Moore Stephens Europe Limited

IFRS/ISA Training Conference

January 2007

David Chopping, London

Agenda

• IAS 39 Financial Instruments: Recognition and Measurement

• IFRS 2 Share Based Payment

• IFRS 3 Business Combinations

• IFRS 4 Insurance Contracts

• IFRS 5 Assets Held for Sale and Discontinued Operations

• IFRS 6 Exploration for and Evaluation of Mineral Reserves

• IFRS 7 Financial Instruments: Disclosures

• IFRS 8 Operating Segments

• IFRICs and Current Projects

Scope of IAS 39

• Does not apply to:– Interests in subsidiaries, associates and joint ventures,

unless comes back via other standard, and does apply to derivatives on an interest unless equity

– Leases, but• Lease receivables of lessors are subject to impairment and

derecognition requirements• Finance lease payables are subject to derecognition

requirements• Derivatives embedded in leases are embedded derivatives

– Employee benefit plans– Equity (per IAS 32) instruments of issuer– Insurance contracts, other than financial guarantees unless

IFRS 4 previously applied

Scope of IAS 39

• Does not apply to:– Contingent consideration in business combinations

– Contracts for a future business combination

– Loan commitments, unless:• Designated as at fair value through profit or loss, or

• Can be settled net in cash or delivery of financial instruments or

• Below market rates

– (Loan commitments are covered by IAS 37)

– Instruments covered by IFRS 2, unless can be settled in cash

– Rights to reimbursement for expenditure to cover a provision required by IAS 37

Scope of IAS 39

• IAS 39 does apply to non-financial contracts which:– Allow settlement in cash (or other financial instruments)

– In practice, are settled in cash

– Delivery occurs but resale is short-term in same state

– The non-financial item is readily convertible to cash

• IAS 39 now applies to all financial guarantee contracts, other than as set out above

Embedded Derivatives

• Accounted for as a derivative if, and only if:– Economic characteristics and risks differ from those of host contract;

– Separate instrument with same terms would be a derivative; and

– The hybrid is not measured at fair value with changes in value through profit or loss

• But, can treat whole contract as at fair value through profit or loss if:– The embedded derivative does not significantly modify the cash flows;

or

– Separate treatment of derivatives is prohibited (under other rules)

• And must if the embedded derivative cannot be valued separately

Initial recognition

• Party to contractual obligations

• Regular way– Trade date; or

– Settlement date

Derecognition of Assets

• Stage 1 – Prior to considering derecognition

– Part only if:• Specifically identifiable cash flows; or

• Fully proportionate share of total cash flows; or

• Fully proportionate share of specifically identified cash flows

– Otherwise in full

– Then stage 2

Derecognition of Assets

• Stage 2 – Basic requirement

– When and only when:• The contractual rights to cash flows expire; [Derecognise] or

• The asset is transferred and qualifies for derecognition. [Stage 3]

Derecognition of Assets

• Stage 3 – Basic transfer requirements

– Transfer valid if and only if:• Transfers contractual rights to receive the cash flows of the asset;

[Stage 5] or

• Retains contractual rights, but creates contractual obligations to pay to recipients; [Stage 4]

Derecognition of Assets

• Stage 4 – Creation of contractual obligations

– Transfer if and only if:• No obligation to pay unless amounts collected; and

• Prohibited from selling or pledging original asset; and

• Required to remit without material delay, holding as cash (or cash equivalent) and passing on interest. [Stage 5]

Derecognition of Assets

• Stage 5 – Risks and rewards on transfer

– If transferred risks and rewards – Derecognise (may still have other assets and liabilities)

– If not transferred – Do not derecognise

– If neither:• If retained control – Continue to recognise to extent of involvement

• If lost control - Derecognise (may still have other assets and liabilities)

– Tests based on cash flows before and after

Derecognition of Liabilities

• Derecognise when:

– Obligation is discharged;

– Obligation is cancelled; or

– Obligation expires.

Derecognition of Liabilities

• Exchange of debt– Extinguishment and new debt

• Substantial modification of debt– Extinguishment and new debt

On Derecognition

• Recognise difference between:– Carrying amount;

– Consideration (including new assets and liabilities, recognised at fair value)

– Cumulative gains or losses previously in equity

• If a servicing fee is retained:– At fair value

– Liability if costs exceeds income

– Pro-rata if above fair value

If No Derecognition

• Retain asset

• Record liability

• Treat separately

Initial Measurement

• Assets and liabilities recognised at fair value

• If not accounted for at fair value through profit or loss, adjust for acquisition or issue costs

• If settlement date accounting is used, fair value is still measured at trade date

Classification of financial instruments

• At fair value through profit or loss (includes trading, derivatives and designated)

• Held to maturity investments

• Loans and receivables

• Available for sale financial assets

• Special rules:– Derivatives

– Equity instruments of issuer

– Compound instruments of issuer

Subsequent Measurement - Assets

• Held to maturity investments - AC

• Available for sale financial assets - FV

• Loans and receivables – AC

• At fair value through profit or loss – FV

• Exceptions for:– Private equity

– Hedging

Subsequent Measurement - Liabilities

• At amortised cost, except:– Liabilities at fair value through profit or loss

– Liabilities linked to assets under derecognition rules

– Financial guarantees, at higher of:• IAS 37 amount; and

• Initial recognition amount less cumulative amortisation

– Commitments to provide loans at below market interest rates, at higher of:• IAS 37 amount; and

• Initial recognition amount less cumulative amortisation

• Exception for hedges

Gains and Losses

• At fair value, through profit or loss

• Available for sale, via equity except;– Impairment– Foreign exchange gains and losses– On derecognition– Interest using effective interest method– Dividends on equity investments

• Using effective interest method– Impairment– On derecognition– Interest using effective interest method

Impairment

• Impairment of a financial asset

• Objective evidence of impairment– Ignore expected future events

Impairment

• Objective events– Significant financial difficulty

– Breach of contract (eg default or delinquency)

– Concessions

– Likely bankruptcy or financial reorganisation

– Disappearance of active market

– Change in market conditions that clearly correlate

• Not, in isolation– Delisting

– Reduction in credit rating

Impairment

• Assets at amortised cost (eg loans, held to maturity)– Compare

• Carrying amount

• Present value of future cash flows discounted at original discount rate

– Charge to profit

– Reversal allowed, so long as not above original calculation

• Assets at cost (eg private equity)– Compare

• Carrying amount

• Present value of future cash flows discounted at current discount rate

– Charge to profit

– Reversal prohibited

Impairment

• Available for sale assets– Transfer losses recognised in equity to profit

• For equity items– No reversal of impairment losses through profit

• For debt items– Reversal can be recognised in profit, if objectively verifiable

Hedging

• Definitions:– Hedging

– Hedged item

– Hedging instrument

Hedging conditions

• Formal documentation

• Hedge expected to be highly effective

• Forecast transactions

• Effectiveness can be reliably measured

• Assessed on an ongoing basis

Hedging Instruments

• Mostly derivatives

• Non-derivatives only for foreign exchange risk

Hedging Instruments

• Generally, all of an item, for all of its life, must be the hedging instrument, but:– Intrinsic and time value of an option can be split with intrinsic

value used as a hedge

– Interest and spot element of a forward contract can be split

– Proportion can be used (eg 50% of notional) may be designated

Hedging Instruments

• Instrument can cover more than one type of risk, if:– The risks are clearly separate identifiable

– The effectiveness can be demonstrated

– The elements can be specifically designated

Hedged Items

• Recognised asset or liability

• Unrecognised firm commitment

• Highly probable forecast transaction

• Individual or group with similar risk characteristics

• For interest rate risk only, a portion of a portfolio

• Foreign currency risk of an intragroup monetary item or forecast transaction, if does not eliminate on consolidation

Hedged Items

• Financial items– Portions or percentages can be used

– Eg risk free interest rate

– For a portfolio for interest rate exposure, an amount can be designated

• Non-financial items– Only for currency risk, or

– In its entirety

Hedge Accounting

• Recognise offsetting effects

• Three types– Fair value hedge

– Cash flow hedge

– Hedge of a net investment in a foreign operation

• Foreign currency risk of a firm commitment may be fair value or cash flow

Fair Value Hedges

• Hedging instrument to profit

• Hedged item to profit, regardless of normal treatment– Goes into amortised cost calculation, if relevant

• For interest rate hedge of a portfolio can treat gain or loss as a separate asset

• For firm commitment can treat gain or loss as a separate asset, on commitment

Cessation

• Hedge accounting for fair value ceases if:– Hedging instrument sold, terminated, expires or is exercised

(excluding planned rollovers)

– Criteria no longer met

– Entity revokes designation

Cash Flow Hedges

• Effective portion - equity

• Ineffective portion - profit

• Firm commitment or forecast transaction, then recognise in profit when asset or liability affects profit

• If results in non-financial assets or liability then as above, or in asset or liability. (Policy required)

Cessation

• Sold, terminated, expiry or is exercised (ignoring planned rollovers)

• Criteria no longer met

• Forecast transaction no longer expected to occur

• Revokes designation

Share Based Payment

• IFRS 2

• Affects– Employee share schemes

– Share options

– Cash payments based on shares

Share Based Payment

• Scope– Basically, all share based payment transactions

• Direct

• Indirect

• Cash settled

– Excludes• Shares issued as part of a business combination (IFRS 3)

• “Commodity” contracts not for use in the business which are financial instruments in their own right (IAS 32 & 39)

Share Based Payment

• Cash-Settled– Estimate value initially

– Amend in subsequent periods

– Liability must equal amount paid at time of vesting

Share Based Payment

• Equity-Settled– Third parties

• Presumption of valuing goods or services

– Employees and similar• Value instruments

Share Based Payment

• Third Parties– Fair value of goods and services received

– Corresponding change in equity

Share Based Payment

• Employees and similar, or where presumption rebutted– Value the instruments at the measurement date

– Measurement date is grant date for employees, goods or service date for others

Share Based Payment

• Valuing the instruments– Market value– Otherwise

• Black Scholes• Binomial• Trinomial• Monte Carlo

– But• Ignore vesting conditions, other than market conditions, since these

are taken into account in determining the expected number of shares to be issued;

• Include market conditions, such as a target share price;• Ignore reload features (automatic further issue where shares are

used to satisfy the exercise price)

Share Based Payment

• Proposals for change– Cancellation leads to charging of unamortised balance

Business Combinations

• IFRS 3

• Purchase method only– No mergers

• Excluded from scope:– Creation of a joint venture

– Entities or businesses under common control

– Two or more mutual entities

– Reporting entity created solely by contract

Business Combinations

Application of purchase method

• Identify an acquirer

• Measure cost– Fair values of assets, liabilities and equity instruments– Directly attributable costs– Best estimate of contingent amounts

Business Combinations

• Allocate cost to assets and liabilities acquired– Identifiable assets and liabilities stated at fair value– Held for sale assets, stated at fair value less costs to sell– Intangible assets and contingent liabilities stated at fair value

• If can be measured reliably

– No liabilities for “restructuring” costs– Goodwill

• Excess of acquirer’s interest over cost• Afterwards, stated at cost less impairment

– “Negative goodwill”• Check your maths• Take to profit

Business Combinations

• Combination in stages– Adjust at each stage– Remainder of entry is revaluation but does not imply a policy

of revaluation

• Provisional amounts– Must correct within twelve months by way of prior period

adjustment

• Deferred tax– If not accounted for, but subsequently recovered:

• Reduce goodwill accordingly• Recognise goodwill reduction as an expense• Recognise tax income

Business Combinations

• Proposals for change– No changes for contingent payments

– No capitalisation of transaction costs

Insurance Contracts

• IFRS 4

• Interim measure– Applies from 1 January 2005– Exempts insurance contracts from many other IFRSs

• Some “limited improvements”– Prohibits equalisation provisions– Prohibits offset of insurance and reinsurance– Prohibits catastrophe provisions, where not occurred

• Allows, for those already applying– Undiscounted insurance liabilities– Excessive prudence– Measuring future investment management fees at above fair value– Using different accounting policies for subsidiaries

Insurance Contracts

• Scope excludes– Product warranties

– Pension schemes

– Residual value guarantees

– Most financial guarantee contracts

– Contingent consideration in a business combination

– Insurance contracts as policyholder (but does apply to cedants)

Insurance Contracts

• Embedded derivatives– IAS 39 does not apply to fixed value rights for policyholder to

surrender– IAS 39 does apply to variable value rights for policyholder to

surrender, or if triggered by a change in a variable

• Unbundling (ie separate insurance and deposit components)– Required if

• Deposit can be measured separately• Not already required to recognise all obligations and rights

associated with the deposit

– Permitted if deposit can be measured separately– Prohibited if cannot be measured

Insurance Contracts

• Temporary Exemptions– Criteria for accounting policies, but must

• Prohibit catastrophe provisions and equalisation provisions

• Undertake a liability adequacy test

• Apply IAS 39 rules on elimination of liabilities

• Apply criteria for changing a policy

– Liability adequacy test can be in any form which:• Estimates all contractual future cash flows, including claims

handling costs; or else

• Apply IAS 37

Insurance Contracts

• Discretionary Participation Features– May, but need not, be recognised separately

– If recognised, treat as liability or equity

– May recognise premiums in total, without splitting

Disposal/Discontinued Operations

• IFRS 5– Non-Current Assets Held for Sale and Discontinued Operations

• Effective date– 1 January 2005

• Excluded assets– Entirely

• Deferred tax assets• Financial assets covered by IAS 39• Assets arising from employee benefits

– Excluded from measurement• Non-current assets carried at fair value with changes recognised in profit or

loss– Excluded from presentation

• Goodwill• Financial assets arising under leases

Disposal/Discontinued Operations

• Presentation of assets held for sale– Applies to individual assets and disposal groups

• Disposal group– Group of assets, and associated liabilities, to be disposed of

by sale or otherwise as a group in a single transaction

Disposal/Discontinued Operations

• Held for sale if:– Management has the authority, and commits itself to a plan to

sell

– asset or disposal group available for immediate sale in present condition, subject to normal terms

– active programme to locate a buyer and other necessary actions have started

– sale highly probable within one year (with exceptions)

– asset or disposal group being actively marketed for sale at a reasonable value

– actions indicate it is unlikely that changes to plan or withdrawal will take place

Disposal/Discontinued Operations

• Measurement– Basic rule, lower of current carrying value and net realisable

value (called fair value less costs to sell)

– Applies whether asset previously revalued or stated at cost, however apply previous IFRS rules immediately prior to reclassification

– Impairment review may be required

– No depreciation, even where asset still in use

Disposal/Discontinued Operations

• Discontinued operations– Retention of material criterion for classification

– “Held for sale”, or to be abandoned

Disposal/Discontinued Operations

• Presentation and disclosure

• Discontinued operations– Post-tax profit or loss and post-tax gain or loss on

remeasurement or disposal• Total on face of income statement

• Analysis on face of income statement or in notes

– Net cash flows by category• On face of cash flow statement or in notes

– Comparatives• As above

Disposal/Discontinued Operations

• Presentation and disclosure

• Held for sale– Separately on balance sheet,

– No offset

– Notes• Description of facts and circumstances leading to expected

disposals, including expected timing and manner

• Gain or loss, and if not on face of income statement, the heading within which included

• If applicable, segment within which reported

Mineral Exploration

• IFRS 6

• Interim standard

• Intended to:– Make limited improvements to accounting

– Provide impairment tests

– Require disclosures

Mineral Exploration

• Scope of IFRS 6– Applies to exploration and evaluation expenditures

• Does not apply to– Expenditures prior to obtaining a right to explore

– Expenditure after technical feasibility and commercial viability is demonstrable

Mineral Exploration

• Exemptions– Analogy rule in IAS 8 does not apply

Mineral Exploration

• Measurement– Recognition at cost

• Example costs– Acquisition of rights– Topographical, geological, geochemcial and geophysical

studies– Exploratory drilling– Trenching– Sampling– Feasibility studies

• Development costs are outside IFRS 6

Mineral Exploration

• Measurement after recognition– Revaluation or cost

• Classification as tangible or intangible

• Reclassify once viable, after an impairment test

Mineral Exploration

• Impairment– Test if there is an indication of impairment

• Right to explore short or expired, and renewal not expected

• No planned further expenditure

• No viable quantities found and planning to discontinue

• Sufficient evidence to show not profitable in the long term as insufficient reserves

– Determine cash-generating units or groups • May not be larger than an IAS 14 segment

IFRS 7

• Implementation 2007, with early adoption allowed

IFRS 7

• Classification

• Divide between– Assets at fair value through profit or loss

– Held to maturity

– Loans and receivables

– Available for sale

– Liabilities at fair value through profit or loss

– Liabilities at amortised cost

• Give details of reclassifications

IFRS 7

• If there are liabilities at fair value, then:– Changes in value not due to movements in interest rates

– Difference between carrying amount and contractual amount at maturity

• Collateral– Carrying amount of pledged financial assets, separately for

contingent liabilities

– Details of collateral accepted

IFRS 7

• Details of allowance accounts for credit losses

• Details of defaults and breaches in the year, unless remedied by the balance sheet date

IFRS 7

• Details of net gains or losses on:– Items at fair value through profit or loss

– Available for sale assets

– Held to maturity investments

– Loans and receivables

– Financial liabilities at amortised cost

• Details of fee income and expense on financial assets and liabilities, if not included in determining the effective interest rate

• Details of interest income on impaired assets

IFRS 7

• Impairment– Details of impairment losses by class of asset

IFRS 7

• Accounting policies– Criteria for at fair value through profit or loss– Criteria for available for sale– Criteria for allowance accounts and write offs– Criteria for impairment

• If fair value is not adopted, treatment of– Costs of acquisition or issuance– Premiums and discounts– Changes in estimates of future cash flows– Changes giving rise to uncertainty– Declines below carrying amount– Restructured financial liabilities

IFRS 7

• Hedge accounting– Description of hedge

– Description of hedging instrument

– Nature of risks

– For cash flow hedges, when cash flow is expected to occur

– Details of forecast transactions for which hedge accounting was used but where the transactions are no longer expected to occur

– Details of items taken to equity

IFRS 7

• Fair values by class, excluding– Short term items where no material difference from carrying

value

– Unquoted equities, or items linked to them, but details are required

• Methods and assumptions used in calculating fair values

• Whether published quotations are used

• Whether valuation techniques are used not base on market prices, and details of sensitivity

IFRS 7

• Qualitative risk disclosures– Details of exposures and how arose

– Objectives, policies and procedures for managing risk

– Methods used to measure risk

– Changes in any of these from the previous period

• Details of concentrations of risk

IFRS 7

• Credit risk– Maximum exposure, ignoring collateral

– Description of collateral, with fair values if practicable

– Information on credit quality of financial assets with credit risks that are neither impaired nor past due

– Details of items that are impaired or past due

– Details of collateral acquired during the period

• Liquidity risk– Maturity analysis of liabilities

– Description of how liquidity risk is managed

IFRS 7

• Market risk– Sensitivity analysis, showing the effect of changes in the

relevant variable

– Methods and assumptions used in preparing the sensitivity analysis

– Changes in the methods and assumptions since the previous periods

IAS 1 - Capital

• Capital– Qualitative information about objectives, policies and

processes for managing capital

– Summary quantitative data about capital

– Changes from the previous period

– Whether the company complied with external requirements

– Details of implications of any non-compliance with external requirements

Segment Reporting

• IFRS 8– Effective 1 January 2009

• Scope– Individual entities with traded securities– Individual entities filing for the purposes of issuing traded

securities– Consolidated financial statements of a parent with traded

securities– Consolidated financial statements of a parent filing for the

purposes of issuing traded securities

• Other entities must not describe information as segment information

Segment Reporting

• Operating segment– Engages in business to earn revenues

– Operating results are assessed or reviewed by chief operating decision maker

– Separate information available

• If more than one basis for internal reporting, other factors such as segment managers

Segment Reporting

• Reportable segments– Aggregate if similar by reference to:

• Nature of products or services

• Nature of production processes

• Type or class of customer

• Methods of distribution

• Nature of regulatory environment

– Disclose if:• 10% of total revenues

• 10% or more of “gross” profits or losses

• 10% of assets

Segment Reporting

• Reportable segments– Aggregate if less than 10% and majority of aggregation criteria

met

– 75% of revenues must be within reportable segments

– Report separately if met thresholds in prior year and still significant

– Adjust comparatives if meet thresholds for first time (with cost exemption)

– “Rule of thumb” on 10 reportable segments

Segment Reporting

• Disclosure– General

• Factors used to identify segments

• Types of products or services by segment

– Measure of profit

– Total assets

– Total liabilities, if reported internally

Segment Reporting

• Disclosure– If reported internally then:

• revenues from external customers;• revenues from transactions with other operating segments of the

entity;• interest revenue;• interest expense;• depreciation and amortisation;• material items of income and expense separately disclosed;• the entity’s interest in the profit or loss of associates and joint

ventures accounted for by the equity method;• income tax expense or income; and• material non-cash items other than depreciation and amortisation.

Segment Reporting

• Measurement– Measure based on internal reporting

• Explanation of measurement– Basis of accounting for intra-segment transactions

– Nature of differences between segments’ profits, assets and liabilities (if not covered by reconciliations)

• Reconciliations– Revenue

– Profit, normally to profit before tax and discontinued operations

– Assets

– Liabilities

– Other reported items

Segment Reporting

• Other disclosures– Revenues by products or services

– External revenues between• Country of domicile

• Other countries

• Individual countries if material, with basis

– Assets (excluding financial instruments, deferred tax, pensions and insurance rights)• Country of domicile

• Other countries

• Individual countries if material

Segment Reporting

• Major customers (10% of revenues)– Fact

– Total per customer

– Segment within which included

– Not• Name

• Amount within each segment

– Includes• Entities under common control

• Government

IFRIC 6

• Accounting periods beginning on or after 1 December 2005, although early adoption is encouraged.

• EU Directive on Waste Electrical and Electronic Equipment - cost of waste management for equipment sold to households before 13 August 2005 borne by producers in the market during the period specified in legislation of member state, pro-rata.

• IFRIC consensus - concluded that the event giving rise to the liability for costs of such historical waste, and so its recognition, is participation in the market during a measurement period, ie a period in which market shares are determined for the purposes of allocating waste management costs.

IFRIC 7

• Hyperinflation is assumed always to have been in place

• Deferred tax in two stages– Recalculate comparative balance on nominal figures

– Update to current prices

IFRIC 8

• Deals with apparently undervalued consideration for share based payments

• Effective periods beginning on or after 1 May 2006

IFRIC 8

• Consensus– IFRS 2 applies even where goods or services are not

identifiable

– Value what you can

– Balancing figure for the remainder

– Applies to charitable donations in the form of shares

– Value at grant date

– Recalculate if cash settled share based payment

IFRIC 9

• Deals with:– Whether embedded derivatives should be reassessed

– When evaluation should take place on initial application of IAS 39

• Effective periods beginning 1 June 2006

IFRIC 9

• Consensus– Embedded derivatives must not be reassessed unless there is

a change in their terms affecting their cash flows

– Embedded derivatives must be reassessed if there is a change in their terms affecting their cash flows

– Embedded derivatives on initial application of IAS 39 must be assessed as at the date of the contract, or the date of a required reassessment as above

IFRIC 10

• Impairments made in an interim period must not be reversed in subsequent interim or annual periods

• Therefore the number of interims an entity has may affect its balance sheet at the end of the accounting year

• Due to an inconsistency between IAS 34 and various other standards

IFRIC 11

• Two issues addressed:– Rights to shares are granted by an entity or shareholders,

which must buy the instruments, or which will be provided by shareholders

– One entity grants rights to shares in another entity (eg subsidiary grants rights to shares in the parent) or company grants rights to its shares to employees of another entity (eg parent grants rights to employees of a subsidiary)

• Effective accounting periods beginning on or after 1 March 2007

IFRIC 11

• Consensus– Rights to shares which the entity needs to acquire are still

equity settled share based payments

– Parent grants rights to employees of a subsidiary• Parent treats as equity settled

• Parent makes investment, subsidiary recognises increase in equity

• If employee transfers to another group company, record at “fair value” based on original transaction values

– Subsidiary grants rights to its employees for shares in parent• Treat as cash settled at subsidiary level

– NB – No change in group accounts

IFRIC 12

• Service concessions– Accounting treatment not disclosure

• No property, plant and equipment

• Consideration– Construction or upgrade (IAS 11)

• Financial asset is unconditional right to cash

• Intangible assets if no unconditional right to cash

– Operation (IAS 18)

– Allocate by fair value

• Effective 1 January 2008

Business Combinations

• IASB Exposure Draft– Scope

– Concept

– Goodwill and Fair Values

– Acquisition Costs

– Consideration

– Subsequent Changes in Group

Provisions and Contingencies

• Terminology– Non-financial liabilities

• Valuation– Exit values

• Example– £1m claim

– 10% likelihood

– Current – Nil, but disclose

– Proposal - £100,000

Management Commentary

• Discussion paper– Should be packaged with accounts– IASB should publish guidance to promote consistency– Objective - to provide information to investors to interpret and assess

the financial statements in the context of the environment in which the entity operates, to assess what management views as the most important issues facing the entity and how it intends to manage those issues, and to assess the strategies adopted by the entity

– Primary focus on investors– Not appropriate to specify precise information, but principles– Management to decide what information is necessary to meet these

requirements, and how exactly the information is to be presented– Limit on information– Placement criteria for financial statements and commentary.

Presentation Proposals

• Presentation– Current proposals

• One or two statements of performance

• Three “balance sheets”

• Balance sheet becomes “Statement of financial position”

– Future project• Aggregation principles

• Reconsideration of totals and sub-totals

• Recycling

• Direct or indirect cash flows

IAS 32 and Equity

• Financial instruments puttable at the fair value of a pro-rata share of the net assets of the entity.

• Under IAS 32 – liability

• But:– the liability recorded can be equivalent to the fair value of the entity’s entire

capitalisation;– underlying profits are likely to lead to reported losses, whilst underlying

losses are likely to lead to reported profits;– many entities may report net liabilities, since the fair value of the business

will normally exceed the carrying value of the net assets, due to unrecorded assets (such as goodwill and intangibles) and assets not carried at fair value;

– the balance sheet shows an entity which appears to be primarily debt funded, which is not really a fair reflection of the position; and

– distributions are shown as expenses.

• IASB proposals – Treat as equity

IAS 32 and Equity

• Instruments with obligations arising only on liquidation

• Includes shares in finite life companies

• IASB proposal – Classify as equity, subject to fairly strict conditions

• In particular, all financial instruments in the most subordinated class of instruments having a right to require liquidation. This would not prove an obstacle for finite life companies, since all shares impose an obligation to transfer cash or assets on liquidation.

Conceptual Framework

• Published proposals on the objective of financial reporting and the characteristics of decision-useful financial information

• The objective of financial reporting is stated to be to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions

• Characteristics– relevance;– faithful representation, itself broken down into verifiability, neutrality

and completeness;– comparability (including consistency); and– understandability.

• No reliability

Other Projects

• Lease accounting - Discussion document 2008– All leases are “finance leases”?

• Employee benefit accounting – Changes by 2010

• Related party disclosure – Discussion document– State owned enterprises (China)

No Changes

• IASB - No new standards that will come into force until 2009

• Does not apply to:– IFRICs;

– Minor amendments to standards

• On an ongoing basis, at least one year between publishing an IFRS, or a major amendment to an IFRS, and the implementation date.

Moore Stephens Europe Limited

IFRS/ISA Training Conference

January 2007

David Chopping, London