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1 International Financial Reporting Standards IFRS for SMEs IFRS Foundation-World Bank 18–20 October 2011 Sarajevo, Bosnia and Herzegovina Copyright ©

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Presentation on theme: "1 International Financial Reporting Standards IFRS for SMEs IFRS Foundation-World Bank 18–20 October 2011 Sarajevo, Bosnia and Herzegovina Copyright ©"— Presentation transcript:

1 1 International Financial Reporting Standards IFRS for SMEs IFRS Foundation-World Bank 18–20 October 2011 Sarajevo, Bosnia and Herzegovina Copyright © 2010 IFRS Foundation. All rights reserved.

2 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 2 The IFRS for SMEs Topic 2.1(a) Section 11 Basic Financial Instruments Pascal Frerejacque

3 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 3 Sections 11 & 12 – Introduction Financial instruments split into two sections: –Sec. 11 Basic Financial Instruments –Sec. 12 Other Financial Instruments Issues Together the two sections cover recognising, derecognising, measuring, and disclosing financial assets and financial liabilities

4 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 4 Sections 11 & 12 – Introduction Section 11 is relevant to all SMEs Section 12 is relevant If: –SME owns or issues exotic financial instruments – instruments that impose risks or rewards that are not typical of basic financial instruments –SME wants to do hedge accounting

5 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 5 Sections 11 & 12 – Accounting choice Entity may choose to apply either: –Sections 11 and 12 in full, or –Recognition and measurement provisions of IAS 39 and the disclosure requirements in Sec 11 & 12 –No option to use IFRS 9 The option chosen applies to all financial instruments (not individually) To change option, follow Section 10

6 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 6 Sections 11 & 12 – Basic principles Basic principle of Section 11: –Amortised cost model for all basic FI except investments in ordinary or preference shares that are publicly traded or whose fair value can be measured reliably – these are fair value through profit or loss (FVTPL). Basic principle of Section 12: –FI not covered by Section 11 are at FVTPL

7 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 7 Section 11 – Scope All basic financial instruments except those covered by other sections of IFRS for SMEs: –Investments in sub, associate, JV (see Sections 9, 14, 15) –Entitys own equity (see Sec 22, 26) –Leases (see Section 20) –Employee benefit assets and liabilities (see Section 28)

8 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 8 Sections 11 & 12 – Definitions Financial instrument –Contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity –Includes cash –But commodities that are near cash like gold are not financial instruments

9 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 9 Sections 11 & 12 – Definitions Basic financial instrument* –Cash –Debt instrument (accounts, notes, and loans receivable and payable) that meet conditions on next slide –Ordinary and preference shares that are not convertible and not puttable *These notes do not discuss loan commitments

10 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 10 Section 11 – Basic debt instruments Debt instruments are in Section 11 if: –Returns to holder are fixed, variable referenced to an observable rate, or combination of fixed and variable –No special provision could cause holder to lose principal –Prepayment conditions are not contingent on a future event –No special conditional returns

11 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 11 Section 11 – Basic debt instruments Examples of basic debt instruments: –Trade accounts and notes receivable and payable –Loans from banks and other 3rd parties –Accounts payable in foreign currency –Loans to/from subsidiaries or associates that are due on demand –Debt instrument that becomes immediately due if issuer defaults All of these measured at amortised cost

12 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 12 Section 11 – Basic debt instruments Examples of NOT basic debt instruments: –Investment in convertible or puttable shares or debt –Swaps, forwards, futures, options, rights, and other derivatives –Loans with unusual prepayment conditions (based on tax change, accounting change, linked to company performance) All of these are FVTPL under Section 12

13 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 13 Section 11 – Recognition and measurement Initial recognition: –When entity becomes a party to the contractual provisions of the instrument –IFRS for SMEs allows judgement regarding trade date vs settlement date accounting, but be consistent

14 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 14 Section 11 – Recognition and measurement Initial measurement: –At transaction price –Include transaction costs except for FI that will be measured at FVTPL –Impute interest if payment is deferred beyond normal terms or below-market interest

15 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 15 Section 11 – Recognition and measurement Initial recognition-measurement examples: –Loan made to another entity: Measure at PV of interest and principal payments –Goods sold to customer (purchased from supplier) on normal credit terms: Measure receivable (payable) at undiscounted invoice price

16 16 Section 11 – Recognition and measurement Initial recognition-measurement examples: –Goods sold (purchased) on 2-year interest free credit: Measure at current cash sale price or PV of receivable or payable Example: We sell goods for 1,000, payment due 2 years, interest-free. Cash price = 857. IRR = 8%. Journal entriesDebitCredit At time of saleReceivable857 Sales Revenue857 End of year 1Receivable 69 8% x 857 = 69 Interest Revenue 69

17 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 17 Section 11 – Recognition and measurement Subsequent measurement: –Debt instruments in the scope of Section 11 (even if publicly traded): –Amortised cost using the effective interest method –Equity instruments in scope of Section 11: –If publicly traded or FV can be measured reliably: FVTPL –All others: cost less impairment

18 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 18 Section 11 – Recognition and measurement What is amortised cost? –Amount measured at initial recognition –Minus repayments of principal –Plus or minus cumulative amortisation of any difference between initial measurement and maturity amount (using effective interest method) –Minus (for assets) reduction for impairment or uncollectibility

19 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 19 Section 11 – Recognition and measurement What is effective interest method? –Effective interest is rate that exactly discounts future cash payments (receipts) to the carrying amount –Also called Internal Rate of Return –Amortised cost = PV of future cash receipts (payments) discounted at effective interest rate –Interest expense (income) = carrying amount at beginning of period x effective interest rate

20 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 20 Section 11 – Effective interest example 1/1/X0 buy 5-year bond for 900, transaction cost = 50, cash interest = 40/year, mandatory redemption at 1,100 at 31/12/X4. YearCarrying amount beginning Int. income at 6.9583%* Cash inflow Carrying amt ending X0950.0066.10(40)976.11 X1976.1167.92(40)1,004.03 X21,004.0369.86(40)1,033.89 X31,033.8971.94(40)1,065.83 X41,065.8374.16(40)1,100.00 *6.9583% is the rate that exactly discounts the cash flows to 950.00

21 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 21 Section 11 – Recognition and measurement What is fair value? –Amount for which FI could be sold or settled in an arms length transaction –Best: Quoted market price in an active market (bid price) –Next: Price in a recent transaction for identical asset (unless circumstances have changed) –Estimate using a valuation technique (a model)

22 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 22 Section 11 – Impairment Impairment only applies to FI measured at cost or amortised cost At each reporting date, look for evidence that FV is below carrying amount –Significant financial difficulty of issuer –Default or delinquency –Abnormal concession granted to debtor by creditor –Probable debtor bankruptcy or reorg.

23 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 23 Section 11 – Impairment Impairment assessment: –Individually for all equity instruments –Individually for debt instruments that are individually significant –For other debt instruments, either individually or grouped based on similar risk characteristics Impairment recognition: –Write-down is recognised in P&L

24 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 24 Section 11 – Impairment Measurement of the impairment loss: –Debt instruments: Difference between carrying amount and current PV of estimated cash flows discounted at assets original effective interest rate. (Use current rate if variable.) –Equity instruments: Difference between carrying amount and best estimate (approximation) of the amount (might be zero) that entity would receive if asset were sold at reporting date.

25 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 25 Section 11 – Impairment Reversal of an impairment loss: –Required if the problem causing the original impairment reduces –Write up but not to more than what carrying amount would have been had no impairment been recognised (ie not to FV but to new amortised cost) –Reversal recognised in P&L

26 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 26 Section 11 – Derecognition Derecognition of a financial asset: –Derecognition = remove from statement of financial position –Only when: a.Rights to cash flows expire or settled b.Substantially all risks and rewards (cash flows) transferred to other entity c.Transferred some but not substantially all risks and rewards, and physical control of asset transferred to another party who has the right to sell the asset to an unrelated third party.

27 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 27 Section 11 – Derecognition Derecognition of a financial asset: –In case (c) above: –Derecognise old asset entirely, and –Recognise separately any rights and obligations retained or created in the transfer (measure at fair value) –If transfer does not result in derecognition, keep transferred asset on books and recognise financial liability for the consideration received –Do not offset

28 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 28 Section 11 – Derecognition Derecog. of financial asset – examples: –Must derecognise: Sell receivables to bank but we continue to collect and remit, for a handling fee. Bank assumes credit risk. –Does not derecognise: Same facts except entity agrees to buy back any receivables in arrears for more than 120 days. Entity continues to recognise the receivables until collected or writeoff as uncollectible.

29 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 29 Section 11 – Derecognition Derecognition of a financial liability: –Only when extinguished, that is: a.Discharged b.Cancelled c.Expired If existing debt is replaced with new one with substantially different terms (or there is a significant modification of terms): –Treat as new liability and extinguishment of original liability

30 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 30 Section 11 –Disclosure Disclose accounting policies for FI Disclose financial assets and liabilities by categories in the statement of financial position: –Equity or debt at FVTPL –Debt at amortised cost –Equity measured at cost less impairment –Liabilities at FVTPL –Liabilities at amortised cost

31 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 31 Section 11 – Disclosure Terms, conditions, and restrictions of financial assets and liability For those at FVTPL, details of how FV was determined Details of transfer of financial asset that did not qualify for derecognition Details of financial assets pledged as collateral Details of defaults and breaches on loans payable continued next slide...

32 © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 32 Section 11 – Disclosure Items of income, expense, gains and losses: –Changes in FV for instruments measured at FVTPL –Total interest income and total interest expense on FI not measured at FVTPL –Impairment loss by class of financial asset

33 33 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

34 34 This presentation may be modified from time to time. The latest version may be downloaded from: http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm 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.


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