FRS 102 A New Era for UK & Irish GAAP

CPA Ireland Skillnet, is a training network that is funded by Skillnets, a state funded, enterprise led support body dedicated to the promotion and facilitation of training and up-skilling as key elements in sustaining Ireland s national competitiveness. The CPA Ireland Skillnet provides excellent value CPE (continual Professional Education) in accountancy, law, tax and strategic personal development to accountants working both in practice and in industry. However our attendees are not limited to the accountancy field as we welcome all interested parties to our events. The CPA Ireland Skillnet is funded by member companies and the Training Networks Programme, an initiative of Skillnets Ltd. funded from the National Training Fund through the Department of Education and Skills. www.skillnets.ie 1 FRS 102 A New Era for UK & Irish GAAP Presented By: Christy Kearney kearneychristy@eircom.net FRS 100 First FRS 100 sets out the Applicable Reporting Framework for entities preparing Financial Statements in Irelands & UK. The effect on the reporting entity depends on the Tier they fall into. Tier 1- entities that are publicly quoted shall use the EU adapted full IFRS for their consolidated Financial Statements. 3 1

Tier 2 entities (other than Charities) that are a member of a group where the Parent of the group prepares publicly available Consolidated Financial Statements on full IFRSs and this entity is included in the consolidation. Such entities shall use FRS 101 in it s individual Financial Statements- full IFRSs with limited disclosures. (option to use full IFRS) Tier 3 All Irish and UK non public Companies above the small threshold shall use FRS 102. (option to use full IFRS) Tier 4 Small companies (refer overleaf) may use the FRSSE (option to use FRS 102 or full IFRS) 4 Small Company Thresholds Where a company meets 2 of the following in respect of that year and the prior year: Employees not exceeding 50 Turnover not exceeding 8.8m Total Assets not exceeding 4.4m 5 Note Full IFRSs Criteria does not depend on size, only whether shares or bonds are quoted on a public market. Opt up option for lower tiers. 6 2

FRS 102 - Introduction FRS 102 replaces Irish & UK GAAP from accounting periods commencing on or after 01 January 2015 for relevant Irish Companies. This means all currently applicable SSAPs (8), FRSs (28) and UITF(31) are superseded by FRS 102 for periods commencing on or after 1 January 2015 7 FRS 102 FRS 102 is a single Financial Reporting Standard that applies to the Financial Statements of entities that are not applying; EU adopted IFRS, FRS 101or the FRSSE 8 Scope This FRS applies to Financial Statements that are intended to give a True and Fair View of a reporting entity s Financial position and profit or loss (or income and expenditure) for a period. The requirements are applicable to public benefit entities and other entities, not just to companies 9 3

Urgency 2015 start date means: 1. Comparatives for 2014 using FRS 102 will be required. 2. The opening Balance Sheet for 2014 will have to be restated to FRS 102 rules. 10 Who has to change? All private companies that exceed the Small Company threshold Once they exceed the small company threshold, those companies will have to decide on what reporting standards they want to use; 1. FRS 102 2. Full IFRSs Whatever choice they make, this will require a full changeover to new Reporting standards which will involve a number of changes to the Opening Balance Sheet on 01 January 2014 and new accounting Policies thereafter 11 Impact FRS 102 will obviously change the descriptions and disclosures. (companies Act formats retained) However, more importantly FRS 102 will change 1. Distributable Profits 2. Net Assets 3. Tax Charge 12 4

Why not choose Full IFRS instead? Disclosure Requirements are very burdensome. Deals with very complex issues that do not concern small companies, which will result in significant expense for companies that decide to adopt the full IFRSs. e.g. Annual impairment of Goodwill Full IFRSs require EPS (IAS 33), Assets held for Sale (IFRS 8) and Interim Reporting (IAS 34). These standards not required in FRS 102 13 What is the new FRS 102 It is the International accounting standard, IFRS for SMEs adapted for Ireland & UK One standard covering all accounting areas. (There is a section for all relevant IASs and IFRSs currently applicable) FRS 102 has substantially less disclosures and in some instances less complex accounting treatments. It has 335 pages, approximately 10% of the related Full International standards 14 Application of SORPs If an entity is prepared in accordance with FRS 102 (or the FRSSE), SORPs will apply in the circumstances set out in those standards. Where a SORP does apply, the entity shall state in it s Financial Statements the title of the SORP and whether its Financial Statements have been prepared in accordance with the SORP s provisions that are currently in effect. In the event of a departure from the SORP, a brief description of how the Financial Statements depart from the recommended practice in the SORP should be given 15 5

Section 2 Concepts and pervasive principles 16 Objective of Financial Statements The objective of FRS 102 is to provide information about the i. Financial Position, ii. Financial Performance and iii. Cash Flows of the entity that is useful for economic decision making by a broad band of users who are not in a position to demand reports tailored to meet their particular information needs. Financial Statements also shows the Stewardship of management, the accountability of management for the resources entrusted to it. 17 Financial Position-definitions Assets A resource controlled by the entity as a result of a past event from which future economic benefits are expected to flow. Liabilities A present obligation arising from a past event, the settlement is expected to result in an outflow of economic resources from the entity Equity The residual interest in the assets of the entity after deducting all liabilities 18 6

Recognition different to definition Some items that meet the definition of an asset or liability may not be recognized in the Financial Statements because they do not satisfy the criteria for recognition. In particular, the expectation that future economic benefits may flow must be sufficiently certain to meet the probability criterion before an asset or liability is recognized. Intangibles such as (1) Employees (2) Marketing Costs. 19 Recognition of Contingent Asset An asset is recognized in the Financial Statements when it is probable that the future economic benefits will flow to the entity. However, an entity shall not recognize a Contingent asset as an asset. However, when the flow of economic benefits is virtually certain, then the related asset is not a contingent asset, and its recognition is appropriate. 20 Measurement Basis Historic Cost Historic cost is the amount of cash or cash equivalent paid or the Fair Value of the consideration given to acquire the asset at the time of its acquisition. Fair Value The amount that an asset can be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. 21 7

Other Going Concern Accrual basis Cannot offset assets and liabilities, income and expenses unless required or permitted by an the FRS Initial Recognition At initial recognition, an entity shall measure assets and liabilities at historical cost unless FRS requires initial measurement on another basis. 22 Section 3 Financial Statement presentation 23 Stay with old Titles for Financial Statements An entity may use titles for the Financial Statements other than those used in this FRS as long as they are not misleading Statement of Financial Position Balance Sheet Income Statement Profit & Loss account Other Comprehensive Income.Other recognized Gains & Losses 24 8

Entity Information An entity shall disclose by way of note 1. Legal form 2. Country of Incorporation 3. Address of the registered office or principal place of business A description of the nature of the entity s operations and its principle activities 25 Compliance Statement Financial Statements that comply with this FRS shall include an explicit and unreserved statement of compliance with the FRS 102 in the notes. Financial Statements shall not be described as complying with FRS 102 unless they comply with all the requirements of the FRS. Can only depart from FRS 102 if management conclude that compliance with FRS 102 would be so misleading that it would conflict with the objectives of the FRS 26 Going Concern When preparing the Financial Statements, the management of the entity shall make an assessment of the entity s ability to continue as a Going Concern. Period of assessment should be at least but not limited to twelve months from the reporting date 27 9

Consistency of Presentation Consistency of Classification An entity shall retain the presentation and classification of items from one period to another Comparative Information Except when FRS permits, an entity shall present comparative information in respect of the preceding year for all amounts presented in the Financial Statements. Also, comparative information for narrative and descriptive information when it is relevant to an understanding of the current years financial statements. 28 Section 4 Statement of Financial Position 29 FRS 102 -formats FRS 102 retains the Companies Acts formats for the; Financial Position (Balance Sheet) and the Performance Statements (Income Statement & Other Comprehensive Income) 30 10

Additional Information An Entity shall present additional line items, headings and sub totals when such presentation is relevant to the understanding of the Financial Statements. (paragraph 4.3) 31 Current assets Definition; 1. It intends to realize the asset in the entity s normal operating cycle 2. It holds the asset primarily for the purpose of trading. 3. It expects to realize the asset within twelve months of the reporting date. 4. The asset is cash or cash equivalent. All other assets shall be classified as non current 32 Debtors due after more than one year In circumstances where the amount of debtors due after more than one year is so material in the context of the Net Current Assets, it should be disclosed on the face of the SOFP. In most cases, it will be satisfactory to disclose the amount due after more than one year in the notes to the Financial Statements 33 11

Current Liabilities Definition; 1. It intends to realize the asset in the entity s normal operating cycle 2. It holds the asset primarily for the purpose of trading. 3. It expects to settle the liability within twelve months of the reporting date. 4. The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. All other Liabilities shall be classified as non current 34 Creditors; amounts falling due within one year An Entity shall classify a creditor as due within one year when the entity does not have an unconditional right at the end of the reporting period, to defer settlement of the creditor for at least twelve months after the reporting date 35 Information to be presented either in the SOFP or the notes 1. PPE sub classifications appropriate to the entity 2. Trade and other receivables showing separately amounts due from related parties, amounts due from other parties and accrued income not billed. 3. Inventories sub-classified as Held for Sale, Work in progress, raw materials. 36 12

Information to be presented either in the SOFP or the notes 4. Trade and other payables showing separate amounts payable to suppliers, related parties, deferred income and accruals. 5. Provisions for employee benefits and other provisions. Companies Act requirements for disclosure of PAYE/PRSI & VAT must be complied with 37 Equity Disclosures Classes of Equity, such as paid in capital, share premiums, retained earnings, and items of income and expense that, as required in the FRS, are recognized in Other Comprehensive Income and presented separately in Equity. 38 Share Capital Disclosures For each class of Share Capital; 1. The number of shares authorized 2. The number of shares issued and fully paid. 3. The number of shares issued and not fully paid. 4. Par value per share, or the fact that the shares have no par value. 5. A reconciliation of the number of shares outstanding at the start and end of the reporting period. 39 13

Share Capital Disclosures 5. The rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital. 6. Shares in the entity held by the entity or by it s subsidiaries or associates. 7. Shares reserved for issue under options and contracts for the sale of shares, including the terms and amounts. 40 Binding Sale agreement for the major disposal of assets, group of assets and liabilities If at the reporting date, the entity has a binding contract for a major disposal of assets or a group of assets and liabilities, the following should be disclosed by note; 1. Description of assets and liabilities 2. Description of facts and circumstances of the sale plan. 3. The carrying amount of the assets and liabilities. 41 Section 5 Statement of comprehensive Income and Income Statement 42 14

To comply with Companies acts Irish companies will have to use; The former title of Profit & Loss Account rather than Income Statement title & Two Statement Format which is Profit & Loss Account & separate Statement of Comprehensive Income 43 One or Two financial statements 1. In a single Statement of Comprehensive Income or 2. In two statements an Income Statement and a Statement of Comprehensive Income. The Income Statement presents all items of Income and Expenses recognized in the period except those that are recognized in Total comprehensive Income outside of the Profit & Loss as permitted by this FRS. Note; A change from one to two statements or vice- versa is a change in Accounting policy 44 Other Comprehensive Income Outside of Profit & Loss 1. Gains and losses arising on the translation of a foreign operation. 2. Re-measurement Gains & Losses in Defined Benefit Schemes 3. Effective part of Gains & Losses in the Hedging Instrument in designated Cash Flow hedges 4. Gains on Revaluation of PPE & Intangible Assets 45 15

Turnover Turnover must be presented on the face of the Income Statement or Statement of Comprehensive Income 46 Analysis of Expenses Either of the following analysis permitted; Analysis by function of the expense; Cost of Sales, distribution and Selling expenses, administration expenses Analysis by nature of the expense; Depreciation, wages, materials 47 Discontinued Operations A line by line analysis shall be presented in the Income Statement relating to Discontinued Operations An entity shall disclose on the face of the Income Statement an amount comprising the total of 1. The post tax profit or loss of discontinued operations; and 2. The post tax gain or loss attributable to the impairment or on the disposal of assets constituting discontinued operations. 48 16

Material Items When items included in the Income Statement are material, an entity shall disclose their nature and amount separately or in the notes Unlike Irish GAAP, no specified exceptional items 49 Section 6 Statement of changes in Equity & statement of Income and retained earnings 50 Note Worthy Statement of Changes in Equity can be omitted & and replaced by a Statement of Income and Retained Earnings in certain circumstances 51 17

Purpose The statement of changes in Equity for the period shall include; 1. Entity s profit or loss for the reporting period 2. Items of income and expenses recognized in Other Comprehensive Income, 3. The effects of changes in the Accounting policies 3. Corrections of errors recognized in the period, 4. The amount of investments by Investors 5. Dividends and other distributions to equity investors. 52 Information to be presented in the Statement Total comprehensive income for the period, showing separately the total amounts attributable to the Non Controlling Interest and the owners of the entity. For each component of equity, the effects of retrospective restatement recognized in accordance with Section 10, Accounting policies, Estimates and errors 53 Information to be presented in the Statement For each component of Equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from; I. Profit & loss II. Each item of comprehensive income III. The amounts of investments by the owners IV. Dividends and other distributions to the owners V. Treasury shares VI. Changes in ownership interests in subsidiaries that did not result in a loss of control 54 18

Statement of Income and Retained Earnings One Statement of income and Retained Earnings is permitted if the only changes in equity (in current or comparatives) are; Profit & loss, Dividends, Corrections of prior period errors & Changes in accounting policy Or (in negative terms) An entity s financial statements (current or comparatives) must not have; Other Comprehensive Income items, New Share Issues or Transfers between reserves 55 Section 7 Statement of Cash Flows 56 Note Worthy Statement of Cash Flows is Mandatory for Companies complying with FRS 102. Cash Equivalents included in cash Flow statements ( not so in UK GAAP) No requirement for Net Debt note. Treatment of Bank Overdraft as Financing Activity or Cash 57 19

Section 7 Statement of Cash Flows The Statement of Cash Flows is a requirement for all companies adopting FRS 102 58 Definition of Cash & Cash Equivalents Cash comprises cash in hand, current account balances, deposits on demand less Bank Overdrafts. Cash Equivalents are short-term, highly liquid investments, held to meet short term cash commitments rather than for investment or other purposes. Therefore, an Investment normally qualifies as a cash equivalent, when it has a short maturity of three months or less from the date of acquisition 59 Bank Overdrafts Bank Overdrafts maybe Financing Activities similar to borrowings. However, if they are repayable on demand and form an integral part of the entity s cash management, bank overdrafts are a component of cash and cash equivalents. 60 20

Cash Flows Cash flows are inflows and outflows of Cash & Cash equivalents. Cash flows to be classified under 3 headings: Operating Activities Investing Activities Financing Activities Flexibility regarding classification of certain items 61 Operating Activities Operating Activities are the principle revenue producing activities of the entity. Therefore, cash flows from operating activities generally result from the transactions and other events that enter into the determination of Profit & Loss. Option to use the direct or indirect method to present Cash Flows from Operating Activities. 62 Cash Flows from Operating Activities Profit before Interest & Tax Adjust for Non Cash Items that have been charged/credited against PBIT Depreciation Profit or Loss on sale of Assets Amortization of Intangibles Impairment write-offs Pension Charges Pension Payments etc. 63 21

Cash Flows from Operating Activities Adjust for Changes in: Stocks, Debtors, Current Liabilities Interest Paid Tax Paid 64 Interest & Dividends An entity shall present separately Interest and Dividends received and paid An entity may classify cash flows from Interest paid & received and dividends received as Operating Cash Flows. Alternatively, they may be classified as Investing (interest and dividends received) and Financing (interest paid) activities respectively. An entity shall classify cash flows from Dividends paid as Financing Cash flows. Alternatively, the entity may classify dividends paid as Operating Cash Flows 65 Income Tax An entity shall classify separately cash flows arising from Income tax and shall classify them as Operating Cash flows, unless they can be specifically identified with Investing and Financing activities. e.g Capital Gains Tax payable on disposal of assets would be shown as Investing activities When tax cash flows are allocated over more than one class of activity, the entity shall disclose the total amount of taxes paid. 66 22

Investing Activities Outflows Cash payments arising from Acquisition of Subsidiaries & Associates Cash payments for Purchase of Investments Cash payments for Purchase of Fixed Assets (refer Leased Assets later) 67 Investing Activities Inflows Cash proceeds from Sale of Subsidiaries & Associates Cash proceeds from sale of Fixed assets Dividends received from Associates Interest Received 68 Financing Activities Outflows Loan Repayments Leasing Payments Equity Dividends paid Dividends paid to NCI Inflows Proceeds of Share Issue New Loan or Debenture Issues 69 23

Major Non Cash Transactions Requires that a Note to the Cash Flow Statement is given for Major Non cash Transactions: New Finance Leases Shares issued other than for Cash (e.g. as consideration in an Acquisition). Conversion of Debt to Equity. 70 New Finance Leases New Finance Leases are not considered to be: Cash Outflow in Fixed Assets or Cash Inflow in Loans/Leasing Obligations When you arrange a Finance Lease, the Lessor pays for the asset & the only cash flows arising in the Lessee s books are the lease payments made.(under Financing Activities) 71 Section 8 Notes to the Financial Statements 72 24

1. Entity information. Order of Notes 2. A Statement that the Financial Statements have been prepared in compliance with FRS 102. 3. Information about judgments and key estimates 4. A summary of the significant accounting policies applied. 5. Supporting information for items presented in the Financial Statements in the sequence in which each statement and each line item is presented. 6. Any other disclosures 73 Information about judgments & key estimates An entity shall disclose in the notes; The judgments (apart from those involving estimations), that management has made in the process of applying the entity s accounting policies and that have the most significant effect on the amounts recognized in the Financial Statements. 74 Information about judgments & key estimates Information about key sources of Estimation uncertainty An entity shall disclose in the notes information about the key assumptions concerning the future and any other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment in the carrying value of assets and liabilities within the next Financial year 75 25

Section 9 Consolidated and Separate Financial Statements 76 Note Worthy Small Group exemption. Exemption for majority controlled subsidiaries. (sub-subsidiary) Same Reporting dates required unless impracticable. No three month rule. Based on IFRS 3 2003 Residual investments in former subsidiaries are valued at original cost. (Fair Value in the full IFRS) Standard deals with Combined Financial Statements. 77 When to prepare Group Accounts Section 9 requires that whenever a Parent Company has a Subsidiary, the Parent company must present Consolidated Accounts in accordance with this FRS. Consolidated Accounts shall include all subsidiaries. 78 26

Exemptions A parent need not prepare Consolidated Accounts if: 1. The parent is itself a subsidiary and its ultimate parent presents Consolidated financial statements that comply with the full IFRS or with this FRS Option only, need not be a 100% subsidiary to avail of option. 79 Exemptions 2. It has no subsidiaries other than one it acquires with the intention of reselling or disposing of within one year. In this case, a Parent shall account for this subsidiary using Fair Value or Cost Model Note; Temporary control exemption only applies if there are no other subsidiaries 80 Definition of a Subsidiary Subsidiary A Subsidiary is an entity that is controlled by another entity. (The Parent). 81 27

Control Key part of definition is Control The power to govern the Financial & Operating policies of the entity so as to obtain economic benefits from its activities Control is not based on effective Interest, but number of Voting Shares. NB; should take account of conversion rights attached to warrants 82 Indicators of Control Control presumed to exist when 1. Entity owns more than 50% of voting shares directly or through a subsidiary. 83 Control also exists when; 2. Entity owns 50% or less of the voting power but it has I. Power over more than 50% of the voting power by virtue of an agreement with other shareholders. II. Power to govern the financial and operating policies of an entity under a statute or an agreement. III. Power to appoint a majority of the board of directors IV. Power to cast a majority of the votes at meetings of the Board of Directors 84 28

Control also exists when; Control can also be achieved by having options or convertible instruments that are currently Exercisable Or By having an agent with the ability to direct the activities for the benefit of the controlling entity. 85 Non Exclusions from Consolidation 1. Dissimilar activities 2. Long term restrictions 3. Investor is a Venture Capital organization 86 Consolidated Accounts-Basic Principle The accounts of the Parent & its subsidiaries are grouped together as if they were one Economic entity. Combine the Financial Statements of the parents and its subsidiaries line by line together with other like items of assets and Liabilities, equity, income and expense 87 29

Consolidation Process Eliminate the carrying value of the Parent s Investment in the subsidiary and the parent s portion of equity of each subsidiary at the acquisition date. Measure & present Non Controlling Interest in the P&L of the consolidated subsidiaries for the reporting period separately from the interests of the owners 88 Consolidation Process Measure and present non-controlling interest in the net assets of the consolidated subsidiaries separately from the parent shareholders equity in them. The proportion of profit or loss and changes in equity allocated to the owners of the parent and to the noncontrolling interest are determined on the basis of existing ownership interests and do not reflect the possible exercise or conversion of options or convertible instruments 89 Same Accounting Period All Group members should have the same accounting period, unless it is impracticable to do so. 90 30

Same Accounting Policies Consolidated Financial Statements shall be prepared using uniform accounting policies. The Parent and the Subsidiary must use the same Accounting Policies. If the subsidiary uses different accounting policies, then appropriate adjustments must be made prior to Consolidation 91 Acquisition & Disposal of Subsidiaries The income and expenses of a subsidiary are included in the Consolidated Financial Statements from the acquisition date until the date on which the parent ceases to control the subsidiary. The difference between the carrying amount and the sale proceeds (excluding Exchange differences recognized in Equity that relate to the Foreign subsidiary) is recognized as the Gain or Loss on disposal in the Income Statement 92 Disposal of Subsidiary If the entity ceases to be a Subsidiary but the parent continues to hold an investment in the former Subsidiary, that investment shall be accounted for as a Financial asset, provided it does not become an Associate or Jointly Controlled Entity. The carrying amount of the Investment on the date that it ceases to be a Subsidiary shall be the cost on the initial recognition. 93 31

Non Controlling Interest An Entity shall present Non Controlling Interest as a separate component of Equity 94 Separate Financial Statements This FRS requires a parent to present Consolidated Financial Statements. The FRS does not require presentation of Separate Financial Statements for the parent entity. Where a Parent prepares Separate Financial Statements and describes them as complying with this FRS, the parent shall adopt a policy of accounting for Subsidiaries, Associates and JVs either; I. At Cost less impairment II. At Fair Value with changes in the P&L III. At Fair Value with change in the OCI 95 Separate Financial Statements Disclosures 1. That the statements are Separate Financial Statements. 2. A description of the methods used to account for Subsidiaries, Associates and Joint Ventures. 3. Identify the Consolidated Financial Statements or other primary statements to which they relate. 96 32

Combined Financial Statements Combined Financial Statements are a single set of Financial Statements of two or more entities that are controlled by a single investor. 97 Section 10 Accounting Policies, Estimates and Errors 98 Definition of Accounting Policies Accounting policies are the; 1. Specific principles, 2. bases, 3. conventions, 4. Rules, 5. Practices. applied by the entity in preparing and presenting Financial Statements. 99 33

Choosing an appropriate Accounting policy If FRS 102 specifically addresses a transaction, FRS 102 must be applied unless it is immaterial. If FRS 102 does not specifically address a transaction, the entity shall use its judgment in selecting a suitable accounting policy 100 Judgment regarding Suitable Accounting policy Relevant Reliable Fair Reflect the economic substance and not merely the legal form. Consider the guidance in FRS 102 on related matters, then the Framework in section 2, and finally the related full IFRSs 101 Changes in accounting policies An Entity shall change its accounting policy only if the change; 1. Is required by changes in FRS 102. 2. Results in the financial statements providing reliable and more relevant information about the effects of the transactions A change to the cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset which FRS 102 requires or permits to be measured at Fair Value is not a change to accounting policy. 102 34

Applying changes in accounting policies Transitional provisions are once off All other changes should be accounted for retrospectively 103 Material Errors Prior period errors are omissions from and misstatements in, an entity s financial statements for one or more prior periods arising from a failure to use or misuse information that; a) Was available when the Financial Statements were authorised for issue. b) Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of the Financial Statements 104 Correction of prior period errors Material prior period errors should be corrected retrospectively. (Current years financial statement adjustment is to the Reserves brought forward rather than the Profit & Loss Account) Comparative financial statements must be restated for the change. Disclosures required by note The nature and the amount for each Financial Statement line effected 105 35

Changes in estimates A change in estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of and expected future benefits and obligations associated with assets and liabilities. Changes arise from new information or new developments. An entity shall recognize the effect of a change in an accounting estimate prospectively by including it in the Profit & Loss in the current period or in the current and future periods if it effects both 106 Section 13 Inventories 107 Measurement An entity shall measure inventories at the lower of cost and estimated selling price less costs to complete and sell. Cost is defined as all costs of purchase, costs of conversion and other costs incurred in bringing the product to their present location and condition. 108 36

Cost includes Costs of purchase (including import duties, transport and handling attributable to the acquisition of stock) Trade discounts, rebates are deducted from cost 109 Conversion Costs Costs directly related to the units of production, such as labour & variable overheads. Fixed production overheads are allocated on the normal level of activity. Exclude; 1. Abnormal waste 2. Storage costs 3. Administration overheads 4. Selling costs 110 Impairment An entity must assess if stocks are impaired at each reporting date. This may arise because of damage, obsolescence or falling selling prices. Impairments should be reversed if the reason for the impairment reverses. 111 37

Additional Actual cost, FIFO & Average cost permitted. (LIFO not permitted) Standard cost & most recent Purchase price permitted, if they approximate cost Retail Method to approximate cost permitted using appropriate gross margin 112 Costs of agricultural produce harvested from Biological assets Section 34(A) requires that inventories comprising agricultural produce that an entity has harvested from it s Biological assets should be measured on initial recognition, at the point of harvest, at either Fair Value less estimated costs to sell or the lower of cost and estimated selling price less costs to complete and sell. This becomes the cost of inventories at that date for application for this section. e.g. Milk, wool, harvested grain 113 Disclosures 1) The accounting policies adopted in measuring inventories, including the cost formula used (FIFO,AVCO) 2) The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity 3) The amount of inventories recognised as an expense during the period. 4) Impairment losses recognised or reversed in the Profit & Loss account in accord with Section 27 5) The total amount of inventories pledged as security for liabilities 114 38

Agriculture Biological assets are living animals or plants. Agricultural produce is the harvested product of the entity s biological assets. A Biological asset is recognized by the entity when it is controlled by the entity, it is probable that future economic benefits associated with it will flow to the entity and it s fair value or cost can be measured reliably. An entity engaged in agriculture activity chooses an accounting policy to measure each class of biological asset and it s related agricultural produce using either the a) Fair Value method b) Cost model 115 Section 14 Investments in Associates 116 Associate Entity An Entity (including non incorporated entities such as a partnership) over which the Investor exercises Significant Influence and which is neither a Subsidiary or Joint Venture. An Associate is not part of the Group and is not consolidated in the Group Accounts. It could be considered a Related Party and is covered by Section 33 disclosures 117 39

Significant Influence Power to participate in, but not control the Financial and Operating decisions of the entity. Shareholdings between 20% - 50% are presumed to exercise Significant Influence. Shareholdings below 20% are presumed not to exercise Significant Influence A Substantial or majority ownership by another investor does not preclude the investor from having significant influence 118 Accounting for Associate An Investor (that is not a parent) shall account for all of it s investments in Associates in Investor s own Financial Statements using one of the following; 1. The Cost Method 2. The Fair Value Method with changes through the OCI 3. The Fair Value model with changes through the P&L 119 Parent in it s separate Financial Statements An Investor that is a parent shall account for all of it s investments in Associates in Investor s own Financial Statements using one of the following; Paragraph 9.26 1. The Cost Method 2. The Fair Value Method with changes through the OCI 3. The Fair Value model with changes through the P&L 120 40

Cost Model An Investor shall measure it s investments in Associates at Cost less accumulated Impairment Losses recognized in accordance with Section 27. The Investor shall recognize dividends as income without any regard for whether they are from accumulated profits of the associate prior to the date of acquisition. 121 Fair Value Model (thru P&L) Recognize initially at the transaction price. At each reporting date, measure its investments at Fair Value, recognizing the change in the Income Statement. An Investor using the Fair Value method, shall use the cost model if it is impractical to value Fair Value reliably without undue cost or effort. 122 Consolidated Accounts An Investor (that is a parent) shall in it s Consolidated Statements account for all of it s investments in Associates using the Equity Method Unless; Associate is part of an Investment Portfolio, where Associates will be accounted at Fair Value with changes in value recognized through the P&L 123 41

Equity Method of Accounting 1. The Investment is initially recorded at transaction price. 2. It is subsequently adjusted to reflect the investor s share of the profit or loss, other comprehensive income and Impairment. 3. Eliminate Unrealized profits in respect of both upstream (associate to investor) or downstream(investor to associate) transactions to the extent of the investor s share of the profits. Note; If the Investor s share of cumulative losses equals or exceeds the carrying amount of it s investment in the associate, the investor shall discontinue recognizing it s share of further losses 124 Equity Method Implicit Goodwill and Fair Value Adjustments On acquisition, the investor shall note the difference between the Fair Value of the Consideration less the Fair Value of the Identifiable assets and Liabilities as Positive or Negative Goodwill This shall result in 1. Additional depreciation of PPE etc 2. Additional amortization of Intangibles. 3. Amortization of Goodwill 125 Group Income Statement Include only one figure: Group Share of Post Acquisition Profit in Associate (adjusted) 126 42

Date of Associates Financial Statements The investor shall use the Financial Statements of the associate as of the same date as the Financial Statements of the Investor unless it is impracticable. If impracticable, the investor shall use the most recent available financial Statements of the Associate, with adjustments made for the effects of any significant transactions or events occurring between the accounting period ends 127 Associate s Accounting Policies If the Associate uses different Accounting Policies, the Investor shall adjust the Associate s Financial Statements for the Investor s Accounting policies, unless it is impracticable to do so. 128 Presentation & Disclosures Classify as Fixed Assets. An Investor in Associate shall disclose 1. It s Accounting policy for Associates 2. The Carrying amount for Associates 3. The Fair Value for Associates using the Equity Method for which there are Published price quotations. 4. For Investments in Associates accounted for using the Cost method, an Investor shall disclose the amount of dividends or other distributions recognized as income. 129 43

Disclosures cont d 5. For Investments accounted for using the Equity Method, the Investor shall disclose separately its share of Profit & Loss of such associates and its share of any Discontinued Activities. 6. For Investments accounted for using the Fair Value Method, the Investor shall disclose matters identified in 11.41-11.44 130 Section 15 Investments in Joint Ventures 131 Joint Arrangements A Contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. A Joint Arrangement can take the form of; 1. Jointly controlled operations 2. Jointly controlled assets 3. Jointly controlled entities Venture 132 44

Joint Control must be present Joint control is a contractually agreed sharing of control over the economic activity and exists only when the relevant decisions (strategic financial and operating decisions )relating to the activity require the unanimous consent of the parties sharing control Key points are Contractual Agreement Unanimous consent 133 Joint Operations The operation of some Joint Arrangements involve the use of the assets and resources of the Joint parties rather than the establishment of a Corporation, partnership or other entity. Each party uses its own assets, carries its own inventories, incurs its own expenses, raises its own finances. The agreement usually provides a means by which the Revenue from the sale of the Joint Product is shared. 134 Joint Operations Accounting; A Venturer shall recognize in its financial statements; 1. The assets (or % of assets) that it owns and the liabilities (or % of liabilities) that it incurs. 2. The expenses (or it s share of expenses) that it incurs and its share of income that it earns from the sale of goods and services by the joint operation. 135 45

Joint Operations proportionate consolidation In this case, a Venturer shall recognize in its own Financial Statements; 1. Its share of the Joint Venture assets classified according to the nature of the assets. 2. Any liabilities it has incurred in respect of the Joint Venture 3. Its share of any liabilities jointly incurred with the other venturers in relation to the Joint Venture. 4. Any income from its share of the Venture together with its share of expenses. 136 Jointly controlled Entities A Joint Arrangement that involves the establishment of a Corporation, partnership or other entity in which the venturer has rights to the Net Assets of the arrangement. The Venturer s interest is solely in the Net Assets of the arrangement, not in individual assets or liabilities. 137 Venturer s own separate Financial Statements A Venturer that is not a parent shall account for all of it s investments in Associates in Investor s own Financial Statements using one of the following; 1. The Cost Method 2. The Fair Value Method with changes through the OCI 3. The Fair Value model with changes through the P&L 138 46

Jointly Controlled Venture in Consolidated accounts A Venturer (that is a parent) shall account in its Consolidated Financial Statements for Joint Ventures using : The Equity Method of Accounting (as in Section 14) 139 Section 16 Investment Property 140 Note worthy Fair Value (through the P&L) is the Measurement method. Annual Adjustment to Fair Value recognized in the P&L ( and subsequently to Retained Earnings) Independent Valuation not explicitly required. Cost module option permitted If undue cost or effort attached to Fair Value. (consider on a property by property basis). In this case, investment property accounted for as Property, Plant & Equipment under Section 17. 141 47

Investment Properties Definition Land or a building, or part of a building or both held by the owner or lessee under a finance lease to earn rentals or capital appreciation or both. Rather than for production or supply of goods and services or for administration purposes 142 Property held under an operating lease In rare circumstances, A property held under an operating lease may be classified and accounted for as an Investment property using this section if it meets the definition of an Investment property and the lessee can measure the fair value of the property interest without undue cost or effort. 143 Mixed Use Properties Mixed use property shall be separated between Investment Property and PPE if the fair value of the Investment Property can be reliably measured without undue cost or effort. If not, the entire property shall be accounted for as PPE 144 48

Example Investment Property Land held for long term capital appreciation Land held for undecided future use Building leased out under an operating lease Vacant building held to be leased out under an operating lease Site under development which is intended to be an Investment Property. 145 Investment property Cannot be; Property held for use in the entity s business Owner occupied property Property held for sale in the normal course of the business Property being developed under contract for 3 rd parties 146 Accounting Treatment - Carrying Value Initial Measurement; Entity shall measure Investment Property at its transaction cost initially. (same rules as PPE) 147 49

Measurement after Recognition Entity shall measure Investment Property at Fair Value where it can be reliably measured without undue cost or effort. If not, Investment property will be accounted for as PPE using the Cost model. (property by property basis). This means such property will be classified as PPE (sub classified as Investment property) 148 Fair Value Model SOFP (BS) The entity re-measures it s investment properties at Fair Value at each reporting date (no deduction for transaction costs) There is no depreciation charge Changes in Fair Value are recognised in the Income Account in the period. The profit or loss on the disposal is the difference between the net proceeds and the carrying value in the Balance Sheet 149 Transfers to and from Classification 1. If a reliable Fair Value Measurement without undue cost or effort is no longer available. 2. Other than above, an entity can transfer a property to and from Investment Property only when the property first meets, or ceases to meet, the definition of Investment Property. Transfer at carrying value at time of reclassification 150 50

Disclosures for Investment Properties Measured at Fair Value The methods and significant assumptions in relation to Fair Value of Investment Property. The extent to which the Fair Value is based on a valuation by an independent valuer who holds a recognized and relevant professional qualification and has recent experience in the location and of the class of investment property being valued. 151 Disclosures If there are no independent valuations, that fact should be disclosed. The existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal. Contractual obligations to purchase, construct or develop investment property, or for repairs, maintenance or enhancements 152 Detailed Quantitative Note A reconciliation between; 1. Opening balances 2. Additions separating additions arising from a business combination. 3. Net gains or losses from fair value adjustments. 4. Transfers to PPE when Fair Value measurement no longer available 5. Transfers to and from Inventories and owner occupied property 6. Other changes 7. Details of relevant disclosures on leases into which it has entered (Section 20 Leases) 153 51

Section 17 Property, Plant and Equipment 154 Note Worthy Revaluation Model is permitted - (using Fair Value) Review of useful life and residual value only when circumstances indicate that a change has occurred.( not required annually) Capitalization of borrowing costs is an option.(section 25) No classification as Held for Sale, but a plan to dispose of PPE before the expected date is an Impairment trigger. Carrying Value can be used as Deemed Cost on transition. 155 Property, Plant and Equipment Definition Tangible Assets that are used in the production or supply of goods and services, for administration purposes and for rental to others (if cost model used) And are expected to be in use for more than one period. 156 52

Recognition An item of property, plant or equipment should be recognised as an asset when: It is probable that future economic benefits associated with the asset will flow to the entity The cost of the asset can be measured reliably 157 Spare Parts Common spare parts are usually carried as Inventory and recognized in the Income Statement as used. Major or dedicated spare parts and standby equipment are PPE Parts of the asset may require replacement at regular intervals (roof of a building). Capitalize direct costs if there is an incremental future benefit to the entity and write off item being replaced. 158 Initial Cost of Measurement PPE should be initially measured at COST. Cost only includes direct costs incurred bringing the asset into working condition. DIRECT COSTS are costs that would not have been incurred if the activity had not taken place. 159 53

End of Capitalization Phase Capitalisation of directly attributable costs should CEASE when substantially all the activities that are necessary to get the asset ready for use is complete, even if the asset has not been brought into use. Subsequent expenditure on Fixed Assets should only be capitalised if it clearly enhances the economic benefits of the asset by Increasing the estimated useful life of the asset significantly. Makes the asset significantly more productive or efficient 160 Costs to be included in Fixed Assets Duties & Taxes Professional Fees (architects, surveyors, legal fees) Cost of Site preparation (levelling a site, services etc) Installation Costs Commissioning/Testing Costs Dismantling costs where obligation to make good. Costs that should NEVER be capitalised Indirect Costs Fixed costs Administration and general overheads Abnormal costs (excess wastage or idle time) Costs incurred AFTER the asset is physically ready for use 161 Costs that should NEVER be capitalised Costs incurred in the initial operating period e.g. Initial operating losses and any further costs incurred before a machine is used at its full capacity Marketing or advertising costs Training Costs for new equipment Feasibility Studies 162 54

Measurement after Initial Recognition Choice to use Cost Model or Revaluation Model If using Revaluation model, 1. Only items of Property, Plant and Equipment whose Fair Value can be reliably measured. 2. Must revalue all PPE in the same class. (having similar nature & function or use in the business) 3. Revaluations must be carried out sufficiently regularly to ensure no material difference between carrying value and current market value. 4. Value normally by professional valuers 163 Revaluation Model-Depreciation 1. Revalue at Fair Value less any subsequent depreciation based on remaining useful life 2. Gains on revaluation recognised in OCI and separate Revaluation Reserve in Equity, unless reversing a previous loss that has been recognised in the P&L 3. Losses on Revaluation recognised in OCI to the extent of any previously recognised revaluation reserve in respect of that asset, any excess shall be recognized in P&L 164 Depreciation: All fixed assets of a finite life must be depreciated over their estimated useful economic life. Depreciation of an asset begins when the asset is available for use. Depreciation allocates the cost or valuation less the estimated residual value over its estimated useful life of the asset. Residual value is based on current prices excluding the effects of inflation or deflation. 165 55