1. © 2011 IFRS Foundation 1 The IFRS for SMEs Topic 2.2 Quiz and Discussion Section 11 Basic Financial Instruments Section 12 Other Financial Inst. Issues Section 22 Liabilities and Equity

2. © 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: 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.

3. © 2011 IFRS Foundation 3 Section 11 – Case Below are items in an entity’s trial balance. Which items are in the scope of Section 11? For those that are in, how to measure after initial recog- nition? FVTPL? Amortised cost? Cost less impairment? Subsequent Measurement? Account In Sec 11? FV TPL Amor -tised Cost Cost less Impair- ment Opening Retained Earnings No (see 11.7(b)) Entity’s own equity is covered by Section 22 Continued...

4. © 2011 IFRS Foundation 4 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Share capitalNo (see 11.7(b)) Entity’s own equity is covered by Section 22 PP&ENoNot a financial asset Intangible assetsNoNot a financial asset Investment in Associate No (see 11.7(a)) Associates are covered by Section 14 Deferred tax assetNoNot a financial asset – statutory, not contractual

5. © 2011 IFRS Foundation 5 Section 11 – Case Subsequent Measurement? AccountIn Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment InventoryNoNot a financial asset Trade receivablesYes (see para 11.14(a)) Measure at undiscounted cash to be received (ie net of impairment) unless a financing transaction

6. © 2011 IFRS Foundation 6 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment CashYesMeasure at cash equivalent in functional currency Investment in non- puttable listed ordinary shares Yes (11.14(c) (i)) Quoted market price

7. © 2011 IFRS Foundation 7 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Investment in non-puttable non- convertible unlisted preference shares Yes (11.14(c) (ii)) If FV is reliably measur able If FV not reliably measurable

8. © 2011 IFRS Foundation 8 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Investment in fixed interest term bonds Yes (unless violates 11.9(b)-(d)) Yes Investment in mutual fund (holds debt and equity) No. Not in 11.9. Will be at FVTPL under Sec 12 because FV is reliably measurable.

9. © 2011 IFRS Foundation 9 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Bank deposit (fixed term and interest) Yes (unless violates 11.9(b)-(d)) Yes Loan receivable from employee (fixed term & int.) Yes (unless violates 11.9(b)-(d)) Yes

10. © 2011 IFRS Foundation 10 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amortised Cost Cost less Impair- ment Loan receivable from associate, no interest, repayable on demand Yes (unless violates 11.9(b)- (d)) Yes (discounted from date expected to be received)

11. © 2011 IFRS Foundation 11 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Bank loan payable (fixed term & int.) Yes (unless violates 11.9(b)- (d)) Yes Liability for long-term employee benefits No (see 11.7(d)) Employee benefits are covered by Section 28

12. © 2011 IFRS Foundation 12 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amortised Cost Cost less Impair- ment Obligations under finance leases No (see 11.7(c)) Leases are covered by Section 20 Trade payablesYes (see para 11.14(a)) Measure at undiscounted cash to be paid unless a financing transaction

13. © 2011 IFRS Foundation 13 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amortised Cost Cost less Impair- ment Warranty obligation NoNot a financial liability – will not result in payment of cash or financial assets Rent payableYesMeasure at undiscounted cash to be paid unless a financing transaction

14. © 2011 IFRS Foundation 14 Section 11 – Case Subsequent Measurement? Account In Sec 11? FV TPL Amor- tised Cost Cost less Impair- ment Interest payableYes Current tax liability NoNot a financial liability – statutory, not contractual Bank overdraft (due on demand, market rate of interest) Yes. Not discounted (due on demand)

15. © 2011 IFRS Foundation 15 Section 11 – Quiz and discussion Question 1: Under the IFRS for SMEs an entity may choose, instead of Sections 11 and 12: a.Full IFRSs for fin. inst: (IAS 32, IAS 39, & IFRS 7) b.Recognition and measurement provisions of Sections 11 and 12 and the disclosure provisions of IFRS 7? c.Recognition and measurement provisions of IAS 39 and the disclosure provisions of Sections 11 and 12? d.Recognition and measurement provisions of either IFRS 9 or IAS 39 and disclosure provisions of Sections 11 and 12?

16. © 2011 IFRS Foundation 16 Section 11 – Quiz and discussion Question 2: Which of the following is a financial asset outside scope of both Sections 11 & 12? a.Trade receivables b.5% holding in non-puttable ordinary shares of another entity c.5% holding in puttable ordinary shares of another entity d.30% holding in ordinary shares of another entity which give us ‘significant influence’ over the other entity e.Cash

17. © 2011 IFRS Foundation 17 Section 11 – Quiz and discussion Question 3: Which of the following is not a basic financial instrument (ie outside scope of Sec 11)? a.Investment in non-convertible, non-puttable preference shares b.An entity’s own equity instrument c.A fixed-interest, fixed-term loan payable to a bank d.A variable-interest, fixed-term loan payable to a bank e.An interest-free loan from a parent entity

18. © 2011 IFRS Foundation 18 Section 11 – Quiz and discussion Question 4: Entity buys 100 ordinary shares in Co X on London Stock Exchange for 20 per share, plus brokerage fee of 100. Co X is not a subsidiary, not a JV, not an associate of the entity. Entity should initially recognise the investment at: a.1,900 b.2,000 c.2,100

19. © 2011 IFRS Foundation 19 Section 11 – Quiz and discussion Question 5: Entity borrows 10,000 from a bank 5 years, fixed interest payable annually 6% in arrears. (This is a market rate.) Bank charges entity 50 loan application fee. Entity should measure the loan on initial recognition at... a.7,473 (= PV 10,000 at 6% for 5 years) b.7,423 c.9,950 d.10,000 e.10,050

20. © 2011 IFRS Foundation 20 Section 11 – Quiz and discussion Question 6: 1/1/X1 entity gives employee interest- free 4-year car loan 10,000. Bank would have charged 8%. Loan receivable at 1/1/X1= ??? And interest income for year X1 = ??? ChoicesInitial receivableInterest income for X1 a7,3500 b 800 c7,350588 d10,0000 e 800

21. © 2011 IFRS Foundation 21 Section 11 – Quiz and discussion Question 7: When assessing impairment of financial assets measured at cost or amortised cost, which must be assessed individually? a.All financial assets that are individually significant b.All equity instruments that are individually significant c.All equity instruments d.All financial assets except equity instruments e.All equity instruments and other financial assets that are individually significant

22. © 2011 IFRS Foundation 22 Section 11 – Quiz and discussion Question 8: SME sells 100 of receivables to bank for 85. SME continues to collect and remit amounts collected to bank, for which bank pays a fee to SME. SME has no obligation for credit losses or for slow payment by debtors. How is this transaction accounted for? See choices on next slide...

23. © 2011 IFRS Foundation 23 Section 11 – Quiz and discussion Question 8: Answer choices: a.SME removes receivables from its balance sheet and shows no liability for 85 proceeds b.SME keeps 100 receivables on its balance sheet and shows a liability for 85 c.SME keeps 100 receivables on its balance sheet and shows no liability for 85 d.SME removes receivables from its balance sheet and shows a liability for 85

24. © 2011 IFRS Foundation 24 Section 12 – Quiz and discussion Question 9: Which of the following is within the scope of Section 12? a.Bank loan payable, interest at LIBOR + 2% b.Financial instrument that is designated as a hedging instrument under IFRS for SMEs c.Quoted fixed-interest bond d.Obligation to pay employees 20% of profits each year, payment 6 mos. after year-end e.Obligation under a finance lease to pay lessor fixed amount for 10-year lease term

25. © 2011 IFRS Foundation 25 Section 12 – Quiz and discussion Question 10: Which of the following are within the scope of Section 12 (must measure at FTVPL)? a.Trade receivables b.5% holding in non-puttable ordinary shares of another entity c.30% holding in non-puttable ordinary shares of an entity over which we have significant influence d.Contract to purchase 100,000 US dollars four months from now at fixed price of 3.5 Ringgit (our functional currency is the Ringgit)

26. © 2011 IFRS Foundation 26 Section 12 – Quiz and discussion Question 11: Which of the following contracts are within the scope of Section 12? a.Contract to buy a property in UK in 6 months that provides for additional payment of 10% of the purchase price if the CPI in UK increases by 1% in the 6 month period b.Contract to buy a property in UK in 6 months that provides for additional payment of 1% of the purchase price if the CPI in UK increases by 1% in the 6 month period Two more choices on next slide...

27. © 2011 IFRS Foundation 27 Section 12 – Quiz and discussion Question 11: Two more choices... c.Contract to sell a property in 6 months that could result in a loss to the seller if the buyer defaults due to financial difficulties d.Contract to sell a property in 6 months to an overseas buyer for 1,000,000 that could result in a loss to the buyer if the currency in the buyer's jurisdiction depreciates against CU during the 6 month period

28. © 2011 IFRS Foundation 28 Section 12 – Quiz and discussion Question 12: 1/1/X0 SME buys 100 share options for 2,000 cash. The options permit SME to buy shares in a listed entity XYZ for 50 per share at any time during the next 2 years. Bank charges a fee of 20. On 1/1/X0 XYZ's share price is 44. At what amount should SME initially measure the options? a.1,900 b.1,980 c.2,000 d.2,020 e.4,040

29. © 2011 IFRS Foundation 29 Section 12 – Quiz and discussion Question 13: Same facts as Q12. At 31/12/X0 SME has not yet exercised the option; XYZ share price is 47; fair value of option is 2,500. At what amount should SME measure the options at 31/12/X0? a.1,980 b.2,000 c.2,020 d.2,500 e.4,700

30. © 2011 IFRS Foundation 30 Section 12 – Quiz and discussion Question 14: Which of following risks is not eligible for hedge accounting under IFRS for SMEs? a.Interest rate risk in debt instrument measured at amortised cost b.FX risk in debt instrument measured at amortised cost c.FX risk in a firm commitment d.Interest rate risk in a firm commitment e.FX risk in a net investment in a foreign operation

31. © 2011 IFRS Foundation 31 Section 12 – Quiz and discussion Ques. 15: SME has inventory it plans to sell in 3 months. SME is worried about price decline during the 3 months and so enters into forward contract to hedge price risk of its inventory. Relationship meets conditions for hedge accounting and SME documents the hedge. What is the accounting? a.Recognise forward contract as an asset or liability at FV and change in FV in P&L. Recognise the change in FV of the inventory in P&L and as an adjustment to the carrying amount of the inventory. More choices next slide...

32. © 2011 IFRS Foundation 32 Section 12 – Quiz and discussion Question 15: Answer choices, continued... b.Recognise forward contract as an asset or liability at FV and change in FV in OCI. Recognise the change in FV of the inventory in OCI and as an adjustment to the carrying amount of the inventory. c.Recognise forward contract as an asset or liability at FV and the change in the FV of the forward contract in OCI. Do not recognise the change in the FV of the inventory as inventory is measured at cost.

33. © 2011 IFRS Foundation 33 Section 22 – Quiz and discussion Question 16: A financial instrument that is designated as a hedging instrument is always measured at Fair Value Through Profit or Loss under Section 12? a.True b.False

34. © 2011 IFRS Foundation 34 Section 22 – Quiz and discussion Question 17: An entity measures equity instruments it has issued at: a.Cost b.Market value of a similar instrument c.Fair value of the cash or other resources received or receivable

35. © 2011 IFRS Foundation 35 Section 22 – Quiz and discussion Question 18: On the balance sheet, an entity presents non-controlling interest in consolidated subsidiaries: a.Within equity b.Within liabilities c.Between liabilities and equity d.Accounting policy choice of (a) or (c) above (choice must be applied consistently from year to year)

36. © 2011 IFRS Foundation 36 Section 22 – Quiz and discussion Question 19: On 20/12/X4, SME A voted to split its ordinary shares, two-for-one as of 15/1/X5. The equity of SME a will... a.Increase on 20/12/X4 b.Increase on 15/1/X5 c.Decrease on 20/12/X4 d.Decrease on 15/1/X5 e.Remain unchanged as a result of the stock split

37. © 2011 IFRS Foundation 37 Section 22 – Quiz and discussion Question 20: SME A issued 100 shares to Shareholder X in 20X2 for 50 per share. SME A repurchased those shares from X for 45 each in Sept. 20X4. Which of the following is true? a.SME A’s equity will increase as a result of the share repurchase b.SME A’s equity will decrease as a result of the share repurchase c.SME A recognises a 500 gain in P&L in Sept 20X4 d.SME A defers the 500 gain and recognise it in P&L only if and when the shares are resold

38. © 2011 IFRS Foundation 38 Section 22 – Quiz and discussion Question 21: In 20X6 SME A bought 80% of shares of X for 600,000. Prepared consolidated F/S for 20X6, X7, and X8. A sold 1/4 th of its holding in X in 20X9 for 250,000 (so now owns 60%). Which is true? a.SME A recognises a gain of 100,000 on sale. b.SME A revalues its remaining holding to FV (250,000 /.25 x 3/4ths = 750,000) and recognises gain (750,000 - 450,000 = 300,000) in P&L. c.Same as (b) but recognise gain in OCI. d.No gain, only an adjustment to equity.

39. © 2011 IFRS Foundation 39 Section 22 – Quiz and discussion Question 22: In 20X6 SME A bought 40% of shares of X for 500,000. Used cost method. In 20X9 SME A distributes those shares as a dividend to its shareholders pro rata. At that time: FV of the shares in X is 1,200,000. If SME A had used the equity method, the carrying amount would have been 800,000. Which is true? Choices on next slide...

40. © 2011 IFRS Foundation 40 Section 22 – Quiz and discussion Question 22: Answer choices... a.SME A recognises a gain of 300,000 on the distribution. b.SME A recognises a gain of 700,000 on the distribution. c.SME A recognises a gain of 280,000 on the distribution. d.The distribution is an equity transaction with shareholders and no gain or loss is recognised.

41. © 2011 IFRS Foundation 41 Section 22 – Quiz and discussion Question 23: 1/1/X1 SME A issues at par a 5% ten- year convertible bond. Par and maturity amount = 100,000. If no conversion feature, SME A would have paid 12%. Which is true? a.The bond liability at 31/12/X1 shown in the balance sheet will be 100,000 b.The bond liability at 31/12/X1 shown in the balance sheet will be greater than 100,000 c.Interest expense for X1 will be greater than 5,000 d.Interest expense for X1 will be less than 5,000 e.Interest expense for X1 will be exactly 5,000