1. IFRS for Liabilities David Cairns

2. © 2006 David Cairns www.cairns.co.uk Liabilities and the IASB Framework Application to: –provisions –employer accounting for employee benefits –lessee accounting for leases

3. © 2006 David Cairns www.cairns.co.uk IASB Framework IFRS balance sheet –includes only assets and liabilities –includes all assets and liabilities that qualify for recognition under IFRS –assets and liabilities are measured in accordance with IFRS –equity is the residual Income and expenses –result from the proper recognition and measurement of assets and liabilities on the balance sheet

4. © 2006 David Cairns www.cairns.co.uk Liabilities and the IASB Framework IFRS balance sheet –includes only ………. liabilities –includes all ………. liabilities that qualify for recognition under IFRS –………. liabilities are measured in accordance with IFRS –equity is the residual Income and expenses –result from the proper recognition and measurement of ……….. liabilities on the balance sheet

5. © 2006 David Cairns www.cairns.co.uk Recognition of Liabilities An item qualifies for recognition as a liability on an IFRS balance sheet only when: –it is a present obligation of the entity –the obligation arises from a past event –it is probable that the settlement of the obligation will result in an outflow of economic benefits from the entity –the cost or value of the item can be measured reliably

6. © 2006 David Cairns www.cairns.co.uk Measurement of Liabilities Amount of cash and cash equivalents received or fair value of other consideration received –payables –own debt (Present value of) expected future payments required to settle obligation –provisions –pensions –leases

7. © 2006 David Cairns www.cairns.co.uk Provisions: Environmental Damage Present obligation Past event Outflow of economic benefits Measurement Legal or constructive obligation to repair damage Damage to environment Expenditure which will be incurred to repair damage (Present value of) expected future payments required to repair damage

8. © 2006 David Cairns www.cairns.co.uk Provisions: Decommissioning Costs Present obligation Past event Outflow of economic benefits Measurement Legal or contractual obligation to decommission plant at end of useful life Installation of plant Expenditure which will be incurred to decommission plant Present value of expected future payments required to decommission plant and restore site

9. © 2006 David Cairns www.cairns.co.uk Provisions: Sale with Warranty Present obligation Past event Outflow of economic benefits Measurement Contractual obligation to repair or replace faulty goods Sale of [faulty] goods Cost of repair or replacement goods Expected future payments required to repair or replace goods

10. © 2006 David Cairns www.cairns.co.uk Provisions: Onerous Contract Present obligation Past event Outflow of economic benefits Measurement Contractual obligation to ….. Change in circumstances that makes contract onerous Unavoidable net costs of meeting contractual obligation Lower of: –costs of fulfilling the contract and –compensation/penalties of not fulfilling the contract

11. © 2006 David Cairns www.cairns.co.uk Provisions: Restructuring Present obligation Past event Outflow of economic benefits Measurement Constructive obligation to carry out restructuring Announcement of detailed formal plan to restructure Expenditure which will be incurred in restructuring Direct expenditure necessarily entailed in the restructuring

12. © 2006 David Cairns www.cairns.co.uk Provisions: Income and Expenses Adjustments to carrying amount of related assets –initial estimate of provisions for decommissioning costs –change in estimate of provisions for decommissioning costs –change in discount rate used to measure provisions for decommissioning costs Income and expenses –initial estimates of all other provisions –change in estimate of all other provisions –application of discount rate for all provisions measured at present value (including provisions for decommissioning costs)

13. © 2006 David Cairns www.cairns.co.uk Post-employment Benefits: Liability Present obligation Past event Outflow of economic benefits Legal or constructive obligation to pay benefits Employee service giving entitlement to benefits Payment of benefits (or contribution to fund that takes over obligation)

14. © 2006 David Cairns www.cairns.co.uk Post-employment Benefits: Measurement Defined contribution post-employment benefit plans Defined benefit post- employment benefit plans Unpaid contributions for service rendered to balance sheet date Present value of defined benefit obligation less f air value of any plan assets

15. © 2006 David Cairns www.cairns.co.uk Post-Employment Benefits: Exceptions Exceptions from Framework principles on recognition of liabilities –past service cost recognition spread over vesting period for increased benefits –actuarial gains and losses may be ignored if cumulative amount lies with 10% corridor; if use corridor approach, amounts outside corridor may be spread over expected remaining service lives of employees if do not use corridor approach, all amounts may be spread over expected remaining service lives of employees

16. © 2006 David Cairns www.cairns.co.uk Post-Employment Benefits: Expenses Not recognised –deferred past service costs –actuarial gains and losses within 10% corridor (if used) –other deferred actuarial gains and losses Income and expenses –contributions to defined contribution plans –current service cost –interest (application of interest to defined benefit obligation) –expected return on plan assets –amortisation of past service costs –recognised actuarial gains and losses

17. © 2006 David Cairns www.cairns.co.uk Post-Employment Benefits: Exceptions Exception from Framework principle that all income and expenses are included in income statement –actuarial gains and losses may be included in equity, instead of income statement, if recognised in full in period in which they arise

18. © 2006 David Cairns www.cairns.co.uk Lease (lessee) Present obligation Past event Outflow of economic benefits Legal obligation to make payments for use of asset Commencement of the lease term Payments over lease term for use of asset

19. © 2006 David Cairns www.cairns.co.uk Leases (lessee) Application of Framework definition and recognition of liability –finance leases Exception from Framework definition and recognition of liability –most operating leases

20. © 2006 David Cairns www.cairns.co.uk Finance Lease (lessee) Present obligation Past event Outflow of economic benefits Measurement Legal obligation to make payments for use of asset Commencement of the lease term Payments over lease term for use of asset Present value of minimum lease payments

21. © 2006 David Cairns www.cairns.co.uk Finance Lease: Lessee Expenses Expenses –interest (application of interest rate on lease obligation) –depreciation of leased asset –any impairment loss on leased asset

22. IFRS for Liabilities David Cairns