IFRS Case Study: Open Safari

Transcription

1 International Financial Reporting Standards IFRS Case Study: Open Safari Warsaw, 6 December 2012 Michael (Mike) Wells, Director, IFRS Education Initiative, IASB 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.

2 Framework-based IFRS understanding 2 relate each IFRS requirements to the concepts in Conceptual Framework understand why some IFRS requirements do not maximise those concepts (eg application of the cost constraint) Concepts Principles Rules

3 Framework-based IFRS understanding provides 3 a cohesive understanding of IFRSs Framework facilitates consistent and logical formulation of IFRSs a basis for judgement in applying IFRSs Framework established the concepts that underlie the estimates, judgements and models on which IFRS financial statements are based a basis for continuously updating IFRS knowledge and IFRS competencies

4 Role of the Conceptual Framework 4 IASB uses Framework to set standards enhances consistency across standards enhances consistency across time as Board members change provides benchmark for judgments IFRS Interpretations Committee uses Framework to interpret IFRSs when there is no IFRS requirement Preparers use Framework to develop accounting policies in the absence of specific standard IAS 8 hierarchy

5 The IASB s Conceptual Framework 5 Framework sets out agreed concepts that underlie IFRS financial reporting the objective of general purpose financial reporting qualitative characteristics elements of financial statements recognition measurement presentation and disclosure Other concepts all flow from the objective

6 Objective of financial reporting 6 Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity

7 Objective of financial reporting 7 Investors, lenders and other creditors expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity. Decisions by investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, eg dividends, principal and interest payments or market price increases. Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect.

8 Objective of financial reporting 8 To assess an entity s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about: the resources of the entity; claims against the entity; and how efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's resources eg protecting the entity's resources from unfavourable effects of economic factors such as price and technological changes

9 Qualitative characteristics If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent (ie fundamental qualities). Financial information without both relevance and faithful representation is not useful, and it cannot be made useful by being more comparable, verifiable, timely or understandable. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (ie enhancing qualities less critical but still highly desirable) 9

10 Pervasive constraint 10 It is consistent with the Conceptual Framework for an IFRS requirement not to maximise the qualitative characteristics of financial information when the costs of doing so would exceed the benefits.

11 Examples economics 11 For each acquisition below choose 1 of: (a) business combination; or (b) separate asset purchase? Freelands Sealands WoXy Safaris Is the expenditure on the medical research center: (a) donation to university; (b) joint arrangement with university; or (c) Open Safari s assets and Open Safari s research and development expenditure?

12 Examples economics continued 12 Is Open Safari s interest in Sealands casino hotel: (a) passive investment; or (b) operating a casino business? Sealands holiday homes is Open Safari: (a) selling goods; or (b) rendering construction services?

13 Examples economics continued 13 Is Open Safari s successful bid at auction in 20X9 for the black rhinos: (a) provision of a service; (b) purchase of inventory; or (c) purchase of biological asset for use in agricultural activity? Is Open Safari s successful bid at auction in 20X9 for the white rhinos (a) provision of a service; (b) purchase of inventory; or (c) purchase of biological asset for use in agricultural activity?

14 Elements concepts 14 Asset resource controlled by the entity expected inflow of economic benefits Liability present obligation expected outflow of economic benefits Equity = assets less liabilities Income recognised increase in asset/decrease in liability in current reporting period that result in increased equity except Expense recognised decrease in asset/increase in liability in current reporting period that result in decreased equity except

15 Examples identifying assets 15 Are the following items Open Safari s assets? For each item below choose 1 of: (a) yes; (b) no, no controlled resource; or (c) no, no expected FEBs. Sealands fish, whales etc in the sea Freelands pre-existing wild animals Open Safari assembled workforce Animals captured on Freelands and released on Sealands WoXy Safaris bees WoXy Safaris quaggas WoXy Safaris elephants

16 Examples identifying assets continued 16 Are the following items Open Safari s assets? For each item below choose 1 of: (a) yes; (b) no, no controlled resource; or (c) no, no expected FEBs. Auction 20X9 black rhino purchased Auction 20X9 white rhino purchased Open Safari brand WoXy brand Open Safari website Contract to sell timber at fixed price (assume timber prices are falling)

17 International Financial Reporting Standards Asset classification (which IFRS applies?) 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

18 Classification concepts assets 18 Different types of economic resources affect a user s assessment of the reporting entity's prospects for future cash flows differently. some future cash flows result directly from existing economic resources (eg accounts receivable and investment property). other cash flows result from using several resources in combination to produce and market goods or services to customers (eg PPE and intangible assets). Although those cash flows cannot be identified with individual economic resources (or claims), users of financial reports need to know the nature and amount of the resources available for use in a reporting entity s operations. (CF.OB14) IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

19 Classification of assets 19 Different assets exhibit different characteristics (nature) and can be held for a variety of uses (use) in order to generate future economic benefits Nature and use determine the classification of assets IFRSs defines a number of assets For some assets significant judgement is required to determine their classification IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

20 Non-financial asset classification 20 ASSET TYPE USE IN BUSINESS? FORM OF FUTURE ECONOMIC BENEFITS Inventory (IAS 2) Sale or used in production of items for sale or in services Usually cash or other asset received in exchange PPE (IAS 16) Intangibles (IAS 38) Used in production or supply of goods or services, rental or administration (more than one period) Used in production or supply of goods or services Usually cash through sale of final product or service Usually cash through sale of final product or service Investment property IAS 40) Earn rentals or capital appreciation, or both Usually cash inflows independent from other assets Biological asset in agricultural activity (IAS 41) To generate returns through managing the biological transformation of biological assets for sale, conversion into agricultural produce or progeny Usually cash or other asset received in exchange for harvested products or sale of progeny IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

21 Examples asset classification 21 Which IFRS classification of asset? For each item below choose 1 of: (a) inventory; (b) PPE; (c) intangible; (d) investment property; (e) biological asset in agricultural activity; or (f) financial asset Freelands land WoXy land planted with plantation Sealands land WoXy bees WoXy quaggas

22 Examples asset classification continued Which IFRS classification of asset? For each item below choose 1 of: (a) inventory; (b)ppe; (c) intangible; (d) investment property; (e)biological asset in agricultural activity; or (f)financial asset Sealands introduced caged animals Sealands introduced fenced animals WoXy + Freelands tourist carrying elephants and horses Sealands casino equipment purchased customer list 22

23 Judgements and estimates (IAS 40) It can be difficult to determine whether particular biological assets are engaged in agricultural activity and therefore in the scope of IAS 41 eg the animals of some zoos. Sometimes it is difficult to identify investment property (IAS 40). In such cases an entity develops criteria so that it can exercise that judgement consistently eg, owner of a hotel transfers some responsibilities to third parties under a management contract (PPE or investment property?) 23 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

24 International Financial Reporting Standards Asset recognition concepts 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

25 Asset recognition concepts 25 An asset is recognised when: it is probable that any future economic benefit associated with the item will flow to the entity; and the item has a cost or value that can be measured with reliability. For some items that satisfy the definition of an asset, 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.

26 Recognition questions 26 What does probable mean? The meaning of probable is determined at the standards level. Therefore, inconsistent use across IFRSs What does measure reliably mean? To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

27 Recognition of development cost (IAS 38) 27 An intangible asset arising from the development phase of an internal project must be recognised if, and only if, an entity can demonstrate all of the following: a. the technical feasibility of completing the intangible asset so that it will be available for use or sale. b. its intention to complete the intangible asset and use or sell it. c. its ability to use or sell the intangible asset. d. how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. e. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. f. its ability to measure reliably the expenditure attributable to the intangible asset during its development. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

28 Examples recognition 28 Recognise the asset? For each item below choose 1 of: (a) yes; (b) no, FEBs not probable; or (c) no, cannot measure with reliability Open Safari brand WoXy brand Goodwill on acquiring WoXy Expenditures to restore WoXy brand Sealands casino licence (government grant) Medical research centre PPE Medical research centre research expenditure Medical research centre development expenditure Contract to sell timber at a fixed price at specified future date (timber prices falling) IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

29 Unit of account 29 The concept unit of account is the level at which an asset is aggregated or disaggregated for recognition purposes. Most IFRS do not prescribe the unit of account therefore judgement is required in applying recognition criteria to an entity s specific circumstances. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

30 Examples unit of account 30 How many separate items for recognition? WoXy elephants (a) herd as a whole (b)individual elephants WoXy bees (a)all 500 swarms collectively (b)each swarm (c) individual bees

31 Examples unit of account continued 31 How many separate items for recognition? Sealands unsold beachfront homes (a)all unsold homes collectively (b)each unsold home separately (c) each unsold home as two separate items roofs separate from main structure

32 Examples unit of account continued 32 How many separate items for recognition? Sealands casino hotel (a) collectively (building, casino equipment and fittings) (b) separate building from casino equipment, from fittings (c) separate building, multiple separate items of casino equipment and multiple separate items of fittings (d) it depends

33 International Financial Reporting Standards Measurement 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.

34 Measurement concepts 34 Measurement is the process of determining monetary amounts at which elements are recognised and carried. (CF.4.54) To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. The Conceptual Framework establishes the concepts that underlie those estimates, judgements and models (CF.OB11) IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

35 Measurement concepts continued 35 Measurement part of Conceptual Framework is weak A number of different measurement bases are employed to different degrees and in varying combinations in financial statements, including historical cost current cost realisable (settlement) value present value (CF.4.55) IASB guided by objective and qualitative characteristics when specifying measurements. IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

36 Measurement concepts continued 36 Historical cost concept : Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Fair value concept: the price that would be received to sell an asset (exit price) in an orderly transaction (not a forced sale) between market participants (market-based view) at the measurement date (current price). IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

37 ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION COST MODEL BASIS OF IMPAIRMENT TEST 37 IAS 2 Inventory Cost of purchase and/or conversion costs and costs to get the item to the location and condition for sale Cost unless impaired Lower of cost (initial recognition) and net realisable value IAS 16 Property, Plant and Equipment IAS 38 Intangibles Assets IAS 40 Investment Property IFRS 9 Financial Instruments Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management. Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management Cost including transaction costs Fair value IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. Accounting policy choice: cost less accumulated depreciation and impairment, if any Accounting policy choice: cost less accumulated amortisation (unless indefinite life asset) and amortisation, if any Accounting policy choice: cost less accumulated depreciation (unless land) and impairment (if any) For particular business models amortised cost Compare carrying amount to recoverable amount. Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36) IAS 39 specifies impairment rules

38 ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION MODEL BASED ON FAIR VALUE BASIS OF IMPAIRMENT TEST 38 IFRS 9 Financial Instruments Fair value For specified financial assets and for particular business models: fair value IAS 16 Property, Plant and Equipment IAS 38 Intangible Assets Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management. Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management Accounting policy choice: revaluation model Accounting policy choice: revaluation model Compare carrying amount to recoverable amount. Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36) IAS 40 Investment Property Cost including transaction costs Accounting policy choice: fair value IAS 41 Agriculture Fair value less costs to sell Fair value less costs to sell IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

39 Examples measurement economics 39 Which currency is Open Safari s functional currency? Choose one of (a) to (f) below: (a) Euro (b) British pound (c) South African rand (d) Africanian Zollar (e) US dollar (f) Any currency that Open Safari chooses

40 Examples measurement economics continued 40 Why did the IASB conclude that it would be highly unlikely that an entity can justify a change in accounting policy for investment property from the fair value model to the cost model? Why did the IASB conclude that fair value measurement was most appropriate measurement attribute for biological assets in agricultural activity? What is the economics of depreciation?

41 Example measurement at initial recognition 41 At what amount are the animals released on Sealands (captured on Freelands) measured when first recognised? (a) nil (b) expenditure on capture (c) expenditure on relocation (d) expenditure on capture and relocation (e) capture date fair value (f) capture date fair value less estimated costs to sell

42 Example depreciation 42 Residual value of spacecraft at 31/12/20Y0? (a) nil (b) CU10 million (c) CU10 million less expected costs of disposal (d) amount would get on 31/12/20Y0 less estimated costs of disposal, if already 5 years old and in the condition expected at the end of 20Y5. (e) amount would get on 31/12/20Y0 less estimated costs of disposal, if already flown 100 flights and in condition expected after 100 flights. (f) present value of CU10 million less estimated costs of disposal.

43 Example depreciation continued 43 Must any components of the spacecraft be depreciated separately? (a) no (b) yes, the inspection component must be depreciated separately from the other components of the spacecraft (ie 2 components). (c) yes, the inspection component and the soft furnishings component must each be depreciated separately from the other components (ie 3 components).

44 Example depreciation continued 44 Which depreciation method must be used for the spacecraft? (a) management choose depreciation method. (b) straight line method for both the inspection component and other component. (c) units of production method for both the inspection component and other component. (d) revenue-based depreciation for both the inspection component and other component. (e) straight line for the inspection component and units of production (based on the number of flights) for other component.

45 Example depreciation continued 45 At 31/12/20Y0 spacecraft s useful life is? (a) 100 years for entire spacecraft. (b) 150 years for entire spacecraft. (c) 4 years for entire spacecraft. (d) 5 years for entire spacecraft. (e) service component = 2 years and other component = 150 voyages. (f) service component = 2 years and other component = 100 voyages. (g) service component = 2 years and other component = 4 years.

46 Examples measurement after recognition 46 How to measure fair value of 1. Sealands casino building? 2. WoXy plantation? 3. animals (eg buffaloes and rhinos on Sealands)?

47 Judgements and estimates, cost 47 Cost of some items includes significant estimates what is cost? costs allocations cost of dismantling, removal, restoration costs of self constructed assets Depreciation represents the consumption of the assets service potential in the period. Measuring requires: identifying significant components to be depreciated separately estimating useful life and residual value identifying the depreciation method that reflects most closely the consumption of the service potential of the item of PPE Determining the classes of assets (eg PPE) IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

48 Judgements and estimates, fair value 48 When using the most recent market transaction price to measure fair value: identifying the most recent market transaction price and evaluating whether economic circumstances have changed significantly. When using market prices for similar assets: adjusting the prices to reflect differences. When using sector benchmarks (eg the value of cattle expressed per kilogram of meat): adjusting to reflect differences. When using DCF model: estimating the expected future net cash inflows and the discount rate. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

49 International Financial Reporting Standards Derecognition The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

50 Derecognition 50 Derecognition occurs when a recognised item is removed from the statement of financial position There is no explicit concept for derecognition in the Conceptual Framework. Consequently: derecognition requirements are specified at the Standards level inconsistencies exist between the derecognition requirements of different IFRSs derecognition does not necessarily coincide with no longer meeting the requirements specified for recognition

51 Examples derecognition 51 When does Open Safari derecognise the elephant bull released onto Freelands? (a)when the bull is released (b)when the bull first walks off Freelands (c)when the bull dies (d)never

52 International Financial Reporting Standards Presentation and disclosure The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

53 Presentation and disclosure concepts 53 Objective of financial reporting Financial statements portray financial effects of transactions and events by: grouping into broad classes (the elements, eg asset) sub-classify elements (eg assets sub-classified by their nature or function in the business) IAS 1 need not provide a specific disclosure if the information is not material application of IFRSs with additional disclosures when necessary results in a fair presentation (faithful representation of transactions, events and conditions) do not offset assets & liabilities or income & expenses IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

54 Examples measurement economics 54 Which currency is Open Safari s presentation currency? Choose one of (a) to (f) below: (a) Euro (b) British pound (c) South African rand (d) Africanian Zollar (e) US dollar (f) Any currency that Open Safari chooses

55 Questions or comments? 55 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 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.