The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Classification of liabilities Joint World Bank and IFRS Foundation train the trainers workshop hosted by the ECCB, 30 April to 4 May 2012 International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Concepts classification of liabilities
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 3 Classification concepts Objective of financial reporting Financial statements portray financial effects of transactions and events by: grouping into broad classes (the elements, eg liability) sub-classify elements IAS 1 application of IFRSs with additional disclosures when necessary results in a fair presentation (faithful representation of transactions, events and conditions) dont offset assets and liabilities or income and expenses
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 4 Classification conceptsassets and claims Information about the nature and amounts of a reporting entitys economic resources and claims can help users to identify the reporting entitys financial strengths and weaknesses. That information can help users to: assess the reporting entitys liquidity and solvency its needs for additional financing and how successful it is likely to be in obtaining that financing. (CF.OB13) IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 5 Classification conceptsclaims Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity (CF.OB13) IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org A liability is defined as a: present obligation arising from a past event the settlement of which is expected to lead to an outflow of future economic benefits from the entity 6 Conceptliability definition IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Conceptliability recognition A liability is recognised when: it is probable that any future economic benefit associated with the item will flow from the entity; and the item has a value that can be measured with reliability.
7 For some items that satisfy the definition of a liability, significant judgement is required to evaluate whether such items satisfy the recognition criteria. Individual IFRSs provide principles and application guidance. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Differentiating equity from liabilities
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Liabilities and equity Differentiation between a financial liability and equity depends on whether there is an obligation to deliver cash (or some other financial asset). However, note the exception for certain puttable instruments. When a transaction will be settled in the issuers own shares, classification depends on whether the number of shares to be issued is fixed or variable. 9 IAS 32 Financial Instruments: Presentation IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org IAS 32 Financial Instruments: Presentation The following are equity: Puttable instrument that entitles holder to pro rata share of net assets on liquidation Instrument that is automatically redeemed if an uncertain future event occurs or death or retirement of holder Subordinated instrument payable only on liquidation IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org IAS 32 Financial Instruments: Presentation The following are liabilities: Instrument is payable on liquidation, but the amount is subject to a maximum ceiling Entity is obliged to make payments before liquidation such as mandatory dividend Mandatorily redeemable preference shares
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Compound financial instruments A compound financial instrument, such as a convertible note, is split into equity and liability components. When the instrument is issued, the equity component is measured as the difference between the fair value of the compound instrument and the fair value of the liability component. 12 IAS 32 Financial Instruments: Presentation IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Examplecompound financial instrument Issuance of convertible debt - Example 1/1/X1 issue at par a 4% convertible bond, par and maturity amount = 50,000, maturity in 5 years If no conversion feature, would have paid 6% Calculate present value of cash flows at 6%: PV 50,000 due in 5 years @ 6% = 37,363 PV annuity 2,000/year 5 years @ 6% = 8,425 Total PV = 45,788 Debit cash 50,000 Credit financial liability 45,788 Credit equity (conversion right) 4,212 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Treatment of interest, dividends, gains and losses Classification of a financial instrument as a financial liability or equity determines the treatment of the interest, dividends, losses or gains on the financial instrument as items of income or expense, or as changes in equity. dividends on shares classified as liabilities are recognised as expenses and affect profit or loss. 14 IAS 32 Financial Instruments: Presentation IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Comparison to the IFRS for SMEs Section 22 Liabilities and Equity of the IFRS for SMEs and IAS 32 share similar principles.
15 IAS 32 Financial Instruments: Presentation IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Judgements and estimates Some financial instruments may have the legal form of equity but their substance is one of a liability. Separating the liability and equity components requires fair value estimates of the liability component based on the contractual stream of future cash flows discounted at the market rate that would have been applied without the conversion option.
16 IAS 32 Financial Instruments: Presentation IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org IFRS 2 Share-based Payment Recognition The transaction is recognised when the entity obtains the goods or services. Goods or services received are recognised as assets or expenses as appropriate. The transaction is recognised as equity (if equity- settled) or as a liability (if cash-settled). If a payment is required, the payment amount is based on the price of the entitys shares (eg share appreciation rights).
17 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Classifying liabilities
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 19 19 Liability Liabilities Contingent Financial Provisions etc Leases Defined Benefit Deferred Tax Classification, recognition and measurement IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Provisions A provision is a liability of uncertain timing or amount (ie recognition is uncertain). A liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entitys actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. 20 IAS 37: Provisions, Contingent Liabilities and Contingent Assets IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 21 IAS 37: Provisions, Contingent Liabilities and Contingent Assets Examplesprovisions Ex 1: Waste from As factory contaminated the groundwater. Lawsuit: local community seek compensation for damages to health from contamination. A acknowledges wrongdoing. Court is deciding extent of the compensation. Lawyers expect ruling in +2 yrs & compensation in the range of CU1,000,000 to CU30,000,000.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 22 IAS 37: Provisions, Contingent Liabilities and Contingent Assets Ex 2: Waste from As factory contaminated the groundwater. Required by law to restore the environment. Estimates restoration cost between 1,000,000 & 15,000,000. Unsure of period to complete restoration. Ex 3: A manufacturer gives warranties to the purchasers of its goods. Warranty = make good, by repair or replacement, manufacturing defects that become apparent within 3 years of sale.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 23 IAS 37: Provisions, Contingent Liabilities and Contingent Assets Examplesnot provisions Ex 1: provision for self-insurance Ex 2: Ski-resort operator operates in a very cyclical business, with good years and bad years depending primarily on the weather. To reduce earnings volatility, it recognises provisions in good years to reverse in bad years. Ex 3: provision for depreciation Ex 4: provision for doubtful debts
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 24 IAS 37: Provisions, Contingent Liabilities and Contingent Assets Exampleconstructive obligation Waste from As factory contaminated the groundwater. A is not required by law to restore the contaminated environment & there is no court case. However, in the reporting period the entity publicly announced that it would restore the contaminated environment within the next 12 months.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Contingent liabilities Contingent liabilities are: possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. obligations that are not recognised because their amount cannot be measured reliably or settlement is not probable (eg litigation against the entity when the occurrence of any wrongdoing by the entity is uncertain and it is more likely than not that the entity will successfully defend the case). Contingent liabilities are not recogniseddefinition and recognition criteria are not met.
25 IAS 37: Provisions, Contingent Liabilities and Contingent Assets IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 26 IAS 37: Provisions, Contingent Liabilities and Contingent Assets Examplecontingent liability A community is seeking compensation from A for damages to their health as a result of contamination believed to be caused by As plant. It is doubtful whether A is the source of the contamination because many entities operate in the same area producing similar waste & it is unclear which entity is the source of the leak A has taken precautions to avoid leaks and is vigorously defending the case. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 27 IAS 37: Provisions, Contingent Liabilities and Contingent Assets Examplecontingent liability continued However, it is not certain that it did not caused the leak and the true offender will only become known after extensive testing has been performed. As legal counsel expects a court ruling in approximately 2 years. If A loses the case, compensation is likely to be in the range of CU1,000,000 to CU30,000,000. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 28 IAS 37: Provisions, Contingent Liabilities and Contingent Assets Examplecontingent liability continued It may be uncertain whether the entity has a present obligationthis is the matter being determined by the court. if taking account of all of the available evidence, it is probable that the entity will successfully defend the court case then the entity has a possible obligation and hence a contingent liability. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Judgements and estimates In some cases judgement is used to determine whether to recognise a provision (liability) or merely to disclose a contingent liability. For example, when defending a court case in which it is difficult to predict the outcome. In other cases judgement is used to determine whether to disclose a contingent asset. For example, a plaintiff in a court case in which it is difficult to predict the outcome.
29 IAS 37: Provisions, Contingent Liabilities and Contingent Assets IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 2011 October | Sao Paulo IFRS Conference All financial liabilities Amortised cost FVO for mismatch, managed on FV basis and hybrids Except: Held for trading Fair value through P&L Own credit in OCI Hybrid financial liabilities are bifurcated
No reclassification permitted 30 Classification model: financial liabilities IFRS 9 Financial Instruments IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Judgements and estimates Classification of financial assets into IFRS 9 categories drives the subsequent measurement and requires careful consideration of all available evidence. Classification is made primarily based on an entitys business model Fair value measurement requires maximum possible use of observable market data and the minimum use of entity-specific factors. In the absence of a quoted active market, it will be necessary to use valuation techniques.
31 IFRS 9 Financial Instruments IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Classification of leases A finance lease transfers to the lessee substantially all the risks and rewards incidental to ownership of the leased asset. All other leases are operating leases. When a lease includes both land and buildings elements, the classification of the land and building elements are considered separately. in determining whether the land element is an operating or finance lease, an important consideration is that land normally has an indefinite economic life. 32 IAS 17 Leases IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 33 IAS 17 Leases Situations that individually or in combination normally indicate a finance lease: lease transfers ownership of the asset to lessee from inception lessee reasonably certain to exercise bargain purchase option lease term is for the major part of assets economic life at inception PV of MLPs = substantially all assets fair value specialised asset (only lessee can use without major modifications) IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 34 IAS 17 Leases Situations that individually or in combination could indicate a finance lease lessee can cancel the lease but compensates the lessors for associated losses gains or losses from the fluctuation in the residual value of the leased asset accrue to the lessee lessee can continue the lease for a secondary period at a rent that is substantially lower than market rent IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Exampleslease classification Ex 1: On 1/1/20X1 enter into 5-yr non-cancellable lease over a machine. Machines cash cost = 100,000, economic life = 10 yrs and residual value = 0. Annual lease payments on 31/12: 4 23,000 & 23,539 at end of yr 5 when ownership transfers to the lessee. The interest rate implicit in the lease is 5% p.a. which approximates lessees incremental borrowing rate. 35 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Exampleslease classification
Ex 2: Same as Ex 1 except ownership of the machine does not automatically transfer to the lessee at the end of the lease. Instead, the lessee has an option to acquire the machine from the lessor on 1/1/20X6 for CU1.
Ex 3: Same as Ex 1 except economic life of the machine is five years and ownership of the machine does not transfer to the lessee at the end of the lease. 36 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Exampleslease classification
Ex 4: Same as Ex 1 except ownership does not transfers to lessee at the end of the lease. Instead lessee has an option to continue the lease asset for a further 5 years at a rent of CU1 per year.
Ex 5: Same as Ex 1 except ownership transfers to the lessee at the end of the lease for a variable payment equal to the assets then fair value (instead of 23,539). 37 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Operating leases The leased asset remains in the statement of financial position of the lessor. Operating lease payments are usually recognised in profit or loss on a straight-line basis. From the perspective of the lessee, if payments are subject to escalation, straight-line recognition is profit or loss may give rise to a liability on the statement of financial position 38 IAS 17 Leases IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Finance leases Finance leases are accounted for by lessees as an asset purchased (other IFRSs then apply to the asset) on credit (a liability). Initially, the liability is recognised at: the fair value of the leased property, or if lower The present value of the minimum lease paymentsthe implicit interest rate is used as the discount rate
39 IAS 17 Leases IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Employee benefits Employee benefits are all forms of consideration paid for services of employees or for termination of employment. IAS 19 separates employee benefits into 4 categories: short-term benefits post-employment benefits other long-term benefits termination benefits 40 IAS 19 Employee Benefits IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Short-term employee benefits Short-term employee benefits are expected to be settled wholly before 12 months after the period in which the employee rendered the related service. recognise as an expense as the employee provides the related service measure obligations at undiscounted amounts (application of the cost constraint) no disclosures specified in IAS 19. 41 IAS 19 Employee Benefits IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 42 IAS 19 Employee Benefits Examples of Short-term employee benefits include: wages, salaries & social security contributions; S/T compensated absences (paid annual leave & paid sick leave) for absences expected to occur within 12 month limitation; profit-sharing & bonuses payable within 12 month limitation; & non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Post-employment benefits Post-employment benefits are payable after the completion of employment. Two types: defined contribution plan, entity pays fixed contributions to a separate entity (a fund) and has no legal or constructive obligation to pay further contributions if the fund cannot pay the employee. all other post-employment plans are defined benefit plans. 43 IAS 19 Employee Benefits IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Post-employment benefitsdefined contribution Employees (not the employer) are exposed to risks. Employer: recognises contributions payable as an expense as the employee provides services in exchange for the contributions. measures obligations for unpaid contributions at undiscounted amounts (application of the cost constraint). disclose amount recognised as an expense. 44 IAS 19 Employee Benefits IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Post-employment benefitsdefined benefit Recognise the defined benefit liability as follows: use the projected unit credit method based on actuarial assumptions to measured the obligation at its present value; less the fair value of plan assets (if any). Recognise all changes in the defined benefit liability (asset) when they occur: service costs and net interest in profit and loss remeasurements in other comprehensive income. Extensive disclosures specified. 45 IAS 19 Employee Benefits IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Other long-term benefits Other long-term benefits are all employee benefits other than short-term employee benefits, post-employment benefits and termination benefits (eg long-service leave) Recognition and measurement is the same as that for post-employment benefits: defined benefit plans. No disclosures specified in IAS 19. 46 IAS 19 Employee Benefits IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Termination benefits Termination benefits arise only on termination, rather than during employment. Principlethe event that gives rise to an obligation is the termination of employment rather than employee service Recognise expense and a liability at the earlier of: when the entity can no longer withdraw the offer of those benefits when the entity recognises the related restructuring provision in accordance with IAS 37. No disclosures specified in IAS 19.
47 IAS 19 Employee Benefits IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 48 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 49
The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. 49