A Quarterly Technical Newsletter of the Institute of Chartered Secretaries

and Administrators in Zimbabwe

IFRS 16 Leasing Standard applies from January 2019

1
IFRS 17 Insurance Contract supersedes IFRS 4 from 2021
2
ISA 200 deals with responsibilities of independent auditor
3
Dzidzo House, 22-32 McChlery Avenue, Eastlea, Harare
024-2700553/5, 2700624
cis@icsaz.co.zw
www.icsaz.co.zw
1 IFRS 16 Leasing Standard
applies from January 2019
International Financial Reporting Standard 16 (IFRS 16), which was issued by the
International Accounting Standards Board in January 2016, applies to annual reporting
periods beginning on or after 1 January 2019.

IFRS 16 supersedes the following standards and interpretations:

Ÿ International Accounting Standard (IAS) 17 Leases
Ÿ IFRIC 4 Determining whether an Arrangement contains a Lease
Ÿ SIC-15 Operating Leases - Incentives
Ÿ SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

Objective
The objective of IFRS 16 is to establish principles for the recognition, measurement, presenta-
tion and disclosure of leases, with the aim of ensuring that lessees and lessors provide relevant
information that faithfully represents those transactions. [IFRS 16:1]

Scope
According to IFRS 16:3, IFRS 16 applies to all leases, including subleases, except for leases to
explore for or use minerals, oil, natural gas and similar non-regenerative resources and leases
accounted for under IAS 41 and 38 and IFRS 15. However, a lessee can elect to apply IFRS 16
to leases of intangible assets other than those listed in paragraph 3 [IFRS 16:4].

Identifying a lease
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset
for a period of time in exchange for a consideration [IFRS 16:9]. Control is conveyed where
the customer has both the right to direct the identified asset's use and to obtain substantially all
the economic benefits from that use [IFRS 16:9].

Identified Asset
According to IFRS 16:20, a capacity portion of an asset is still an identified asset if it is physi-
cally distinct (for example, a floor of a building). A capacity or other portion of an asset that is
not physically distinct (for example, a capacity portion of a fibre optic cable) is not an identi-
fied asset unless it represents substantially all the capacity such that the customer obtains sub-
stantially all the economic benefits from using the asset.

Separating components of a contract

For a contract that contains a lease component and additional lease and non-lease components,
such as the lease of an asset and the provision of a maintenance service, lessees shall allocate
the consideration payable on the basis of the relative stand-alone prices, which shall be

1 Dzidzo House, 22-32 McChlery Avenue, Eastlea, Harare

1 IFRS 16 Leasing Standard
applies from January 2019
estimated, if observable prices are not readily available. As a practical expedient, a lessee may
elect, by class of underlying asset, not to separate non-lease components from lease compo-
nents and instead account for all components as a lease. [IFRS 16:13-15]

Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with
Customers.

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets
and liabilities for all leases with a term of more than 12 months, unless the underlying asset is
of low value. A lessee is required to recognise a right-of-use asset representing its right to use
the underlying leased asset and a lease liability representing its obligation to make lease
payments.

Accounting by lessees
Upon lease commencement a lessee recognises a right-of-use asset and a lease liability [IFRS
16:22]. The lease asset is the right to use the underlying asset and is presented in the statement
of financial position either as part of property, plant and equipment or as its own line item.

According to IFRS 16:26, assets and liabilities arising from a lease are initially measured on a
present value basis. The initial lease asset equals the lease liability in most cases.

However, variable lease payments that are not included in the measurement of the lease
liability are recognised in profit or loss in the period in which the event or condition that
triggers payment occurs, unless the costs are included in the carrying amount of another asset
under another Standard [IFRS 16:38(b)]. IFRS 16:36 states that the lease liability is subse-
quently re-measured to reflect changes in:
Ÿ the lease term (using a revised discount rate);
Ÿ the assessment of a purchase option (using a revised discount rate);
Ÿ the amounts expected to be payable under residual value guarantees (using an unchanged
discount rate); or
Ÿ future lease payments resulting from a change in an index or a rate used to determine those
payments (using an unchanged discount rate).

Recognition exemptions
Instead of applying the recognition requirements of IFRS 16 described above, a lessee may
elect to account for lease payments as an expense on a straight-line basis over the lease term or
on another systematic basis for the following two types of leases:
i) leases with a lease term of 12 months or less and containing no purchase options – this

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1 IFRS 16 Leasing Standard
applies from January 2019
election is made by class of underlying asset; and
ii) leases where the underlying asset has a low value when new (such as personal computers
or small items of office furniture) – this election can be made on a lease-by-lease basis
[IFRS 16:5, 6 & 8].

Accounting by lessors
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
Accordingly, a lessor continues to classify its leases as operating leases or finance leases and to
account for those two types of leases differently.

Sale and leaseback transactions

If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases
back from the buyer-lessor, both the seller-lessee and the buyer-lessor are required to account
for the transfer contract and the lease applying IFRS 16:99 to 103. To determine whether the
transfer of an asset is accounted for as a sale an entity applies the requirements of IFRS 15 for
determining when a performance obligation is satisfied, [IFRS 16:99].

Disclosure
The objective of IFRS 16's disclosures is for information to be provided in the notes that,
together with information provided in the statement of financial position, statement of profit or
loss and statement of cash flows, gives a basis for users to assess the effect that leases have.
Paragraphs 52 to 60 of IFRS 16 set out detailed requirements for lessees to meet this objective
and paragraphs 90 to 97 set out the detailed requirements for lessors [IFRS 16:51, 89].

Transition
As a practical expedient, an entity is not required to reassess whether a contract is, or contains,
a lease at the date of initial application [IFRS 16:C3]. A lessee shall either apply IFRS 16 with
full retrospective effect or alternatively not restate comparative information but recognise the
cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date
of initial application [IFRS 16:C5, C7].

3 cis@icsaz.co.zw
2 IFRS 17 Insurance Contract
supersedes IFRS 4 from 2021
A new International Financial Reporting Standard for insurance contracts, IFRS 17, which
was published by the International Accounting Standards Board (IASB) on 18 May 2017,
comes into effect the year after next.

IFRS 17 Insurance Contracts supersedes IFRS 4 Insurance Contracts. The new standard and
related interpretations are effective for periods from 1 January 2021 but can be adopted earlier,
if IFRS 15 and 9 have also been applied.

The fundamental task for insurers right now is to make the appropriate implementation
decisions.

Objective
The objective of IFRS 17 is to ensure that an entity
provides relevant information that faithfully repre-
sents the contracts. This information provides users of
financial statements with a basis to assess the effect
that insurance contracts have on the entity's financial
position, financial performance and cash flows.

Scope
IFRS 17 is applicable to insurance contracts (including reinsurance contracts), reinsurance
contracts the entity holds and investment contracts with discretionary participation features it
issues, provided the entity also issues insurance contracts.

Principles of IFRS 17
The key principles in IFRS 17 are that an entity:

Ÿ identifies as insurance contracts those contracts under which the entity accepts significant
insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the insured event) adversely affects the
policyholder;

Ÿ separates specified embedded derivatives, distinct investment components and distinct

performance obligations from the insurance contracts;

Ÿ divides the contracts into groups that it will recognise and measure;

Ÿ recognises and measures groups of insurance contracts at:

Ÿ a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that

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2 IFRS 17 Insurance Contract
supersedes IFRS 4 from 2021
incorporates all of the available information about the fulfilment cash flows in a way
that is consistent with observable market information plus (if this value is a liability) or
minus (if this value is an asset);

Ÿ an amount representing the unearned profit in the group of contracts (the contractual
service margin);

Ÿ recognises the profit from a group of insurance contracts over the period the entity provides
insurance cover and as the entity is released from risk. If a group of contracts is or becomes
loss-making, an entity recognises the loss immediately;

Ÿ presents separately insurance revenue (that excludes the receipt of any investment
component), insurance service expenses (that excludes the repayment of any investment
components) and insurance finance income or expenses; and

Ÿ discloses information to enable users of financial statements to assess the effect that
contracts within the scope of IFRS 17 have on the financial position, financial performance
and cash flows of an entity.

IFRS 17 includes an optional simplified measurement approach, or premium allocation

approach, for simpler insurance contracts.

The General Model

According to IFRS 17:32, the general model is so defined that at initial recognition an entity
shall measure a group of contracts at the total of:
(a) the amount of fulfilment cash flows (FCF), which comprise probability-weighted
estimates of future cash flows, an adjustment to reflect the time value of money (TVM)
and the financial risks associated with those future cash flows, and a risk adjustment for
non-financial risk; and
(b) the contractual service margin (CSM).

On subsequent measurement, the carrying amount of a group of insurance contracts at the end
of each reporting period shall be the sum of the liability for remaining coverage and the
liability for incurred claims.

Premium allocation approach (PAA)

An entity may simplify the measurement of the liability for remaining coverage of a group of
insurance contracts using the (PAA) on condition that [IFRS 17:53] at the inception of the
group:

5 Dzidzo House, 22-32 McChlery Avenue, Eastlea, Harare

2
(a)

(b)
IFRS 17 Insurance Contract
supersedes IFRS 4 from 2021
the entity reasonably expects that this will be a reasonable approximation of the general
model, or
the coverage period of each contract in the group is one year or less.

Where, at the inception of the group, an entity expects significant variances in the FCF during
the period before a claim is incurred, such contracts are not eligible to apply the PAA. [IFRS
17:54]

Changes from IFRS 4

The following are the differences in scope between IFRS 4 and IFRS 17:
Ÿ The requirement that, in order to apply the insurance standard to investment contracts with
discretionary participation features (DPF), an entity has to also issue insurance contracts.
Ÿ An option to apply IFRS 15 Revenue from Contracts with Customers to fixed-fee contracts
provided certain criteria are met.
Ÿ IFRS 17 requires entities to identify portfolios of insurance contracts, which comprise
contracts that are subject to similar risks and are managed together. Each portfolio of
insurance contracts issued shall be divided into a minimum of three groups:
a group of contracts that are onerous at initial recognition;
a group of contracts that at initial recognition have no significant possibility of
becoming onerous subsequently; and
a group of the remaining contracts in the portfolio, if any.

Recognition
An entity shall [IFRS 17:25] recognise a group of insurance contracts it issues from the earliest
of the following:
(a) the beginning of the coverage period of the group of contracts;
(b) the date when the first payment from a policyholder in the group becomes due; and
(c) for a group of onerous contracts, when the group becomes onerous.

Measurement
On initial recognition, an entity shall measure a group of insurance contracts at the total of:
[IFRS 17:32]
(a) the FCF, which comprise:
(i) estimates of future cash flows;
(ii) an adjustment to reflect the TVM and the financial risks associated with the future
cash flows; and
(iii) a risk adjustment for non-financial risk
(b) the contractual service margin.

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2
Discount rates
IFRS 17 Insurance Contract
supersedes IFRS 4 from 2021

The discount rates applied to the estimate of cash flows shall [IFRS 17:36]:
(a) reflect the time value of money, the characteristics of the cash flows and the liquidity
characteristics of the insurance contracts;
(b) be consistent with observable current market prices (if any) of those financial
instruments whose cash flow characteristics are consistent with those of the insurance
contracts; and
(c) exclude the effect of factors that influence such observable market prices but do not
affect the future cash flows of the insurance contracts.

Presentation in the statement of financial position

An entity shall present separately in the statement of financial position the carrying amount of
groups of [IFRS 17:78]:
(a) insurance contracts issued that are assets;
(b) insurance contracts issued that are liabilities;
(c) reinsurance contracts held that are assets; and
(d) reinsurance contracts held that are liabilities.

Recognition and presentation in the statement(s) of financial performance

An entity shall disaggregate the amounts recognised in the statement(s) of financial perfor-
mance into [IFRS 17:80]:
(a) an insurance service result, comprising insurance revenue and insurance service
expenses; and
(b) insurance finance income or expenses.

Income or expenses from reinsurance contracts held shall be presented separately from the
expenses or income from insurance contracts issued. [IFRS 17:82]

De-recognition
An entity shall derecognise an insurance contract when it is extinguished, or if any of the con-
ditions of a substantive modification of an insurance contract are met. [IFRS 17:74]

Transition
An entity shall apply IFRS 17 retrospectively unless impracticable, in which case entities have
the option of using either the modified retrospective approach or the fair value approach.
[IFRS 17: C3, C5]

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3
Auditing.
ISA 200 deals with responsibilities
of independent auditor
The International Standard on Auditing 200 (ISA 200) deals with the overall objectives of the
independent auditor and the conduct of an audit in accordance with International Standards on

It is intended to establish standards for and provide guidance on the objective and general
principles governing an audit of financial statements.

It also describes management's responsibility for the preparation and presentation of the
financial statements and for identifying the financial reporting framework to be used in
preparing the financial statements, referred to in the ISAs as the 'applicable financial reporting
framework'.

ISA 200 should be read in the context of the Preface to the International Standards on Quality
Control, Auditing, Review, Other Assurance and Related Services, which sets out the
application and authority of ISAs.

Objective of an Audit of Financial Statements

The objective of an audit of financial statements is to enable the auditor to express an opinion
on whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework.

Ethical Requirements
The auditor should comply with relevant ethical requirements relating to audit engagements.
As discussed in ISA 220, 'Quality Control for Audits of Historical Financial Information',
ethical requirements relating to audits of financial statements ordinarily comprise Parts A and
B of the International Federation of Accountants' Code of Ethics for Professional Accountants
(the IFAC Code) together with national requirements that are more restrictive.

ISA 220 recognises that the engagement team is entitled to rely on a firm's systems in meeting
its responsibilities with respect to quality control procedures applicable to the individual audit
engagement unless information provided by the firm or other parties suggests otherwise.

Accordingly, International Standard on Quality Control (ISQC) 1, 'Quality Control for Firms
that Perform Audits and Reviews of Historical Financial Information, and Other Assurance
and Related Services Engagements', requires the firm to establish policies and procedures
designed to provide it with reasonable assurance that the firm and its personnel comply with
relevant ethical requirements.

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3 ISA 200 deals with responsibilities
of independent auditor
Conduct of an Audit of Financial Statements
The auditor should conduct an audit in accordance with International Standards on Auditing.
ISAs contain basic principles and essential procedures together with related guidance in the
form of explanatory and other material, including appendices.

The basic principles and essential procedures are to be understood and applied in the context of
explanatory and other material that provides guidance for their application.

In conducting an audit in accordance with ISAs, the auditor should also be aware of and
consider International Auditing Practice Statements (IAPSs) applicable to the audit
engagement. IAPSs provide interpretive guidance and practical assistance to auditors in
implementing ISAs

Scope of an Audit of Financial Statements

The term “scope of an audit” refers to the audit procedures that, in the auditor's judgment and
based on the ISAs, are deemed appropriate in the circumstances to achieve the objective of the
audit.

Professional Scepticism
The auditor should plan and perform an audit with an attitude of professional scepticism,
recognising that circumstances may exist that cause the financial statements to be materially
misstated.

An attitude of professional scepticism means the auditor makes a critical assessment, with a
questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that
contradicts or brings into question the reliability of documents and responses to inquiries and
other information obtained from management and those charged with governance.

Reasonable Assurance
An auditor conducting an audit in accordance with ISAs obtains reasonable assurance that the
financial statements taken as a whole are free from material misstatement, whether due to
fraud or error.

Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary
for the auditor to conclude that there are no material misstatements in the financial statements
taken as a whole. Reasonable assurance relates to the whole audit process.

An auditor cannot obtain absolute assurance because there are inherent limitations in an audit

9 Dzidzo House, 22-32 McChlery Avenue, Eastlea, Harare

3
§

§
ISA 200 deals with responsibilities
of independent auditor
that affect the auditor's ability to detect material misstatements. These limitations result from
factors such as:
§ the use of testing;
the inherent limitations of internal control (for example, the possibility of management
override or collusion); and
the fact that most audit evidence is persuasive rather than conclusive.

Audit Risk and Materiality

The auditor is required to plan and perform the audit to reduce audit risk to an acceptably low
level that is consistent with the objective of an audit.

The auditor reduces audit risk by designing and performing audit procedures to obtain
sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to
base an audit opinion. Reasonable assurance is obtained when the auditor has reduced audit
risk to an acceptably low level.

The auditor is concerned with material misstatements and is not responsible for the detection
of misstatements that are not material to the financial statements taken as a whole. The auditor
considers whether the effect of identified uncorrected misstatements, both individually and in
the aggregate, is material to the financial statements taken as a whole – ISA 320.

Responsibility for the Financial Statements

While the auditor is responsible for forming and expressing an opinion on the financial
statements, the responsibility for the preparation and presentation of the financial statements
in accordance with the applicable financial reporting framework is that of the management of
the entity, which has oversight of the accounts.

Acceptability of Financial Reporting Framework

The auditor should determine whether the financial reporting framework adopted by
management in preparing the financial statements is acceptable. The auditor ordinarily makes
this determination when considering whether to accept the audit engagement, as discussed in
ISA 210, 'Terms of Audit Engagements'.

Opinion on Financial Statements

When the auditor is expressing an opinion on a complete set of general purpose financial
statements prepared in accordance with a financial reporting framework that is designed to
achieve fair presentation, the auditor refers to ISA 700, 'The Independent Auditor's Report on a
Complete Set of General Purpose Financial Statements', for standards and guidance on the

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3 ISA 200 deals with responsibilities
of independent auditor
matters the auditor considers in forming an opinion on such financial statements and on the
form and content of the auditor's report.

The auditor also refers to ISA 701 when expressing a modified audit opinion, including an
emphasis of matter, a qualified opinion, a disclaimer of opinion or an adverse opinion.

Public Sector Perspective

Irrespective of whether an audit is being conducted in the private or public sector, the basic
principles of auditing remain the same.

What may differ for audits carried out in the public sector is the audit objective and scope.
These factors are often attributable to differences in the audit mandate and legal requirements
or the form of reporting. For example, public sector entities may be required to prepare
additional financial reports.

AUDIT

11 cis@icsaz.co.zw