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7 ED Classification and measurement of share-based payment transactions – proposed amendments to IFRS 2

7 ED Classification and measurement of share-based payment transactions – proposed amendments to IFRS 2

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(b)



Classification of share-based payment transactions with net settlement features



(c)



Accounting for modifications of share-based payment transactions from cash-settled to equitysettled.



The ED is covered in more detail in Chapter 9 of this Study Text in the context of IFRS 2.



2.8 Initial comprehensive review of the IFRS for SMEs

In May 2015, the IASB completed its comprehensive review of the IFRS for SMEs. The most significant

amendments are as follows:

(a)



SMEs are now permitted to use a revaluation model for property, plant and equipment.



(b)



The main recognition and measurement requirements for deferred income tax are aligned with full

IFRS.



The changes are incorporated in the coverage of the IFRS for SMEs in Chapter 21 of the Study Text.



2.9 Improvements to IFRS 2012 to 2014 Cycle

The Annual Improvements to IFRSs 2012 to 2014 Cycle was issued in September 2014. Below is a

summary of its main changes.



2.9.1 IFRS 5 Non-current assets held for sale and discontinued operations

This amendment relates to changes in methods of disposal, and adds specific guidance in IFRS 5 for

cases in which an entity reclassifies an asset from held for sale to held for distribution or vice versa and

cases in which held-for-distribution accounting is discontinued



2.9.2 Amendments to IFRS 7 Financial instruments: disclosures

This amendment clarifies issues in relation to servicing contracts and condensed interim financial

statements:

(a)



Additional guidance is provided on whether a servicing contract is continuing involvement in a

transferred asset for the purpose of determining the disclosures required.



(b)



Clarification is given on whether the amendments to IFRS 7 on offsetting disclosures applies to

condensed interim financial statements.



2.9.3 Amendment to IAS 19 Employee benefits

This amendment relates to the discount rate, and clarifies that the high quality corporate bonds used in

estimating the discount rate for post-employment benefits should be denominated in the same currency

as the benefits to be paid (thus, the depth of the market for high quality corporate bonds should be

assessed at currency level).



2.9.4 Amendments to IAS 24 Interim financial reporting

This amendment concerns disclosure of information 'elsewhere in the interim financial report'.

It clarifies the meaning of 'elsewhere in the interim report' and requires a cross-reference,



3 Other current issues and debates

FAST FORWARD



Other current issues highlighted by the examining team are:













538



Disclosure initiative

Profit or loss versus other comprehensive income

Equity accounting

Debt versus equity

Additional performance measures



19: Current developments  Part D Developments in reporting



3.1 Disclosure initiative

3.1.1 Overview

The IASB’s disclosure initiative is a broad-based undertaking exploring how disclosures in IFRS financial

reporting can be improved. It is made up of a number of projects, the first of which has been completed in

December 2014.

The disclosure initiative was formally begun in 2012. Subsequently IASB undertook a constituent survey

on disclosure and held a disclosure forum designed to bring together securities regulators, auditors,

investors and preparers. This led to issued Feedback Statement Discussion Forum – Financial Reporting

Disclosure in May 2013, which outlined the IASB's intention to consider a number of further initiatives,

including short-term and research projects.

The disclosure initiative is intended to complement the work being done on the Conceptual Framework

project (covered in Chapter 1).



3.1.2 Current status of projects

One project, the amendments to IAS 1 is complete, one, proposed amendments to IAS 7 is at the ED stage

and the remainder at the research stage.



3.1.3 Disclosure initiative: Amendments to IAS 1

This is a narrow scope project which aims to ensure that entities are able to use judgement when

presenting their financial reports as the wording of some of the requirements in IAS 1 had in some cases

been read to prevent the use of judgement. The final Standard Disclosure Initiative (Amendments to IAS 1)

was published in December 2014, and is effective for annual periods beginning on or after 1 January 2016

with earlier application permitted.

The following amendments are made.

(a)



Materiality. Information should not be obscured by aggregating or by providing immaterial

information. Materiality considerations apply to the all parts of the financial statements. Materiality

considerations still apply, even when a standard requires a specific disclosure.



(b)



Statement of financial position and statement of profit or loss and other comprehensive

income. The list of line items to be presented in these statements can be disaggregated and

aggregated as relevant and additional guidance on subtotals in these statements. An entity's share

of other comprehensive income of equity-accounted associates and joint ventures should be

presented in aggregate as single line items based on whether or not it will subsequently be

reclassified to profit or loss.



(c)



Notes. Additional examples have been added of possible ways of ordering the notes to clarify that

understandability and comparability should be considered when determining the order of the notes

and to demonstrate that the notes need not be presented in the order so far listed in paragraph 114

of IAS 1. The IASB also removed guidance and examples with regard to the identification of

significant accounting policies that were perceived as being potentially unhelpful.



This topic is covered in more detail in the context of IAS 1 in Chapter 10.



3.1.4 ED Disclosure initiative: Proposed amendments to IAS 7

In December 2014, the IASB issued an exposure draft proposing amendments to IAS 7 on the

presentation of a reconciliation of liabilities relating to financing activities and disclosure of restrictions on

the use of cash and cash equivalents.

This topic is covered in more detail in the context of IAS 7 in Chapter 17.



Part D Developments in reporting  19: Current developments



539



3.1.5 Disclosure initiative: other projects

The following disclosure initiative projects are at the pre-exposure-draft or research stage.

(a)



Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. These

amendments would clarify the definitions of a change in accounting policy and a change in

accounting estimate. An ED is expected in early 2016.



(b)



Materiality project. The IASB is considering how materiality is applied in practice in IFRS financial

statements. The IASB has tentatively decided to provide guidance on the application of materiality,

which will take the form of a Practice Statement. In April 2015 the IASB tentatively decided that the

Principles of Disclosure Discussion Paper should include a discussion on whether the definition of

materiality should be changed and whether IAS 1 Presentation of financial statements should

include additional guidance that clarifies the key characteristics of materiality.



(c)



Principles of disclosure. This project aims to identify and develop a set of principles for disclosure

in IFRS that could form the basis of a Standards-level project. The focus is on reviewing the

general requirements in IAS 1 Presentation of financial statements, and considering how it may be

revised.



(d)



Standards level review of disclosures. The IASB will review disclosures in existing Standards to

identify targeted improvements and to develop a drafting guide. This project will be informed by the

principles being developed in the Principles of Disclosure (PoD) project.



3.2 Profit or loss versus other comprehensive income

3.2.1 The classification issue

The statement of profit or loss and other comprehensive income aims to present the financial performance

of an entity to a wide variety of users in a way that is understandable and comparable for the purpose of

assessing the net cash inflows of the entity. The manner in which the information in the statement is

classified and aggregated plays a key role in fulfilling this aim.

Since the 2011 revision of IAS 1, entities have been required to show separately in other comprehensive

income those items that may be reclassified to profit or loss (recycled) and those which may never be

reclassified (together with the related tax effects).

There has been disagreement as to which items should appear in profit or loss, and which in other

comprehensive income (OCI). The issue of reclassification has also been controversial.



3.2.2 Profit or loss items

Generally, changes resulting from or related to an entity’s primary performance or main revenueproducing activities are reported in profit or loss. Examples include sales revenue, administration

expenses and gains on disposal of property, plant and equipment. Reclassification adjustments, that is

when items are recycled from other comprehensive income, are also included.

Investors tend to focus on profit or loss rather than OCI, and many accounting ratios are calculated using

profit or loss for the year, rather than total comprehensive income.



3.2.3 Other comprehensive income

Generally, these are items of income and expense arising from other, non-primary or non-revenue

producing activities of the company that are not reported in profit or loss as required or permitted by

other IFRS.



3.2.4 Profit or loss v OCI ≠ realised v unrealised

A common misconception in considering the classification of items is that profit or loss is for realised

gains and losses and OCI for unrealised. However, this distinction is itself controversial and therefore of

limited use in determining the P/L versus OCI classification.

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19: Current developments  Part D Developments in reporting



3.2.5 OCI as the ‘dumping ground’

It could be argued that OCI is defined in opposition to profit or loss, that is items that are not profit or

loss, or even that it has been used as a ‘dumping ground’ for items that entities do not wish to report in

profit or loss. Reclassification from OCI has been said to compromise the reliability of both profit or loss

and OCI.



3.2.6 Approach in Conceptual Framework

Part of the problem is conceptual – the current Conceptual Framework does not contain principles to

determine:

(a)

(b)

(c)



What items are recognised in profit or loss

What items are recognised in other comprehensive income

Whether, and when, items can be recycled from other comprehensive income to profit or loss



In response, a 2013 Discussion Paper proposed that the Conceptual Framework should:

(a)



Require a profit or loss total or subtotal that also results, or could result, in some items of income

or expense being recycled.



(b) Limit the use of OCI (only to income and expenses resulting from remeasurements of assets and

liabilities).

This approach was carried forward into the 2015 Exposure Draft.

The Discussion Paper proposed a narrow and broad approach to what should be included in other

comprehensive income, but the IASB has not yet decided which approach it will use.

(a)



Narrow approach. Other comprehensive income would only include bridging items and

mismatched remeasurements.

Bridging items are items of income or expense which represent the difference between

measurement used in determining profit or loss and remeasurement used in the statement of

financial position. An example would be investments in equity instruments with changes in fair

value recorded in other comprehensive income. Such items would have to be recycled as a

consequence of the measurement basis presented in profit or loss.

Mismatched remeasurements represent the effects of part of a linked set of assets, liabilities or

past or planned transactions. It represents their effect so incompletely that, in the opinion of the

IASB, the item provides little relevant information about the return that the entity has made on its

economic resources in the period. An example would be a cash flow hedge, where fair value gains

and losses are accumulated in other comprehensive income until the hedged transaction affects

profit or loss. These amounts should be recycled when the item can be presented with the

matched item.



(b)



Broad approach. In addition to the narrow approach, this would also include transitory

remeasurements. Transitory remeasurements are remeasurements of long-term assets and

liabilities that are likely to reverse or significantly change over time. These items would be shown in

OCI - for example, the remeasurement of a net defined pension benefit liability or asset. The IASB

would decide in each IFRS whether a transitory remeasurement should be subsequently

recycled.



The ED on the Conceptual Framework does not provide any guidance as to which of the above approaches

it recommends.

(The Conceptual Framework and the related ED is covered in full in Chapter 1.)



3.3 Equity accounting

Equity accounting has been used in recent years to account for associates and joint ventures (see Chapter

12), but it was originally used to account for subsidiaries as an alternative to consolidation, at a time when



Part D Developments in reporting  19: Current developments



541



acquisition accounting was considered inappropriate because it showed assets and liabilities not owned by

the reporting entity. Its use has been called into question in recent years, because it does not apply IFRS

3 consolidation principles consistently.

There are two main recent developments.



3.3.1 Separate financial statements of the investor

The option to apply the equity method in separate financial statements had been removed in the 2003

revision of IAS 27 Consolidated and separate financial statements as the IASB noted at that time that the

information provided by the equity method is reflected in the investor's economic entity financial

statements and that there was no need to provide the same information in the separate financial

statements. The decision was carried forward to IAS 27 Separate financial statements in 2011. However,

the IASB reconsidered this decision in the light of feedback and reinstated the option in a 2014

amendment to IAS 27.

Accordingly, investments in subsidiaries, associates and joint ventures in the separate financial statements

of the parent is should be:

(a)

(b)

(c)



Accounted for at cost, or

In accordance with IFRS 9, or

Using the equity method as described in IAS 28 Investments in associates and joint ventures



The amendments also clarify that when a parent ceases to be an investment entity, or becomes an

investment entity, it must account for the change from the date when the change in status occurred.



3.3.2 ED Equity method: share of other net asset changes

This Exposure Draft was published in 2012. The objective of the proposed amendments is to provide

additional guidance to IAS 28 on the application of the equity method. Specifically; the proposed

amendments intend to specify the following.

(a)



An investor should recognise, in the investor's equity, its share of the changes in the net assets of

the investee that are not recognised in profit or loss or other comprehensive income (OCI) of the

investee, and that are not distributions received ('other net asset changes').



(b) The investor must reclassify to profit or loss the cumulative amount of equity that the investor had

previously recognised when the investor discontinues the use of the equity method.

These amendments have by no means resolved all the uncertainties about the method, and it is still

perceived to lack a clear conceptual basis.



3.4 Debt versus equity



12/13, 6/14



3.4.1 Classification differences

It is not always easy to distinguish between debt and equity in an entity's statement of financial position,

partly because many financial instruments have elements of both. IAS 32 Financial instruments:

presentation brings clarity and consistency to this matter, so that the classification is based on

principles rather than driven by perceptions of users.

IAS 32 defines an equity instrument as: 'any contract that evidences a residual interest in the assets of an

entity after deducting all of its liabilities'. It must first be established that an instrument is not a financial

liability, before it can be classified as equity.

A key feature of the IAS 32 definition of a financial liability is that it is a contractual obligation to

deliver cash or another financial asset to another entity. The contractual obligation may arise from a

requirement to make payments of principal, interest or dividends. The contractual obligation may be

explicit, but it may be implied indirectly in the terms of the contract. An example of a debt instrument is a

bond which requires the issuer to make interest payments and redeem the bond for cash.



542



19: Current developments  Part D Developments in reporting



A financial instrument is an equity instrument only if there is no obligation to deliver cash or other

financial assets to another entity and if the instrument will or may be settled in the issuer’s own equity

instruments. An example of an equity instrument is ordinary shares, on which dividends are payable at

the discretion of the issuer. A less obvious example is preference shares required to be converted into a

fixed number of ordinary shares on a fixed date or on the occurrence of an event which is certain to occur.

An instrument may be classified as an equity instrument if it contains a contingent settlement provision

requiring settlement in cash or a variable number of the entity's own shares only on the occurrence of an

event which is very unlikely to occur – such a provision is not considered to be genuine. If the

contingent payment condition is beyond the control of both the entity and the holder of the instrument,

then the instrument is classified as a financial liability.

A contract resulting in the receipt or delivery of an entity’s own shares is not automatically an equity

instrument. The classification depends on the so-called ‘fixed test’ in IAS 32. A contract which will be

settled by the entity receiving or delivering a fixed number of its own equity instruments in exchange for

a fixed amount of cash is an equity instrument. The reasoning behind this is that by fixing upfront the

number of shares to be received or delivered on settlement of the instrument in question, the holder is

exposed to the upside and downside risk of movements in the entity’s share price.

In contrast, if the amount of cash or own equity shares to be delivered or received is variable, then the

contract is a financial liability or asset. The reasoning behind this is that using a variable number of own

equity instruments to settle a contract can be similar to using own shares as ‘currency’ to settle what in

substance is a financial liability. Such a contract does not evidence a residual interest in the entity’s net

assets. Equity classification is therefore inappropriate.

IAS 32 gives two examples of contracts where the number of own equity instruments to be received or

delivered varies so that their fair value equals the amount of the contractual right or obligation.

(a)



A contract to deliver a variable number of own equity instruments equal in value to a fixed

monetary amount on the settlement date is classified as a financial liability.



(b)



A contract to deliver as many of the entity’s own equity instruments as are equal in value to the

value of 100 ounces of a commodity results in liability classification of the instrument.



There are other factors which might result in an instrument being classified as debt.

(1)



Dividends are non-discretionary.



(2)



Redemption is at the option of the instrument holder.



(3)



The instrument has a limited life.



(4)



Redemption is triggered by a future uncertain event which is beyond the control of both the issuer

and the holder of the instrument.



Other factors which might result in an instrument being classified as equity include the following.

(a)

(b)

(c)



Dividends are discretionary.

The shares are non-redeemable.

There is no liquidation date.



More detail on these amendments is found in Chapter 3, Section 5



3.4.2 Significance of the classification

The distinction between debt and equity is very important, since the classification of a financial instrument

as either debt or equity can have a significant impact on the entity's reported earnings and gearing

ratio, which in turn can affect debt covenants. Companies may wish to classify a financial instrument as

equity, in order to give a favourable impression of gearing, but this may in turn have a negative effect

on the perceptions of existing shareholders if it is seen as diluting existing equity interests.

The distinction is also relevant in the context of a business combination where an entity issues financial

instruments as part consideration, or to raise funds to settle a business combination in cash.

Management is often called upon to evaluate different financing options, and in order to do so must



Part D Developments in reporting  19: Current developments



543



understand the classification rules and their potential effects. For example, classification as a liability

generally means that payments are treated as interest and charged to profit or loss, and this may, in

turn, affect the entity’s ability to pay dividends on equity shares.



3.4.3 Equity versus liabilities in the 2013 Conceptual Framework Discussion Paper

The distinction between equity and liabilities is clarified through focus on the definition of a liability. The

paper identifies two types of approach: narrow equity and strict obligation.

(a)



Narrow equity approach. Equity is treated as being only the residual class issued, with changes in

the measurement of other equity claims recognised in profit or loss.



(b)



Strict obligation approach. All equity claims are classified as equity with obligations to deliver

cash or assets being classified as liabilities. Any changes in the measurement of equity claims

would be shown in the statement of changes in equity.



Under the strict obligation approach, certain transactions now classified as liabilities would now be

classified as equity because they do not involve an obligation to transfer cash or assets. An example of

this is an issue of shares for a fixed monetary amount.

This topic was not explored in the 2015 ED – instead, it is part of a separate project.



3.5 Additional performance measures

The problem of presenting financial performance was discussed in Section 3.1 above, in the context of the

profit or loss/OCI distinction. Another topical issue is the use of additional performance measures. These

can take the form of additional key performance indicators or providing more information on the individual

items within the financial statements.

Users have driven the demand for additional performance measures (APMs) because financial statements,

prepared in accordance with applicable financial reporting standards, have been restricted in the amount

of information that can be provided.



3.5.1 Purpose and common types of APMs

Preparers of financial statements may wish to report ‘sustainable’ earnings. This means, in effect, that

certain items of income and expense are excluded because they are considered irrelevant as regards their

impact on future years’ performance. Examples of such items include fair value gains or losses on

financial instruments.

Common APMs include the following:

(a)



Normalised profit. This may be defined in various ways, but principally means profit per IFRS (or

other applicable standards) excluding non-recurring items such as disposals of business, and other

items such as amortisation of intangibles.



(b)



EBIT. This means earnings before interest and tax.



(c)



EBITDA. This stands for earnings before interest, tax and amortisation.



(d)



Net financial debt. This is gross financial debt less cash and cash equivalents and other financial

assets, and is a useful indicator of an entity’s ability to meet its financial obligations.



In general, APMs are any measures of financial performance not specifically defined by the applicable

financial reporting framework.



3.5.2 Potential problems with APMS

The problematic nature of some APMs may be seen in the case of EBITDA. This is a proxy for operating

cash flows, although it is not the same. It takes operating profit and strips out depreciation, amortisation

and (normally) any separately-disclosed items such as exceptional items.



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19: Current developments  Part D Developments in reporting



EBITDA is not a cash flow ratio as such, but it is a widely used, and sometimes misused, approximation.

Particular reservations include:

(a)



EBITDA is not a cash flow measure and, while it excludes certain subjective accounting practices, it

is still subject to accounting manipulation in a way that cash flows would not be. Examples would

include revenue recognition practice and items that have some unusual aspects but are not disclosed

separately and, therefore, not added back.



(b)



EBITDA is not a sustainable figure as there is no charge for capital replacement such as

depreciation in traditional profit measures or CAPEX (capital expenditure) as in free cash flow.



More generally, APMs are sometimes used by issuers to present an overly favourable picture of an

entity’s financial performance by stripping out the negative aspects.



3.5.3 ESMA guidance

While both the IASB and the UK Financial Reporting Council have acknowledged the usefulness of APMs,

guidance is needed in order to ensure that users have the information they need to judge them

appropriately. The European Securities and Markets Authority (ESMA) has begun a consultation process

and developed some draft guidelines in this area, published in February 2014. Key points from these

guidelines are as follows.

(a)



Preparers must provide a definition of the APM used and the basis of its calculation.



(b) The definition and calculation of the APM must be consistent over time.

(c)



Preparers must show comparatives for the APM.



(d) If an APM is discontinued, an explanation must be given as to why it is no longer used, and a reason

given for any replacement APM.

(e)



APMs must be reconciled to the financial statements.



Because the aim of the above guidelines is consistency, the APMs should not change much between

accounting periods and so the cost of compliance with these guidelines should not be prohibitive. The

costs will, it is hoped, be outweighed by the benefits of greater transparency.



4 Managing the change to IFRS



6/08, 6/11



4.1 IFRS 1 First-time Adoption of International Financial Reporting

Standards

FAST FORWARD



IFRS 1 gives guidance to entities applying IFRS for the first time.

The adoption of a new body of accounting standards will inevitably have a significant effect on the

accounting treatments used by an entity and on the related systems and procedures. In 2005 many

countries adopted IFRS for the first time and over the next few years other countries are likely to do the

same. In addition, many Alternative Investment Market (AIM) companies and public sector companies

adopted IFRS for the first time for accounting periods ending in 2009 and 2010, and US companies are

likely to move increasingly to IFRS.

IFRS 1 First-time adoption of International Financial Reporting Standards was issued to ensure that an

entity's first IFRS financial statements contain high quality information that:

(a)

(b)

(c)



Is transparent for users and comparable over all periods presented

Provides a suitable starting point for accounting under IFRSs

Can be generated at a cost that does not exceed the benefits to users



4.1.1 General principles

An entity applies IFRS 1 in its first IFRS financial statements.



Part D Developments in reporting  19: Current developments



545



An entity's first IFRS financial statements are the first annual financial statements in which the entity

adopts IFRS by an explicit and unreserved statement of compliance with IFRS.

Any other financial statements (including fully compliant financial statements that did not state so) are not

the first set of financial statements under IFRS.



4.1.2 Opening IFRS statement of financial position

An entity prepares and presents an opening IFRS statement of financial position at the date of transition

to IFRS as a starting point for IFRS accounting.

Generally, this will be the beginning of the earliest comparative period shown (ie full retrospective

application). Given that the entity is applying a change in accounting policy on adoption of IFRS, IAS 1

Presentation of Financial Statements requires the presentation of at least three statements of financial

position (and two of each of the other statements).

Illustration: Opening IFRS SOFP

1st year of adoption



Comparative year

1.1.20X8

31.12.20X9



31.12.20X8



Transition

date

Preparation of an opening IFRS statement of financial position typically involves adjusting the amounts

reported at the same date under previous GAAP.

All adjustments are recognised directly in retained earnings (or, if appropriate, another category of

equity) not in profit or loss.



4.1.3 Estimates

Estimates in the opening IFRS statement of financial position must be consistent with estimates made at

the same date under previous GAAP even if further information is now available (in order to comply with

IAS 10).



4.1.4 Transition process

(a)



Accounting policies

The entity should select accounting policies that comply with IFRSs effective at the end of the first

IFRS reporting period.

These accounting policies are used in the opening IFRS statement of financial position and

throughout all periods presented. The entity does not apply different versions of IFRS effective at

earlier dates.



(b)



Derecognition of assets and liabilities

Previous GAAP statement of financial position may contain items that do not qualify for recognition

under IFRS.

For example, IFRS does not permit capitalisation of research, staff training and relocation costs.



(c)



Recognition of new assets and liabilities

New assets and liabilities may need to be recognised.

For example, deferred tax balances and certain provisions such as environmental and

decommissioning costs.



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19: Current developments  Part D Developments in reporting



(d)



Reclassification of assets and liabilities

For example, compound financial instruments need to be split into their liability and equity

components.



(e)



Measurement

Value at which asset or liability is measured may differ under IFRS.

For example, discounting of deferred tax assets/liabilities not allowed under IFRS.



4.1.5 Main exemptions from applying IFRS in the opening IFRS statement of

financial position

(a)



Property, plant and equipment, investment properties and intangible assets

(i)



(b)



Fair value/previous GAAP revaluation may be used as a substitute for cost at date of

transition to IFRSs.



Business combinations

For business combinations prior to the date of transition to IFRSs:



(c)



(i)



The same classification (acquisition or uniting of interests) is retained as under previous

GAAP.



(ii)



For items requiring a cost measure for IFRSs, the carrying value at the date of the business

combination is treated as deemed cost and IFRS rules are applied from thereon.



(iii)



Items requiring a fair value measure for IFRSs are revalued at the date of transition to

IFRSs.



(iv)



The carrying value of goodwill at the date of transition to IFRSs is the amount as reported

under previous GAAP.



Employee benefits

Unrecognised actuarial gains and losses can be deemed zero at the date of transition to IFRSs. IAS

19 is applied from then on.



(d)



Cumulative translation differences on foreign operations

Translation differences (which must be disclosed in a separate translation reserve under IFRS) may

be deemed zero at the date of transition to IFRS. IAS 21 is applied from then on.



(e)



Adoption of IFRS by subsidiaries, associates and joint ventures

If a subsidiary, associate or joint venture adopts IFRS later than its parent, it measures its assets

and liabilities:

Either:



At the amount that would be included in the parent’s financial statements, based on the

parent’s date of transition



Or:



At the amount based on the subsidiary (associate or joint venture)’s date of transition.



Disclosure



FAST FORWARD



(a)



A reconciliation of previous GAAP equity to IFRSs is required at the date of transition to IFRSs

and for the most recent financial statements presented under previous GAAP.



(b)



A reconciliation of profit for the most recent financial statements presented under previous GAAP.



The change to IFRS must be carefully managed.



Part D Developments in reporting  19: Current developments



547



4.2 Practical issues

The implementation of the change to IFRS is likely to entail careful management in most companies. Here

are some of the change management considerations that should be addressed.

(a)



Accurate assessment of the task involved. Underestimation or wishful thinking may hamper the

effectiveness of the conversion and may ultimately prove inefficient.



(b)



Proper planning. This should take place at the overall project level, but a detailed task analysis

could be drawn up to control work performed.



(c)



Human resource management. The project must be properly structured and staffed.



(d)



Training. Where there are skills gaps, remedial training should be provided.



(e)



Monitoring and accountability. A relaxed 'it will be alright on the night' attitude could spell danger.

Implementation progress should be monitored and regular meetings set up so that participants

can personally account for what they are doing as well as flag up any problems as early as

possible. Project drift should be avoided.



(f)



Achieving milestones. Successful completion of key steps and tasks should be appropriately

acknowledged, ie what managers call 'celebrating success', so as to sustain motivation and

performance.



(g)



Physical resourcing. The need for IT equipment and office space should be properly assessed.



(h)



Process review. Care should be taken not to perceive the change as a one-off quick fix. Any change

in future systems and processes should be assessed and properly implemented.



(i)



Follow-up procedures. As with general good management practice, the follow up procedures

should be planned in to make sure that the changes stick and that any further changes are

identified and addressed.



4.2.1 Financial reporting infrastructure

As well as sound management judgement, implementation of IFRS requires a sound financial reporting

infrastructure. Key aspects of this include the following:

(a)



A robust regulatory framework. For IFRS to be successful, they must be rigorously enforced.



(b)



Trained and qualified staff. Many preparers of financial statements will have been trained in local

GAAP and not be familiar with the principles underlying IFRS, let alone the detail. Some

professional bodies provide conversion qualifications – for example, the ACCA's Diploma in

International Financial Reporting – but the availability of such qualifications and courses may vary

from country to country.



(c)



Availability and transparency of market information. This is particularly important in the

determination of fair values, which are such a key component of many IFRSs.



(d)



High standards of corporate governance and audit. This is all the more important in the transition

period, especially where there is resistance to change.



Overall, there are significant advantages to the widespread adoption of IFRS, but if the transition is to go

well, there must be a realistic assessment of potential challenges.



4.3 Other implementation challenges

4.3.1 More detailed rules

Implementation of International Financial Reporting Standards entails a great deal of work for many

companies, particularly those in countries where local GAAP has not been so onerous. For example, many

jurisdictions will not have had such detailed rules about recognition, measurement and presentation of

financial instruments, and many will have had no rules at all about share-based payment.



548



19: Current developments  Part D Developments in reporting



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7 ED Classification and measurement of share-based payment transactions – proposed amendments to IFRS 2

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