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Section 21 Provisions and Contingencies Section 28 Employee BenefitsThe IFRS for SMEs Topic 3.1 Section 20 Leases Section 21 Provisions and Contingencies Section 28 Employee Benefits © 2011 IFRS Foundation
2 This PowerPoint presentation was prepared by IFRS Foundation education staff as a convenience for others. It has not been approved by the IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training on the IFRS for SMEs. However, if you make any changes to the PowerPoint presentation, your changes should be clearly identifiable as not part of the presentation prepared by the IFRS Foundation education staff and the copyright notice must be removed from every amended page . This presentation may be modified from time to time. The latest version may be downloaded from: The accounting requirements applicable to small and medium‑sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. © 2011 IFRS Foundation 2
The IFRS for SMEs 3 Section 20 Leases © 2011 IFRS Foundation 3
Section 20 – scope 4 A lease is an agreement whereby the lessor conveys to the lessee in return for payment or a series of payments the right to use an asset for an agreed period of time Section 20 covers accounting and reporting for most leases (see paragraphs 20.1–20.3 for exceptions and inclusions) © 2011 IFRS Foundation 4
Section 20 – classification of leases5 A lease is classified a finance lease if it transfers substantially all the risks & rewards incidental to ownership an operating lease if it does not transfer substantially all the risks & rewards incidental to ownership Use judgement considering all facts & circumstances to classify leases operating lease if lessor retains significant risks & rewards of ownership substance of finance lease is similar to the purchase of an asset on credit. © 2011 IFRS Foundation 5
Section 20 – classification of leases continued6 Situations that individually or in combination normally indicate a finance lease: lease transfers ownership of the asset to lessee from inception lessee reasonably certain to exercise bargain purchase option lease term is for the major part of asset’s economic life at inception PV of MLPs = substantially all asset’s fair value specialised asset (only lessee can use without major modifications) © 2011 IFRS Foundation 6
Section 20 – classification of leases continued7 Situations that individually or in combination could indicate a finance lease lessee can cancel the lease but compensates the lessor’s for associated losses gains or losses from the fluctuation in the residual value of the leased asset accrue to the lessee lessee can continue the lease for a secondary period at a rent that is substantially lower than market rent © 2011 IFRS Foundation 7
Section 20 – lease classification Ex8 Ex 1: On 1/1/20X1 enter into 5-yr non‑cancellable lease over a machine. Machine’s cash cost = 100,000, economic life = 10 yrs and residual value = 0. Annual lease payments on 31/12: 4 × 23,000 & 23,539 at end of yr 5 when ownership transfers to the lessee. The interest rate implicit in the lease is 5% p.a. which approximates lessee’s incremental borrowing rate. © 2011 IFRS Foundation
Section 20 – lease classification Ex9 Ex 2: Same as Ex 1 except ownership of the machine does not automatically transfer to the lessee at the end of the lease. Instead, the lessee has an option to acquire the machine from the lessor on 1/1/20X6 for CU1. Ex 3: Same as Ex 1 except economic life of the machine is five years and ownership of the machine does not transfer to the lessee at the end of the lease. © 2011 IFRS Foundation
Section 20 – lease classification Ex10 Ex 4: Same as Ex 1 except ownership does not transfers to lessee at the end of the lease. Instead lessee has an option to continue the lease asset for a further 5 years at a rent of CU1 per year. Ex 5: Same as Ex 1 except ownership transfers to the lessee at the end of the lease for a variable payment equal to the asset’s then fair value (instead of 23,539). © 2011 IFRS Foundation
Section 20 – lease classification Ex11 Ex 6: Tripartite lease agreement. Lessor transfers substantially all risks & rewards to 2 unrelated parties: the lessee obtains the right of use of the leased asset for a period of time; and the other party contracts to acquire the leased asset from the lessor at the end of the lease term at a fixed price. © 2011 IFRS Foundation
Section 20 – lease classification Ex12 Ex 6 continued: Lease classification: lessor = finance lease lessee = operating lease other party has firm commitment to acquire asset © 2011 IFRS Foundation
(finance lease & operating lease)The IFRS for SMEs 13 Lessee (finance lease & operating lease) © 2011 IFRS Foundation 13
Section 20 – lessee: finance lease14 Initial recognition & measurement: recognise assets (rights) & liabilities (obligations) at fair value of leased property or, if lower, the present value of the minimum lease payments add to asset the lessee’s incremental costs that are directly attributable to negotiating & arranging a lease © 2011 IFRS Foundation 14
Section 20 – lessee: finance lease continued15 Subsequent measurement: apportion minimum lease payments between finance charge & liability using effective interest method depreciate asset in accordance with relevant section (eg Section 17 PP&E) © 2011 IFRS Foundation 15
Section 20 – lessee: finance lease Ex16 Ex 7: Same as Ex 1. Finance lease obligation amortisation table: 1 Jan Finance cost Payment 31 Dec 20X1 100,000 5,000 (23,000) 82,000 20X2 4,100 63,100 20X3 3,155 43,255 20X4 2,163 22,418 20X5 1,121 (23,539) – © 2011 IFRS Foundation
Section 20 – lessee: finance lease Ex17 Ex 7 continued: 1/1/20X1 (initial recognition) recognise: asset (PP&E) 100,000; and liability (finance lease obligation) 100,000 For the year ended 31/12/20X1 recognise: allocate payment of 23,000 (5,000 finance cost in profit or loss & 18,000 repayment of finance lease obligation) CU10,000 depreciation expense in profit or loss and as a reduction to the asset © 2011 IFRS Foundation
Section 20 – lessee: finance lease continued18 Disclose: For each class of asset, the net carrying amount at reporting date Total FMLPs on reporting date, showing due (i) in < 1 year; (ii) > 1 year but < 5 yrs; (iii) in > 5 years General description of significant leasing arrangements Also see Sections 17, 18, 27 and 34. © 2011 IFRS Foundation 18
Section 20 – lessee: operating lease19 Recognition & measurement: expense lease payments on straight-line basis unless: another systematic basis is more representative of the user’s benefit; or payments are structured to increase in line with expected general inflation (based on published indexes or statistics). © 2011 IFRS Foundation 19
Section 20 – operating lease examplesEx 8: On 1/1/20X1 A entered into a 5-year non‑cancellable operating lease over a building. Rentals X1–X4 = 0. Rental X5 = 5,000. Ex 9: Same as Ex 8 except lessor agrees to pay the lessee’s relocation costs (ie 500) as an incentive to the lessee for entering into the new lease Ex 10: Operating lease payments increase by expected CPI (10% p.a.) to compensate the lessor for expected inflation. X1 = 1,000; X2 = 1,100; X3 = 1,210; etc © 2011 IFRS Foundation
Section 20 – lessee: operating lease21 Disclose: Total FMLPs for non-cancellable operating leases, showing due (i) in < 1 year; (ii) > 1 year but < 5 years; (iii) in > 5 years lease payments recognised as an expense a general description of the lessee’s significant leasing arrangements including for example, information about contingent rent, renewal or purchase options and escalation clauses, subleases, and restrictions imposed by lease arrangements © 2011 IFRS Foundation 21
(finance lease & operating lease)The IFRS for SMEs 22 Lessor (finance lease & operating lease) © 2011 IFRS Foundation 22
Section 20 – lessor: finance lease23 Initial recognition & measurement: recognise assets held under a finance lease (a receivable) at an amount equal to the net investment in the lease (ie gross investment in the lease discounted at the interest rate implicit in the lease). The gross investment in the lease is the aggregate of: (a) the minimum lease payments receivable by the lessor under a finance lease, and (b) any unguaranteed residual value accruing to the lessor. © 2011 IFRS Foundation 23
Section 20 – lessor: finance lease24 Subsequent measurement recognise finance income—constant periodic rate of return on net investment in lease apply lease payments against gross investment in the lease to reduce both the principal & the unearned finance income. if indication that estimated unguaranteed residual value used in computing the lessor’s gross investment in lease has changed significantly, income allocation over lease term is revised, & reduction in respect of amounts accrued recognised immediately in profit/loss © 2011 IFRS Foundation 24
Section 20 – lessor: finance lease25 Other issues: Manufacturer or dealer lessors have 2 types of income: profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts, and finance income over the lease term. Disclosures (see paragraph 20.23) © 2011 IFRS Foundation 25
Section 20 – lessor: operating lease26 Recognition & measurement lease payments as income on straight-line basis unless: another systematic basis is more representative of the user’s benefit; or payments are structured to increase in line with expected general inflation (based on published indexes or statistics) recognise other costs incurred in earning the lease income (eg depreciation) © 2011 IFRS Foundation 26
Section 20 – lessor: operating lease27 Examples Ex 11: On 1/1/20X1 A entered into a 5-yr non‑cancellable operating lease over a building. No rentals for 4 yrs. Rental for yr-5 = 5,000. Ex 12: Same as Ex 11 except lease payments increase by expected CPI (10% p.a.) to compensate the lessor for expected inflation. X1 = 1,000; X2 = 1,100; X3 = 1,210; etc © 2011 IFRS Foundation
Sale and lease-back transactions (finance lease & operating lease)The IFRS for SMEs 28 Sale and lease-back transactions (finance lease & operating lease) © 2011 IFRS Foundation 28
Section 20 – sale and leaseback29 A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. the lease payment & the sale price are usually interdependent because they are negotiated as a package the accounting treatment of a sale and leaseback transaction depends on the type of lease (finance or operating). © 2011 IFRS Foundation 29
Section 20 – finance leaseback30 Recognition of sale & finance leaseback the seller-lessee defers recognition of income (ie does not recognise any excess of sales proceeds over the carrying amount in profit or loss immediately) Deferred income is recognised in profit or loss over the lease term © 2011 IFRS Foundation 30
Section 20 – operating leaseback31 Recognition of sale & operating leaseback by seller-lessee if at FV, recognise profit or loss immediately if SP < FV & lease payments not adjusted, recognise profit or loss immediately if SP < FV & lease payments are adjusted, defer & amortise such loss in proportion to the lease payments over the period for which the asset is expected to be used. If SP > FV defer the excess over fair value and amortise it over the period for which the asset is expected to be used. © 2011 IFRS Foundation 31
Section 20 – operating leaseback examples32 Ex 13: On 1/1/20X1 A sells a building (CA = 85,000) for 100,000 (fair value) & rents it back under a 3-yr operating lease. Lease rentals = 9,500 (payable yearly in arrears). On 31 January 20X1 the remaining economic life of the building was 25 years with nil residual value. © 2011 IFRS Foundation
Section 20 – operating leaseback examples33 Ex 14: Same as Ex 13 except SP = 95,000 & rentals = 7,800. Ex 15: Same as Ex 13 except SP = 80,000 & rentals = 2,800. © 2011 IFRS Foundation
Provisions & ContingenciesThe IFRS for SMEs 34 Section 21 Provisions & Contingencies © 2011 IFRS Foundation 34
except those provisions covered by other sections including:Section 21 – scope 35 Section 21 applies to accounting & reporting of provisions, contingent liabilities & contingent assets except those provisions covered by other sections including: leases (Section 20). However, Section 21 covers onerous operating leases construction contracts (Section 23) employee benefit obligations (Sec. 28) income tax (Section 29) © 2011 IFRS Foundation 35
A liability is a present obligation… Section 21 – provisions 36 Provisions are liabilities of uncertain timing or amount. A liability is a present obligation… A present obligation may be either –legal (binding contract or statutory requirement) –constructive (derives from an entity’s actions which the entity has no realistic alternative to settling) © 2011 IFRS Foundation 36
Section 21 – examples provisions37 Ex 1*: Waste from A’s factory contaminated the groundwater. Lawsuit: local community seek compensation for damages to health from contamination. A acknowledges wrongdoing. Court is deciding extent of the compensation. Lawyers expect ruling in +2 yrs & compensation in the range of CU1,000,000 to CU30,000,000. * see example 1 in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 37
Section 21 – examples provisions continued38 Ex 2*: Waste from A’s factory contaminated the groundwater. Required by law to restore the environment. Estimates restoration cost between 1,000,000 & 15,000,000. Unsure of period to complete restoration. Ex 3*: A manufacturer gives warranties to the purchasers of its goods. Warranty = make good, by repair or replacement, manufacturing defects that become apparent within 3 years of sale. *see example with the same number in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 38
Section 21 – examples not provisions39 Ex 4*: ‘provision’ for self-insurance Ex 5*: Ski-resort operator operates in a very cyclical business, with ‘good years’ and ‘bad years’ depending primarily on the weather. To reduce earnings volatility, it recognises ‘provisions’ in ‘good years’ to reverse in ‘bad years’. Ex a: ‘provision’ for depreciation Ex b: ‘provision’ for doubtful debts * see example with the same number in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 39
Section 21 – example constructive oblig.40 Ex 12*: Waste from A’s factory contaminated the groundwater. A is not required by law to restore the contaminated environment & there is no court case. However, in the reporting period the entity publicly announced that it would restore the contaminated environment within the next 12 months. * see example 12 in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 40
Section 21 – recognition of provisions41 Recognise a provision when: the entity has an obligation at the reporting date as a result of a past event; it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; & the amount of the obligation can be estimated reliably. Use of estimates is essential part of preparing financial statements and does not undermine their reliability. © 2011 IFRS Foundation 41
Section 21 – measurement of provisions42 Measure provision at best estimate of the amount required to settle the obligation at the reporting date = amount an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Review provisions at each reporting date & adjust them to reflect the current best estimate at that reporting date. unwinding of the discount is a finance cost © 2011 IFRS Foundation 42
Section 21 – best estimate43 If large population of items, best estimate reflects probability weighting of all possible outcomes. If single obligation, best estimate = adjusted individual most likely outcome Present value using pre-tax discount rate/s that reflect current market assessments of the time value of money (& risks specific to the liability if not already reflected in estimated cash flows). © 2011 IFRS Foundation 43
Section 21 – examples measurement44 Ex 14*: A has 1,000 units of a product sold with active warranties (ie A will repair defects found up to 6 months after sale). Probabilities & repair cost: major defect = 5% chance of CU400 repair; minor defect = 20% chance of CU100 repair; 75% chance of no defects. Best estimate (expected value) = CU40,000 Calculation: (75% x 1,000 units x nil) + (20% x 1,000 units x CU100) + (5% x 1,000 units x CU400) * see example 14 in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 44
Section 21 – examples measurement45 Ex 15*: Personal injury lawsuit brought by customer. Lawyers estimate 30% chance compensation = CU2,000,000 & 70% chance = CU300,000. Ruling expected in 2 years. Discount rate = 4% per year (ie 2‑year government bonds = 5% less 1% risks specific to liability). Individual most likely outcome = CU300, Because only other possible outcome is higher, the best estimate to settle the obligation at 31/12/20X1 will be higher than PV of the most likely outcome of CU300,000, eg PV of CU810,000 at 4% = ±CU748,890 * see example 15 in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 45
Section 21 – example remeasurement46 Ex 25*: Provision for a lawsuit = CU40,000 at 31/12/20X1 & remeasured to CU90,000 at 31/12/20X2. CU3,000 of the increase = unwinding of the discount & the remainder is for better information becoming available. The increase of CU50,000 will be recognised as an expense in the determination of the entity’s profit or loss for the year ended 31/12/20X2 CU3,000 = finance cost CU47,000 = change in estimate * see example 25 in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 46
Section 21 – provision disclosure47 For each class of provision, no comparatives a reconciliation showing CA opening & closing additions, incl. measurement adjustments charged against provision in period unused amounts reversed in period nature, expected payments (amount & timing) indication of uncertainties (amount or timing) amount of any expected reimbursement & amount recognised as an asset © 2011 IFRS Foundation 47
Section 21 – contingent liabilities48 A contingent liability is either: (i) a possible but uncertain obligation; or (ii) a present obligation that is not recognised because it fails the recognition criteria in paragraph 21.4. © 2011 IFRS Foundation 48
Section 21 – contingent liabilities49 Do not recognise a contingent liability as a liability (except contingent liabilities of an acquiree in a business combination). Contingent liabilities are disclosed unless the possibility of an outflow of resources is remote. When an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability. © 2011 IFRS Foundation 49
Section 21 – example contingent liability50 Ex 29*: Community is seeking compensation from A for damages to their health as a result of contamination believed to be caused by A’s plant. It is doubtful whether A is the source of the contamination because –many entities operate in the same area producing similar waste & it is unclear which entity is the source of the leak –A has taken precautions to avoid leaks & is vigorously defending the case. * see example 29 in Module 21 of the IFRS Foundation training material © 2011 IFRS Foundation 50
Section 21 – example contingent liability51 Ex 29 continued: However, it is not certain that A did not cause the leak & the true offender will only become known after extensive testing has been performed. A’s legal counsel expects a court ruling in approximately 2 years. If A loses the case, compensation is likely to be in the range of CU1,000,000 to CU30,000,000. © 2011 IFRS Foundation 51
Section 21 – example contingent liability52 Ex 29 continued: It may be uncertain whether the entity has a present obligation—this is the matter being determined by the court. if taking account of all of the available evidence, it is probable that the entity will successfully defend the court case then the entity has a possible obligation & hence a contingent liability. © 2011 IFRS Foundation 52
Section 21 – contingent liab disclosure53 For each class of contingent liability unless the possibility of any outflow is remote, disclose, a brief description of the nature of the contingent liability and, when practicable: estimate of its financial effect (measured like a provision); indication of uncertainties of amount or timing; & possibility of any reimbursement. If impracticable to make one or more of these disclosures, that fact shall be stated. © 2011 IFRS Foundation 53
Section 21 – contingent asset54 Do not recognise a contingent asset as an asset. Disclose a contingent asset when an inflow of economic benefits is probable. However, when the flow is virtually certain, then the related asset is not a contingent asset, and its recognition is appropriate. © 2011 IFRS Foundation 54
Section 21 – contingent asset disclosure55 If an inflow of economic benefits is probable (more likely than not) but not virtually certain, disclose: a description of the nature of the contingent assets at the end of the reporting period, and when practicable without undue cost or effort, an estimate of their financial effect (measured using the principles set out for measuring provisions). If it is impracticable to make this disclosure, that fact shall be stated. © 2011 IFRS Foundation 55
Section 21 – prejudicial disclosures56 In extremely rare cases, disclosure of some or all of the information required by para’s 21.14–21.16 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, C liab. or C asset. In such cases, need not disclose the information, but must disclose the general nature of the dispute, together with the fact that, & reason why, the information has not been disclosed. Note: no recognition & measurement exemption for provisions. © 2011 IFRS Foundation 56
Section 28 Employee BenefitsThe IFRS for SMEs 57 Section 28 Employee Benefits © 2011 IFRS Foundation 57
Section 28 – scope 58 Employee benefits (EBs) are all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management. Section 28 applies to all EBs, except for share-based payment transactions, which are covered by Section 26 Share-based Payment. © 2011 IFRS Foundation 58
Section 28 – types of employee benefits59 4 types of EBs: short-term employee benefits post-employment benefits other long-term employee benefits termination benefits And equity compensation (see Section 26) © 2011 IFRS Foundation 59
Section 28 – general recognition criteria60 Recognise cost of EBs to which employees have become entitled for service rendered to entity in reporting period liability, after deducting amounts that have been paid. Asset if prepaid EB expense expense, unless another section requires cost included in asset (for example inventories or PP&E) © 2011 IFRS Foundation 60
Section 28 – short-term employee benefits61 Short-term employee benefits (S/TEBs) are wholly due within 12 months after the end of the period in which the employees render the related service (hereafter 12 month limitation). but excludes termination benefits. © 2011 IFRS Foundation 61
Section 28 – short-term employee benefits62 Examples of S/TEBs include: wages, salaries & social security contrib; S/T compensated absences (paid annual leave & paid sick leave) for absences expected to occur within 12 month limitation; profit-sharing & bonuses payable within 12 month limitation; & non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees. © 2011 IFRS Foundation 62
Section 28 – measurement of S/TEBs63 Measure S/TEBs that meet general recognition criteria (above) at the undiscounted amount expected to be paid © 2011 IFRS Foundation 63
Section 28 – examples S/TEBs64 Ex 10*: An employee is entitled to 5 days paid sick leave a year. Unused sick leave is carried forward for 1 calendar year. It is allocated on a FIFO basis. No sick leave is expected to lapse. Employee 1 earns 400 per working day. Sick leave record: 4.5 days accumulated at 1/1/20X1; 2 days taken in 20X1. Salary increase = 5% effective 1/1/20X2. 31/12/20X1 liability = CU2,100 (ie CU400 wage rate × 1.05 increase × 5 (max) days due at 31/12/20X1 & expected to be taken in 20X2. * see example 10 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 64
Section 28 – examples S/TEBs65 Ex 13*: Same as Ex 10 except sick leave cannot be carried forward to the next calendar year & does not vest (ie is not paid out in cash). No liability at 31/12/20X1 (no obligation). Ex 10a: Similar to Ex 10 and Ex 13 except sick leave is paid out in cash in January 20X2 payroll at 20X1 salary rate. 31/12/20X1 liability = CU1,200 (ie CU400 wage rate × 3 (5 earned less 2 taken) days due at 31/12/20X1 & paid out in 20X2. * see example 13 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 65
Section 28 – examples S/TEBs66 Ex 17*: A pays 3% of year’s profit (before profit sharing) to employees who serve throughout the current year & who will continue to serve throughout the following year. A expects to save 10% through staff turnover. The bonus will be paid on 31/12/20X2. Profit for 20X1 before profit sharing = CU1,000,000. Liability at 31/12/20X1 & expense = CU27,000 (ie 3% × CU1,000,000 × 90%) * see example 17 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 66
Section 28 – post-employment benefits67 Post-employment benefits (PEBs) are employee benefits (other than termination benefits) that are payable after the completion of employment Examples of PEBs include retirement benefits, such as pension other PEBs, such as post-employment life insurance and post‑employment medical care © 2011 IFRS Foundation 67
Section 28 – post-employment benefits68 Arrangements whereby an entity provides PEBs are PEB plans. 2 types of PEB plans: defined contribution plans (entity pays fixed contributions into a separate entity (a fund) and has no further obligations, ie all risks with employee). defined benefit plans (actuarial & investment risk (if funded) with entity). © 2011 IFRS Foundation 68
Section 28 – PEBs defined contribution69 Recognise the contribution payable for a period as an expense, unless another section requires the cost to be recognised as part of the cost of an asset (eg inventories or PP&E). Ex 18*: On 8/1/20X2 a retailer paid 100 contribution to a defined contribution plan in part exchange for services performed by the entity’s employees in December 20X1. At 31/12/20X1 recognise CU100 liability (accrual of PEBs) & CU100 expense in profit or loss. * modified from example 18 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 69
Section 28 – PEBs defined benefit plans70 Apply general recognition principle, recognise: a liability for its obligations under defined benefit plans net of plan assets—its ‘defined benefit liability’ (see paragraphs 28.15–28.23). the net change in that liability during the period as the cost of its defined benefit plans during the period (see paragraphs 28.24–28.27). © 2011 IFRS Foundation 70
Section 28 – defined benefit liability71 Measure defined benefit liability at net of: PV of defined benefit obligation (DBO) FV of plan assets (if any) out of which the obligations are to be settled directly paragraphs 11.27–11.32 provide guidance on fair value measurement). If PV of DBO < FV of plan assets, plan has a surplus. Recognise surplus as asset only to extent recoverable through reduced future contributions or through refunds from the plan. © 2011 IFRS Foundation 71
Section 28 – defined benefit obligation (DBO)72 PV of DBO reflects estimated amount of benefit that employees have earned in return for their service in the current & prior periods including benefits that are not yet vested including the effects of benefit formulas that give employees greater benefits for later years of service (eg final salary). Significant judgements in measuring DBO include actuarial assumptions. © 2011 IFRS Foundation 72
Section 28 – DBO actuarial assumptions73 Actuarial assumptions comprise: demographic assumptions, eg: (i) mortality during & after employment; (ii) employee turnover, disability & early retirement; (iii) proportion of plan members with dependants who will be eligible for benefits; & (iv) claim rates under medical plans; financial assumptions, eg: (i) discount rate; (ii) future salary & benefit levels; (iii) for medical benefits—future medical costs, including cost of administering claims and benefit payments. © 2011 IFRS Foundation 73
Section 28 – DBO valuation method74 Measure DBO using projected unit credit method (PUC). However, if undue cost or effort use simplified calculation. Under simplified calculation: ignore estimated future salary increases; ignore future service of current employees (ie assume closure of the plan for existing as well as any new employees); & ignore possible in-service mortality of current employees (however, consider mortality after service (ie life expectancy)). © 2011 IFRS Foundation 74
Section 28 – DBO PUC valuation method75 Ex 30*: Lump sum benefit payable on retirement = 1% of final salary for each year of service. Salary in Y1 = 10,000 (increase at 7% pa). Discount rate = 10% pa. Employee expected to retire at end of Y5. Shows how the obligation builds up: assuming that there are no changes in actuarial assumptions. for simplicity, this example assumes employee will stay until end of Y5. * see example 30 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 75
Section 28 – DBO PUC valuation method76 Year 1 2 3 4 5 Attributed to: – prior years - 131 262 393 524 – current year (1% of final salary) – current and prior years 655 Opening obligation 89 196 324 476 Interest at 10% 9 20 33 48 Current service cost 98 108 119 Closing obligation © 2011 IFRS Foundation 76
Section 28 – DBO PUC valuation method77 Notes on PUC calculations: Current service cost is the present value of benefit attributed to the current year eg Y1—CU131 × 1/(1.1)4 = CU131 ÷ = CU89.47 The closing obligation is the present value of benefit attributed to current and prior years. © 2011 IFRS Foundation 77
Section 28 – DBO simplified method78 Ex 33*: Same as Ex 30, except use simplified method of calculation. * see example 33 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 78
Section 28 – DBO simplified method79 Year 1 2 3 4 5 1% of current salary (increase at 7% per year) 100 107 114 123 131 Years service at end of year FV of obligation 214 343 490 655 Discount factor (10%) 0.6830 0.7513 0.8264 0.9091 PV of obligation 68 161 284 445 Opening obligation – Interest (10%) 7 16 28 45 Current service cost 80 95 111 Actuarial gain or loss (balancing figure) 12 22 34 Closing obligation © 2011 IFRS Foundation 79
Section 28 – DBO simplified method80 Notes on simplified method calculations Current service cost = PV of benefit attributed to the current year Calculation Y1: CU100 salary × 1/(1.1)4 = CU68.30 Closing obligation = PV of benefit attributed to current & prior years Calculation Y1: CU100 × 1 year’s service ÷ 1/(1.1)4 = CU68.30 © 2011 IFRS Foundation 80
Section 28 – defined benefit expense81 Recognise net change in defined benefit liability in the period (other than benefits paid to employees or contributions from the employer) as the cost of its defined benefit plans during the period. Recognise cost either (accounting policy) entirely in profit or loss as an expense, or partly in profit or loss & partly as an item of OCI (only actuarial gains & losses can be in OCI) unless part of the cost of an asset (eg see Section 17 PP&E). © 2011 IFRS Foundation 81
Section 28 – defined benefit expense Ex82 Ex 39*: A recognises actuarial gains & losses in profit or loss. Employees promised a pension of 0.2% of final salary for each year of service. The pension is payable from the age of 65. The plan is unfunded. At 31/12/20X1 CA of the plan obligation = CU1,000 (20X0: CU900). In 20X1 A paid pensions of CU40 to its past employees. * see example 39 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 82
Section 28 – defined benefit expense Ex83 Defined benefit plan obligation (liability) account 1/1/20X1 Opening balance 900 20X1 Pension paid 40 31/12/20X1 Closing balance 1,000 Profit or loss 140 1,040 1/1/20X2 © 2011 IFRS Foundation 83
Section 28 – defined benefit expense Ex84 Ex 42*: Same as Ex 39 except recognises all actuarial gains & losses in OCI. CU50 of the cost of the defined benefit plan for 20X1 is attributable to actuarial losses. Recognise CU140 expense for 20X1 as follows: CU50 in OCI (ie actuarial gains & losses) CU90 (the remainder) in profit or loss. * see example 42 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 84
Section 28 – defined benefit expense Ex85 Ex 40*: Same as Ex 39 except plan is funded in 20X1 fund paid pensions of CU40 to past employees & entity contributed CU110 to the fund. at 31/12/20X1 FV of plan assets = CU980 (20X0: CU890). * see example 40 in Module 28 of the IFRS Foundation training material © 2011 IFRS Foundation 85
Section 28 – defined benefit expense Ex86 Funded defined benefit plan (liability) account 1/1/20X1 Opening balance 10(a) 20X1 Increase funding 110 31/12/20X1 Closing balance 20(b) Profit or loss 120(c) 130 1/1/20X2 20 (a) CU900 obligation less CU890 plan assets (b) CU1,000 obligation less CU980 plan assets (c) balancing figure © 2011 IFRS Foundation 86
Section 28 – other long-term employee benefits87 Other long-term employee benefits (OL/TEBs) are employee benefits (other than post-employment benefits & termination benefits) that are not wholly due within 12 months after the end of the period in which the employees render the related service. © 2011 IFRS Foundation 87
Examples of OL/TEBs include: Section 28 – OL/TEBs 88 Examples of OL/TEBs include: long-term compensated absences, eg long-service or sabbatical leave long-service benefits long-term disability benefits profit-sharing & bonuses payable + 12 months after the end of the period in which the employees render the related service deferred compensation paid + 12 months after the end of the period in which it is earned © 2011 IFRS Foundation 88
Recognise a liability for OL/TEBs measured at the net of: Section 28 – OL/TEBs 89 Recognise a liability for OL/TEBs measured at the net of: PV of the benefit obligation FV of plan assets (if any) out of which the obligations are to be settled directly. Expense recognition is same as post-employment defined benefit plan can choose to recognise actuarial gains & losses in OCI) © 2011 IFRS Foundation 89
Section 28 – termination benefits90 Termination benefits are employee benefits payable as a result of either: an entity’s decision to terminate an employee’s employment before the normal retirement date, or an employee’s decision to accept voluntary redundancy in exchange for those benefits. © 2011 IFRS Foundation 90
Section 28 – termination benefits91 Termination benefits include commitments by legislation, by contractual or other agreements with employees or their representatives or by a constructive obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other benefits) to employees when it terminates their employment. © 2011 IFRS Foundation 91
Section 28 – recognition & measurement92 Recognise termination benefits as a liability & an expense only when the entity is demonstrably committed either: to terminate the employment of an employee before the normal retirement date, or to provide termination benefits as a result of a firm voluntary redundancy offer. measure at best estimate of expenditure that would be required to settle the obligation at reporting date (PV if > 12 months). © 2011 IFRS Foundation 92
Section 28 – EBs disclosures93 PEBs have extensive disclosures. S/TEBs Section 28 does not specify disclosures For each category OL/TEBs & termination benefits: the nature of the benefit, the amount of its obligation and the extent of funding at the reporting date. © 2011 IFRS Foundation 93
Accounting (Basics) - Lecture 5 Lease. Contents Classification of leases Finance leases - financial statements of lessees and lessors Operating leases.
© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 3.4 Quiz and Discussion Liabilities Sections 20, 21 & 28.
1 International Financial Reporting Standards IFRS for SMEs IFRS Foundation-World Bank 18–20 October 2011 Sarajevo, Bosnia and Herzegovina Copyright ©
LORNA GARCIA NIDIA CEA LEASES.
International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS.
International Accounting Standard 37
The Arab Society of Certified Accountants (ASCA) 1 International Financial Reporting Standards IFRS for SMEs Joint DUBAI SME-ASCA-IFRS Foundation Workshop.
Accounting (Basics) - Lecture 6 Provisions and contingencies.
© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 1.4 Quiz and Discussion Section 1 SMEs Section 2 Concepts & Pervasive Principles.
Investment property IAS 40
© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Chapter 15 Leases.
Statement of Cash Flows
Financial Audit Autonomous Bodies AS 13 and AS 15 Session 1.7
Lease Accounting Dr.T.P.Ghosh Professor, MDI, Gurgaon.
IAS 19 vs. FAS158, 132R, 87, etc. versus. The scope is broad and includes wages, vacation or holiday pay, bonus, termination benefits, etc. as well as.
ACCOUNTING STANDARD-19 LEASES J.P., KAPUR & UBERAI.
Time and Labor Processing Day 1
+ SECTIONS IFRS on SME’s CERA.CRUZ.MACARAIG.RODRIGUEZ.TAN.
Chapter 3 IAS 19 Employee benefits
Copyright © 2007 by The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 15-1 Chapter Fifteen Leases.
International Accounting Standard 33
Revise lecture 23. Leases What is a leasing agreement? A leasing agreement is an agreement whereby one party, the lessee, pays lease rentals to another.
STATEMENT OF CASH FLOWS
The basics for simulations
ACCOUNTING STANDARD (AS) 15 An Actuarial Perspective AICG ACTUARY INDIA CONSULTING GROUP.
Before Between After.
Accounting (Basics) - Lecture 3 Property, plant and equipment.
R-1173, AL-NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI.
Add Governors Discretionary (1G) Grants Chapter 6.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Leases 15.
Revise lecture 22.
© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 1.7 Quiz and Discussion Section 23 Revenue.
© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 3.3 Quiz and Discussion Section 29 Income Tax.
SFRS FOR SMALL ENTITIES
The 5S numbers game..
MCQ Chapter 07.
Static Equilibrium; Elasticity and Fracture
Financial Accounting II Lecture 28. Lessee should recognise finance lease as asset and liabilities in their balance sheets at amounts equal at the inception.
O RIENTATION Objective Scope Definition Classification of Leases Finance Lease Operating Lease Finance Leases and Operating Leases Calculations Sale.
Definition Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees.
Other Significant Liabilities
CHAPTER 15 Leases.
Corporate Reporting. 2 Employment Benefits Apply and discuss the accounting treatment of short term benefits. Apply and discuss the accounting treatment.
Daimler Benz in 1993 under German GAAP reported a profit of 168 million DM but under US GAAP for the same period, the company reported a loss of almost.
© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 2.5 Quiz and Discussion Assets Sections 13–18 & 27.
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