2020/03/30 CPD Lecture 2 1 AGENDA • The table below summarises the standards that will be dealt with in this technical update lecture: Standard IFRS 16: Leases IAS 37: Provisions, Contingent Liability and Contingent Assets IAS 10: Events after the reporting period IAS 19: Employee Benefits IAS 8: Material Prior Period Error, Change in accounting estimates and changes in estimates Asset Classifications 1
2020/03/30 IFRS 16 Leases Substance over Form Buy a printer Lease a printer Outsource the printing service • Dr: Asset • Dr: Right of • Dr: Printing use asset expense • Cr: Bank • Cr: Lease • Cr: Bank Liability 2
2020/03/30 Identification of Leases Leases Identified Right to asset control use Substantive Explicit or Portions of Substitution Benefits Power Implicit assets Rights Determine how and for what purpose the asset is used •The standard gives several examples of relevant decision-making rights: •Right to change what type of output is produced. •Right to change when the output is produced. •Right to change where the output is produced. •Right to change how much of the output is produced 3
2020/03/30 Customer controls the Supplier controls the right of use of the asset right of use of the asset (or portion) “LEASE CONTRACT” “SERVICE CONTRACT” LEASES • Recognition and Measurement Lessee shall recognize a right of use asset and a lease liability Present value of the lease Right of use asset is measured payments discounted at the as the present value of the rate implicit in the lease, if not lease liability, plus any initial use the incremental borrowing direct costs rate - Increase with interest -Reduce with the lease Initial cost less depreciation payments and impairment losses and any -Remeasure the carrying lease remeasurements amount for any reassessments or revision 4
2020/03/30 Interest rate implicit in the lease (App A) – Rate for the lessor – NB! = “lease pmts” “Lease N = 0 N = 1 N = 2 term” PMT = lease payments PMT = lease payments FV = Residual value PV = Fair guarantee value + Initial I/YR? direct costs of + lessor Unguaranteed residual value Measuring lease liability: INPUTS Lease term Non-cancellable period of a lease plus: “Reasonably certain” (= n) Extension periods (if likely to exercise); assessment & “facts and Termination periods (if likely will not exercised) circumstances” B37 Lease payments Include: (= PMT and/or FV) Fixed payments (including in substance fixed payments) Variable ONLY IF / to extent based on observable index or rate (e.g. inflation). Use base year index/rate and reassess when actual cash flows change due to the change in index/rate. Other amounts if likely to incur : purchase options + termination penalties (similar to IFRS 15) End of lease payments / guaranteed residual values App. A Definitions Discount rate Interest rate implicit in agreement OR if not determinable (= i) Lessees incremental rate of borrowing (lease specific) 5
2020/03/30 LESSOR ACCOUNTING Identification Classification Finance lease Criteria Operating lease Finance Lease Operating lease Recognition Lessor recognizes a Lease income shall be receivable at the recognized on either a amount equal to the straight line basis or net investment in the another systematic lease basis Initial Measurement Finance lease Straight line lease measurement Initial direct costs are Manufacturers and added to the asset dealer Depreciation asset Non-manufactures Subsequent Finance Income is Measurement recognized over the term of the lease Sale and leaseback • Why sale and leaseback transactions? Cash flow problems Seller-lessee Sale of Lease of asset asset Buyer-lessor 6
2020/03/30 Sale and leaseback • If the transfer of the asset is a sale Right-of- ❶ Measure right- of-use asset as a ❷ Recognise a use retained proportion of gain/loss only on the previous carrying rights sold Seller-lessee amount Sale of certain rights ❶ Account for the ❷ Account for the Buyer-lessor purchase of the lease using lessor asset principles (OL or FL) SALE AND LEASEBACK LESSEE • Measure the right of use asset at the proportion of the carrying amount that relates to the right of use retained: o = Old Carrying amount * Right of use asset/ Fair value of the asset • Calculate the gain on the rights sold: o Total gain* (Fair value of asset-right of use asset)/ Fair value of the asset 7
2020/03/30 Sale and leaseback • If the transfer of the asset is NOT a sale for accounting purposes BUT ECONOMICALLY Provision of financing All rights ❷ Recognise a financial liability ❶ Continue to Seller-lessee retained for the loan and carry at recognise the asset and amortised cost depreciate accordingly Loan repaid through No sale lease payments Loan provided Buyer-lessor ❶Recognise a financial asset for the loan and carry at amortised cost IAS 37 Provisions, Contingent Liabilities and Contingent Assets 8
2020/03/30 Structure to IAS 37 • A provision should be recognised when: o The entity has a present obligation o From a past event o Probable that benefits will flow from the entity o Can be measured reliably 1. Present Obligation Present obligation is either legal or constructive in nature. Normally very easy to determine if there is a present obligation If taking into account all available information it is more likely than not that there is a present obligation Consider the opinion of legal experts to determine the existence of the present obligation 9
2020/03/30 2. Past Events A provision is recognized as a result of a past obligating event. The event that creates the present obligation and the entity has no realistic alternative but to settle the obligation. The obligation exists independently of the future actions of the entity (par 19 test! NB!) The entity can do nothing to prevent the payment of the obligation. 3. Probable Outflow More likely than not that there will be an outflow of economic benefits Number of similar obligations- determine probability considering the class of obligations as a whole 10
2020/03/30 4. Reliable Estimates Reliable estimate can be made of the provision. (par 25 – par 26) o Best estimate to settle liability at the end of reporting date (par 36 – par 52) o Big population – Expected value (par 39 + example) o Risks and uncertainties (par 42 – par 44) o Present value (par 45 – par 47) o Future events (par 48 – par 50) o Expected disposal of assets (par 51 – par 52) Last Factors to consider…. Always remember: • Contingent liability • Reimbursements • Onerous contracts • Restructuring 11
2020/03/30 IAS 10: Events After the Reporting Period Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. Two types of events can be identified: o those that provide evidence of conditions that existed at the end of the reporting period ( adjusting events after the reporting period); and o those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period). Structure of IAS 19 Short-term employee benefits Short-term absences Bonus payments Post-employment benefits Defined contribution plans Defined benefit plans Other-long term employee benefits – understand using the principle of a defined benefit liability Termination benefits 24 12
2020/03/30 IAS 24: Related Parties Related Parties • Person and close family member • Significant Influence Control • Member of key management personnel • Control or joint control • Person or close family Significant influence member • Control or joint control Member of • Person or close family key member management • Control or joint control personnel 13
2020/03/30 Related Parties One entity is a JV Joint Ventures of and the other an the same entity associate of the same third party Post employment Associate or Joint benefit plan for the reporting Venture of the reporting entity entity or entity related to it Entity is Reporting Members of the controlled by key same group management Entity personnel IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors 14
2020/03/30 IAS 8 Changes in Accounting Changes in accounting Material Prior Error Policy estimates Failure to misuse 1. Required by S/I information that was New information or available at date of 2. Relevant and New development preparing financial Reliable information statements Asset Classification 15
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