - use consistently applied management judgment

January 2009
Slide 16
IAS 23 (revised), Borrowing Costs
General requirements, continued

• Capitalise when…
– borrowing costs are being incurred; and
– asset preparations are in progress

• Suspend capitalisation when…

– active development interrupted for extended periods

• Cease capitalisation when…

– activities to prepare the asset to be used are complete

January 2009
Slide 17
IAS 23 (revised), Borrowing Costs
Other application points

• Income from temporarily invested proceeds from borrowings

- Required to offset borrowing costs
• Financing of long production period of inventories, e.g. wine
- Management can choose to capitalise borrowing costs
• ‘Notional’ borrowing costs
- Cannot be capitalised; limited to actual borrowing costs incurred
• Operating cash flows sufficient to finance capital expenditures
- General borrowings are assumed to be used first for qualifying assets,
therefore borrowing costs should be capitalised
• Finance lease interest cost
- Is an element of borrowing costs to be capitalised

January 2009
Slide 18
Quick guide to applying IAS 23 revised Handout 1

January 2009
Slide 19
Business Combination and Consolidation IFRS 3 & IAS 27

  
Convergence of IFRS and US GAAP

IAS 22

IFRS 3 IFRS 3R
IAS 27R

FAS 141R
FAS 160
APB 16 FAS 141
FAS 10
The IFRS journey

IAS 22 IFRS 3 IFRS 3 (Revised)

Pooling method
Purchase method Purchase method Acquisition method
MI share of net assets Net assets at fair Net assets at fair
at book value value value
MI share of net assets Goodwill parent share Goodwill parent
at fair value Transaction costs share
Goodwill parent share capitalised in BC Goodwill includes
Goodwill amortised Earn-out adjusts cost NCI share

Transaction costs of BC
capitalised
Earn-out adjusts
goodwill
Principles – IFRS 3 (Revised)

Amount paid Goodwill

All combinations apply the
acquisition method Assets,
liabilities,
Components of a business contingent
combination are measured at fair liabilities
value. Previous
interest
Accounting for only what we have Non-
gained control of and what has controlling
been transferred for that control. interest

January 2009
Slide 23
The effect on earnings

Share options Earn-out

given to seller
Indemnity
from seller
Existing
interest held
Transaction in target
costs
Purchase or
Pre-existing sale of
relationships minority
Full goodwill

January 2009
Slide 24
Consolidation – IFRS 3 (revised) and IAS 27 (revised)

1. Scope and applicability

2. Method of accounting
3. Consideration
4. Goodwill and non-controlling interests (NCI)
5. Asset and liability recognition
6. Other issues

January 2009
Slide 25
Scope and applicability
Scope
It now includes combinations of mutual entities and combinations
without considerations
Definition
Definition of a business has been amended slightly. It now states
that the elements are ‘capable of being conducted’ rather than
‘are conducted and managed’. Bring more transactions into
acquisition accounting.
Common Control Transactions
Common control transactions (JVs, businesses under common
control) remain outside the scope of the new standard.
Applicability
Standards applicable from years beginning on or after 1 July 2009
• Early application permitted
• Both standards should be applied together
• Prospective – previous accounting largely unchanged
January 2009
Slide 26
Method of accounting – only acquisition method (formerly
purchase method)

Steps in applying the acquisition method are:

1. Identification of the ‘acquirer’- the combining entity that
obtains the control of the acquiree
2. Determination of the acquisition date- the date on which the
acquirer obtains control
3. Recognition and measurement of the identifiable assets
acquired, the liabilities assumed and any non-controlling
interest (NCI, formerly MI) in the acquiree
4. Recognition and measurement of goodwill or a gain from the
bargain purchase

January 2009
Slide 27
Consideration – components

Cash, other assets, businesses etc (at fv)

Equity instruments, options, warrants (at fv)

Contingent consideration (at fv)

Replacement share award (under IFRS 2)

January 2009
Slide 28
Consideration – what has been transferred for the business
acquired

• Consideration measured at fair value at the date of the

combination
• Acquirer’s interest includes previous holdings
• All elements recognised at combination date
• Subsequent changes will affect income
• Excluded items that are not consideration will be charged to P&L
eg transaction costs, settlement of pre-existing relationships,
remuneration for future employee services, reimbursements for
paying the acquirer’s acquisition costs, payment for
indemnification assets

January 2009
Slide 29
Consideration – what has been transferred for the business
acquired

Issue Implication

Acquirer previously held • Remeasured to fair value

an interest in acquiree • Gain on remeasurement recognised in
earnings at date of acquisition
• Recycle items of other comprehensive
income

Issue Implication
Options given to selling • Payments for ownership interest (part of
shareholders consideration) or for post-combination
employment?
• Payments for employment expensed in
income statement January 2009
Slide 30
Consideration – what has been transferred for the business
acquired

Issue Implication

Earn-outs and contingent • Contingent consideration recognised

consideration whether probable or not
• Liabilities remeasured through income
statement
• Equity not remeasured (see next slide)

Issue Implication

Transaction costs • Transaction costs not transferred to seller

for the acquired business
• Expense through income statement as
incurred
January 2009
Slide 31
Consideration …. contd.

Earn-out payable in cash: Cash being financial liability hence re-

measured at fair value at every balance sheet date

Earn-out payable in ordinary shares: May not require re-

measurement through the income statement.
• Where the number of shares varies to give the recipient of the shares
a fixed value (would meet the definition of a financial liability). As a
result, the liability will need to be fair valued through income.
• Where a fixed number of shares either will or will not be issued
depending on performance, regardless of the fair value of those
shares, the earn-out meets the definition of equity and so is not re-
measured through the income statement.

January 2009
Slide 32
 Goodwill

• Concept-Goodwill amount Amount paid Goodwill

frozen on Combination (Consideration)
Assets,
• Measure NCI at fair value – liabilities,
‘full goodwill’ including NCI contingent
share Previous
liabilities

• Measure NCI at share of net interest

Non-
assets – ‘partial goodwill’ not controlling
including NCI share interest

January 2009
Slide 33
 Goodwill

Issue Implication

Policy choice – NCI at fair Full goodwill

value or share of net assets
• Increased net assets/ equity

• Increased future impairment charge

• Less effect on net assets/ equity from future

purchase of NCI
Partial goodwill
• Greater effect on net assets/ equity from future
purchase of NCI

Frequency of impairment does not change – only amount.

January 2009
Slide 34
Impairment of Goodwill testing when fair value Handout 2
(full value) method is chosen

January 2009
Slide 35
Impairment of Goodwill testing when proportionate Handout 3

method is chosen

January 2009
Slide 36
Assets and liabilities recognised – what has been acquired

• Almost all assets, liabilities, contingent liabilities recognised and

measured at fair value with exceptions for certain items eg
deferred tax and pension liability
• No major changes to current IFRS 3
• More guidance on assessing contracts
• Intangible assets must always be recognised and measured.
There is no ‘reliable measurement’ exception

January 2009
Slide 37
Asset and liability recognition...contd.

Provisional Accounting - maximum period of adjustment

An adjustment period for the finalization of acquisition accounting ends on the
earlier of:
• twelve months or
• acquirer has gathered all the necessary information
There is no exemption from the 12-month rule for deferred tax assets or
changes in the amount of contingent consideration.

Accounting for indemnity given by the seller

• The indemnity is recognised as an asset of the acquiring business.
• It is measured in the same way as the indemnified liability, and it is
limited to the amount of the indemnified liability.

January 2009
Slide 38
Assets and liabilities recognised – what has been acquired
Issue Implication

Indemnities given by • Indemnified (contingent) liability at fair

seller value
• Indemnification asset recognised on same
basis at acquisition date and subsequently
• May reduce income statement volatility

Issue Implication

Assessment of • Hedging, embedded derivatives etc should

contracts be assessed at acquisition date and re-
classified, if required
• Only exceptions are leases and insurance
contracts – classify based on conditions
when incepted January 2009
Slide 39
Assets and liabilities recognised – what has been acquired

Issue Implication

Deferred tax accounting •Deferred tax asset may be recognised on

Combination if it gives rise to timing
differences. The asset would be adjusted
against Goodwill.
•Deferred tax liability is prohibited to be
recognised against Goodwill. Resultant
subsequent impairment shall also not affect
deferred tax balances.
• Changes to deferred tax balances after
acquisition date affect income or equity as
normal under IAS 12

January 2009
Slide 40
Changes in ownership interest

• Non-controlling interest (NCI) is equity contributor to entity

• Recognised in equity (no change)
• Purchases from NCI in equity – no goodwill
• Sales to NCI in equity – no gain
• Loss of control is remeasurement event (gain!)

January 2009
Slide 41
Changes in ownership interest – No loss of control

Issue Implication

Purchase of or sale to • Purchase – difference between cash paid

NCI after a business and NCI recorded in equity
combination
• Debit greater where partial goodwill
recorded
• Sale of shares to NCI – difference
between cash received and NCI recorded
in equity

January 2009
Slide 42
Changes in ownership interest – Loss of control

Issue Implication

Sale of controlling • Retained interest recognised at fair value

interest in subsidiary.
• Gain on sale includes gain on remeasuring
Interest in associate or
retained interest
financial asset retained

January 2009
Slide 43
Other issues

Before the acquisition

• Explaining the acquisition to investors – the financial
statements will look different
- Effect on income statement in period of acquisition
- How payment structure will affect income statement
subsequently
- How assets and liabilities recognised will affect income
statement subsequently
• Valuations expertise

January 2009
Slide 44
Other issues

After the acquisition

• Monitoring and measurement
- Contingent consideration
- Finalising fair values
- Indemnified liabilities

January 2009
Slide 45
Summary

• First IFRS and US GAAP converged standard

• More fair value measurement
• More income statement volatility
- At date of acquisition
- After an acquisition
• Economic entity model now embedded
• Financial statements will look different – be ready to explain

January 2009
Slide 46
 Handout 4
Principles of business combinations

A
January 2009
Slide 47
 Handout 4
Principles of business
combinations …contd. A

January 2009
Slide 48
 Handout 4
Principles of business
combinations …contd.

January 2009
Slide 49
Step acquisitions and disposals Handout 5

January 2009
B Slide 50
 Handout 5
B

January 2009
Slide 51
Moving to IFRS 8

  
Agenda

• IFRS 8 basics
• The Road to IFRS 8 – 4 simple steps
- Identification of the CODM
- Identification of operating segments
- Determining the reportable segments
- Disclosures
• Other considerations
• How this will affect companies?
• Summary

January 2009
Slide 53
IFRS 8 – Background & problems

• New concept (innovative idea)

• Strong & reliable MIS (A must)
• Varied results (no consistency or comparability)
• Interpretational issues (open to the judgement of
management)
• Practical issues in Pakistan context
- How performance is measured – difference in
perceptions (cash flows Vs book profits Vs book
profits plus other tax free income)
- Lack of reliable MIS
- MIS parameters different

January 2009
Slide 54
Moving to IFRS 8

Why is it What is the key

important today? learning point?

11
2
3
4
5
January

2009
(annual reports
beginning on or
after)

January 2009
Slide 55
Why IFRS 8
(is this only about convergence with US GAAP?)

More Consistency with

meaningful the management
information for reports
users

Less time and cost

of obtaining the
information

January 2009
Slide 56
IFRS 8

Core principle

An entity shall disclose information to

enable users of its financial statements to
evaluate the nature and financial effects of
the business activities in which it engages
and the economic environments in which it
operates

January 2009
Slide 57
IFRS 8

Core principle – simple English

To : Public company - Reporting entity

From: IASB / IFRS 8 Staff
RE: Useful information to Users
Please provide Mr. John Q Public with useful information
that will help him get a grip of what your main activities are,
where are they located and how well they do.
Yours sincerely,
PS – this should be very much based on the information
used by management to accomplish the same goal.

January 2009
Slide 58
IFRS 8

IFRS 8 Key features

Segments through the

eyes of management

Financial information
management uses

January 2009
Slide 59
The Road to IFRS 8 – 4 simples stages:

1 Identify the CODM

2 Identify the operating segments

3 Determine the reportable segments

Present the required information

4 (and reconcile to primary statements)
January 2009
Slide 60
Chief Operating Decision Maker 1
(CODM)

Allocates resources

Assesses performance

Function not a title

January 2009
Slide 61
Find CODM 1

January 2009
Slide 62
 1
Excerpts from recent Committee Meeting minutes:

• HR Committee – Approved compensation terms for Mr A Hussain, newly

hired Controller . . . (1 April 2008)

• Investment Committee – . . . recommended additional investment for

ongoing research project . . . (12 July 2008)

• Executive Committee – Reviewed five year forecasts for Sri Lanka

operations . . . Approved closure of two manufacturing plants in Africa . . . (20
June 2008)

January 2009
Slide 63
The CODM is - 1
The Executive Committee

Thanks to Rene Magritte and Picasso for doing

these wonderful portraits for us
January 2009
Slide 64
The Road to IFRS 8 – 4 simples stages:

1 Identify the CODM

2 Identify the operating segments

3 Determine the reportable segments

Present the required information

4 (and reconcile to primary statements)
January 2009
Slide 65
What are the key features of an
2
operating segment?

1. Engages in business activities

2. Operating results are regularly reviewed by CODM to assess

performance and make decisions

3. Discrete financial information available

January 2009
Slide 66
Operating segment : 2
– a component that has all the following features:

Engages in business
activities

Start up activities ?
R&D operation ?

Vertically integrated
business ?
Functional department?

January 2009
Slide 67
Operating segment : 2
– a component that has all the following features:
e a
a v t o
Its operating results are regularly rly h tabl e
reviewed by CODM to assess u la u n M
r e g c c o D
performance and make decisions ld a C O
o u c t l y t he
n t w dire it h
m e is t w
g
e financialh o ta c
Several sets s
of w n
t in g
g er a r c o Use the one which is most
information
e ra (components)?
a n a
g ul consistent with financial
o p m s re
n
A me n t statements
ta in
s e g a in
Matrixd moperation?
an Use products & services to
identify segment

January 2009
Slide 68
Operating segment : 2
– a component that has all the following features:

Has discrete financial

information available

• Reliable ie verifiable
• Consistent with CODM approach to
operate business
• Used by CODM

January 2009
Slide 69
The Road to IFRS 8 – 4 simples stages:

1 Identify the CODM

2 Identify the operating segments

3 Determine the reportable segments

Present the required information

4 (and reconcile to primary statements)
January 2009
Slide 70
Determining reportable segments 3
Identify each operating segment that exceeds 10% threshold

Aggregate any operating segments that meet all

aggregation criteria
Optional

Optional
For the remaining operating segments below 10% threshold,
aggregate with each other if majority of aggregation criteria met

If reportable segments are less than 75% of revenue

add more reportable segments

January 2009
Slide 71
Determining reportable segments 3
Aggregation criteria:

Aggregation is consistent with core principle

Segments have similar economic characteristics

Segments similar on each of five specified criteria***

*** When aggregating two immaterial

segments, only a majority of the five specified
criteria need to be met
January 2009
Slide 72
Determining reportable segments – 3
The five specified criteria

• Nature of products and services

• Nature of production process
• Type or class of customer
• Method of distribution
• Nature of regulatory environment

Maximum limit of reportable segments: 10

January 2009
Slide 73
The Road to IFRS 8 – 4 simples stages:

1 Identify the CODM

2 Identify the operating segments

3 Determine the reportable segments

Present the required information

4 (and reconcile to primary statements)
January 2009
Slide 74
Disclosure considerations 4
Disclosure of certain minimal information

Disclose if provided in
Must disclose some manner to CODM
Non-GAAP
Measures

Measure of assets ** Segment assets

Segment liabilities

Measure of profit Significant items like depreciation,

interest, revenue

Reconciliation of totals to primary Associates and capex

financial statements
**2009 Improvement

January 2009
Slide 75
Disclosure considerations
Disclosure of certain minimal information - must disclose 4
• General information-factors used to identify segments (which of 5
basis used?)
• Types of products and services of each segment

• Measurement basis for intra-segment transactions (transfer

pricing)
• Nature of difference in

• Profit & loss

• Assets

• Liabilities

• Changes in policies from last year

• Nature and effect of any asymmetrical allocations to segments

January 2009
Slide 76
Disclosure considerations 4
Entity wide disclosures
Applies to all entities subject to standard (including entities
with just one reportable segment)
• Information about products and services
• Geographical areas
- Domicile and foreign revenues
- Domicile and foreign non-current assets
• Major customers
The above is not required if given at segment level.

January 2009
Slide 77
Disclosure considerations 4
• Retrospective application in all the following:
- When adopted
- When segment is initially identified as reportable
- Changes in organization structure

January 2009
Slide 78
4 simples stages - recap:

Present the required information

(and reconcile to primary statements)

Determine the reportable segments

Identify the operating segments

Identify the CODM

January 2009
Slide 79
IFRS 8 – Other considerations – Issues??

• Verifiability of information (Documentation of

analysis and conclusions)
• Consistency of conclusions and information
• Segment reporting used basis inconsistent with
IFRS (eg LIFO method used for inventories,
employee benefit plan accounting)
• Transfer pricing (market based or not)

January 2009
Slide 80
IFRS 8 – How this will affect companies

• Consequential amendment to IAS

Reportable
36
Segment
- Reallocation of goodwill to
operating segments
- Potential impairment
Operating Operating
Segment Segment
Note - this has wide
IFRS implications –
not just for
companies that are
required to apply Component Component Component Component
IFRS 8

January 2009
Slide 81
IFRS 8 – How this will affect companies ?
• Management reporting may require substantial improvement
• Documentation of analysis and conclusions required to make
information reliable
• Inconsistencies in basis within segments be removed
• Previous segment reporting may no longer be acceptable
• Potentially more segments
• May affect goodwill allocation and impairment
• Regulators expect consistency
• Education of investors may be required
• Can be different from competitors

January 2009
Slide 82
Moving to IFRS 8

“Things we see from here

are different from things
we see from there….”
Anonymous traveler

January 2009
Slide 83
Handout 6

January 2009
Slide 84
Cost of investment − amendments to IFRS 1 and IAS 27
The cost of a subsidiary, jointly controlled entity or associate in a
parent’s separate financial statements, on transition to IFRS, is
determined under IAS 27 or as a deemed cost. Deemed cost is
either fair value or the carrying amount under the previous
accounting practice

Dividends from a subsidiary, jointly controlled entity or associate

are recognized as income. There is no longer a distinction
between pre-acquisition and post-acquisition dividends

The cost of the investment of a new parent in a group (in a

reorganization meeting certain criteria) is measured at the
carrying amount of its share of equity as shown in the separate
financial statements of the previous parent

Effective from periods beginning on or after January 1, 2009

No likely impact in Pakistan environment.

January 2009
Slide 85
Hedging of portions of financial
instruments – IAS 39 amendment
The amendment prohibits:
• designating inflation as a hedgeable component of a fixed
rate debt
• In a Hedge of one-sided risk with options, it prohibits
including time value in the hedged risk
Effective from periods on or after July 1, 2009, should be
applied retrospectively

No likely impact in Pakistan environment.

January 2009
Slide 86
Puttable financial instruments and obligations arising on
liquidation – amendments to IAS 32 and IAS 1

The amendment applies to certain financial instruments issued by

an entity that give the investor the right to get its capital back from
the issuing entity for cash or another financial asset:

• at the investor’s option

• automatically on the occurrence of a specified event,
• on liquidation of a limited life entity or when liquidation is at
the option of the investor.

January 2009
Slide 87
Puttable financial instruments and obligations arising on
liquidation – amendments to IAS 32 and IAS 1
The amendment applies to certain financial instruments issued by an
entity that give the investor the right to get its capital back from the
issuing entity for cash or another financial asset:

• To be classified as equity, such instruments must meet the strict

criteria set out in the amendment. For example, one requirement
is that the instrument holder is entitled to a pro rata share of net
assets on liquidation, which could be indicative of an equity like
return.
• A puttable minority interest that is classified as equity in the
subsidiary is always treated as a liability.
• Effective from periods on or after January 1, 2009, should be
applied retrospectively
No likely impact in Pakistan environment.

January 2009
Slide 88
Share-based payment – IFRS 2 (Amendment)
vesting conditions & cancellation
The amendment narrows the definition of vesting conditions only to
service and performance conditions.

Previous definition implied that other conditions (other than service

and performance) could also become vesting conditions.

This might seem to be a very minor amendment, but it can have

some significant consequences.

It mainly clarifies the accounting for SAYE (Save as You Earn )

Scheme prevalent in UK.

The requirement to save is not a vesting condition; the failure to

save now results in a cancellation and an acceleration of the charge.

Retrospectively effective for periods beginning on or after 1 January

2009
January 2009
Slide 89
‘Credit crunch’ amendment
Reclassification of Financial Assets (IAS-39 & IFRS-7)
• IASB issued an amendment to IAS 39 on 13 October 2008 (&
November 2008)
• Trustees suspended normal due process procedures in
issuing amendment
• Amendment allows to transfer assets from held for trading
and AFS categories to loans and receivables category that
would have met the definition of L&R and the entity has
intention and ability to hold that financial asset for the
foreseeable future
• Also allows limited flexibility in reclassification of financial
assets out of ‘held for trading’ category in ‘rare
circumstances’ (for assets other than those which qualify as
L&R)
January 2009
Slide 90
‘Credit crunch’ amendment
Reclassification of Financial Assets (IAS-39 & IFRS-7)
• Entities continue to be prohibited from reclassifying derivative
financial instruments, non-derivative financial liabilities and
financial instruments designated on initial recognition as at fair
value through profit or loss out of the fair value through profit or
loss category. Any reclassification into the fair value through profit
or loss category after initial recognition remains prohibited.
• The fair value at the date of reclassification shall become the new
cost or amortised cost. Any future increase/decrease in cash
receipts shall adjust the effective interest rate
• IFRS 7 also amended to give extensive disclosure for such
reclassified assets
• Intends to level the playing field between IFRS and US GAAP filers
• Effective on or after 1 July 2008

January 2009
Slide 91
 Handout 7
Flowchart –when reclassification is possible

January 2009
Slide 92
Interpretations (IFRIC) update

January 2009
Slide 93
 Interpretations (IFRIC) update
IFRIC 13 – Customer Loyalty Programmes

Fr • Multi-element transaction
fly equ
m er ent
• Analysed from the perspective of the customer
ile • Allocation of consideration issues
s
- Fair value
Hotel points - Forfeitures
programmes - Change in estimates
• Variety of programmes
e • Variety of awards
l i n
Air s
m ile
Miles Effective for annual periods beginning on or after 1 July 2008
credit
cards
January 2009
Slide 94
Interpretations (IFRIC) update

IFRIC 14 – Limit on Defined Benefit Asset

It further clarifies the asset recognition criteria under para 58 of IAS 19

“Present value of economic benefits” may be difficult to estimate. It

could either be a:
• refund; or
• reduction in future contributions

A refund would be recognised if:

• the refund is permitted under the terms of the plan
• is realisable during the life of plan or on settlement
• will be recognised net of any associated costs (eg taxes, fee)
• no discounting of refund amount permitted

January 2009
Slide 95
Interpretations (IFRIC) update

IFRIC 14 – Limit on Defined Benefit Asset

A reduction in future contributions would be recognised if:

- there are no minimum funding requirements
- the asset would be restricted to the PV of future service cost

In case of minimum funding requirements in respect of future service

cost, the reduction in future contributions would be restricted to the
excess of economic benefit amount over the minimum funding
requirement

In case of minimum funding requirements in respect of past service cost,

the reduction in future contributions would be considered after the
amounts have been paid into the fund

Effective for annual periods beginning on or after 1 January 2008

January 2009
Slide 96
Interpretations (IFRIC) update
IFRIC 15 – Agreements for the Construction of Real Estate
The interpretation provides guidance on determining whether an agreement is
within the scope of IAS 11, ‘Construction contracts’, or is for the sale of goods
under IAS 18, ‘Revenue’ (relevant in Pakistan context).

• Determine whether arrangement contains multiple elements

• Allocate fair value to each component
• Determine if IAS 11 or IAS 18 applies to each component
Buyer is able to specify major structural design before construction (IAS
11) Vs buyer’s limited ability to influence the design (IAS 18)
Analyse transfer of risks and rewards
- Rendering of services (% of completion method); or
- Sale of goods (recognise revenue when significant risks and rewards
transferred and no continuing managerial involvement + other conditions)
Effective for periods beginning on or after 1 January 2009

January 2009
Slide 97
 Handout 8
Analysis of a single agreement for the construction
of real state

January 2009
Slide 98
Interpretations (IFRIC) update
IFRIC 16 – Hedges of a Net Investment in a Foreign Operation
IFRIC 16 applies to an entity that hedges the foreign currency risk arising from its
net investments in foreign operations and wishes to qualify for hedge accounting in
accordance with IAS 39.

IFRIC 16 provides guidance on:

- The risk being hedged should relate to difference in functional currencies
between any parent (including an intermediate parent) and its subsidiary.
The hedged risk cannot relate to the group’s presentation currency.
- Hedging instruments may be held anywhere in the group (apart from the
subsidiary that itself is being hedged).
Most hedging strategies used in practice will continue to be permitted by the
interpretation. Most entities will not, therefore, face any changes from applying it.

No likely impact in Pakistan environment.

Effective for periods beginning on or after 1 October 2008

January 2009
Slide 99
Interpretations (IFRIC) update
IFRIC 17 – Distributions of Non-cash Assets to Owners
IFRIC 17 clarifies that:
• a dividend payable should be recognised when the dividend is
appropriately authorised and is no longer at the discretion of the entity
• where an owner has a choice of a dividend of a non-cash asset or
cash, the dividend payable is estimated considering both the fair value
and probability of the owners selecting each option.
• an entity should measure the dividend payable at the fair value of the
net assets to be distributed
• an entity should recognise the difference between the dividend paid
and the carrying amount of the net assets distributed in profit or loss.
The Interpretation also requires an entity to provide additional disclosures
if the net assets being held for distribution to owners meet the definition of
a discontinued operation.

Effective for annual periods beginning on or after 1 July 2009

January 2009
Slide 100
Improvements

January 2009
Slide 101
 Handout 9

Annual Improvement Project 2008

January 2009
Slide 102
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 103
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 104
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 105
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 106
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 107
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 108
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 109
 Handout 9

Annual Improvement Project 2008…contd.

January 2009
Slide 110
 2009 Annual improvements – exposure draft

IAS 39 Financial Instruments: Recognition and Measurement

- Scope exemption for business combination contracts (applies to forward
contracts to acquire control-a clarification)
- Application of the fair value option (only for financial instruments covered in
IAS 39 and not for non-financial contracts - a clarification)
- Cash flow hedge and reclassification of gains/losses (clarification that the
hedging gains/losses would be reclassified when the hedged transaction takes
place)
- Bifurcation of an embedded foreign currency derivative not required (a
clarification)
IFRS 2 and IFRS 3R
- Confirmation that acquisition of goods under combination of business on
formation of JV and common control transactions are not within scope of IFRS
2 even if they do not meet the definition of business combination
IAS 36 and IFRS 8
- Clarification that the largest unit permitted for the impairment testing of
goodwill is operating segment before aggregation

January 2009
Slide 111
2009 Annual improvements – exposure draft, continued

IFRS 8
- Disclosures – only require the asset disclosures if they are provided
in the CODM package
IAS 7
- Clarification that expenditure is classified as investing only when it is
an asset recognised on the balance sheet – relevant to extractive
industries and advertising and promotion as well as R&D activities
IAS 18
- Additional guidance on identification of principal and agent

January 2009
Slide 112
Third Wave of IFRS – major ongoing projects

Project Expected time of issuance

of IFRS
Consolidation 2009
JVs IAS 31 2009
SME standard 2009
Provisions IAS 37 2009
Fair value measurement (guidance) 2010
Income tax IAS 12 2010
Leases IAS 17 2011
Revenue recognition IAS 18 2011
Retirement benefit plans IAS 19 2011
Insurance contracts IFRS 4 2011

January 2009
Slide 113
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