SOCPA IFRS Transition Project

SOCPA IFRS Transition Project
Muhammad Asif Iqbal Director Accounting Standards SOCPA

Agenda IFRS Transition in KSA
Modifications in IFRS as suggested by SOCPA Key differences between SOCPA GAAP and IFRSs IFRS 1 – First time adoption of IFRS

IFRS Transition in KSA

IFRS Transition in KSA SOCPA Board, in its meeting held on February 18, 2012, approved the project of implementation of IFRSs. IFRSs in KSA will be similar to the standards issued by the IASB with possible modification in the following manners: Adding more disclosure requirements; Removing optional treatments; Amending the requirements that contradict Shariah or local law, taking in consideration level of technical and professional preparedness in the KSA. The earliest date for application shall be on financial statements of listed entities prepared for financial periods starting on or after January 1, For other entities the earliest date for application shall be on financial statements prepared for financial periods starting on or after January 1, 2018. SOCPA decided to review converged standards in phases according to certain priorities including categorization of standards into groups of correlated topics. It was decided that the convergence would be completed within five years. Standards would be addressed in correlated groups [14 groups] which are as follows:

Presentation of financial statements
IFRS Transition in KSA Presentation of financial statements Employee benefits Non-current assets – I Group accounts Non-current assets – II IAS 1 Presentation of Financial Statements IAS 19 Employee Benefits IAS 2 Inventories IAS 27 Separate Financial Statements (revised) IAS 40 Investment Property IAS 7 Statement of Cash Flows IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 16 Property, Plant and Equipment IAS 28 Investments in Associates (revised) IAS 36 Impairment of Assets IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IFRS 2 Share-based Payment IAS 23 Borrowing Costs IFRS 10 Consolidated Financial Statements IAS 41 Agriculture IAS 10 Events After the Reporting Period IFRIC 14 - IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction SIC 32 - Intangible Assets-Web Site Costs IFRS 11 Joint Arrangements IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IAS 24 Related Party Disclosures IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement IAS 33 Earnings Per Share IFRS 3 Business Combinations IAS 34 Interim Financial Reporting IFRIC 10 - Interim Financial Reporting and Impairment IFRS 8 Operating Segments IFRIC 17 - Distributions of Non-cash Assets

IFRS Transition in KSA Revenue recognition Leasing
Financial Instruments Foreign Currency Income Taxes IFRS 15 Revenue IAS 17 Leases IAS 32 Financial Instruments: Presentation IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 12 Income Taxes IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IFRIC 4 - Determining whether an Arrangement contains a Lease IFRS 7 Financial Instruments: Disclosures IAS 29 Financial Reporting in Hyperinflationary Economies SIC 25 - Income Taxes-Changes in the Tax Status of an Entity or its Shareholders IFRIC 12 - Service Concession Arrangements IFRS 9 Financial Instruments IFRIC 7 - Approach under IAS 29 Financial Reporting in Hyperinflationary Economies SIC 15 - Operating Leases-Incentives IFRIC 2 - Members’ Shares in Co-operative Entities and Similar Instruments SIC 27 - Evaluating the Substance of Transactions Involving the Legal Form of a Lease IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments SIC 29 - Disclosure-Service Concession Arrangements IFRIC 16 - Hedges of a Net Investment in a Foreign Operation

IFRS Transition in KSA Provisions Insurance Mineral Assets First-time Adoption IAS 37 Provisions, Contingent Liabilities and Contingent Assets IFRS 4 Insurance Contracts IFRS 6 Exploration for and Evaluation of Mineral Assets IFRS 1 First-time Adoption of IFRSs IFRIC 1 - Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 5 - Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 - Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment SOCPA will develop a separate standard on Zakat besides IAS 12. SOCPA would develop two sets of accounting standards; the first one represents converged IFRS standards – other than SME standard - applied to publicly accountable entities (such as listed companies, financial institutions etc). the second set, representing topics covered by accounting standards for small and medium size entities (SMEs) - would be applied to other entities.

IFRS Transition timelines for Listed companies in KSA
Current GAAP Comparative period 31 Dec 2014 Date of transition 31 Dec 2015 / 1 Jan 2016 31 Dec 2016 / 1 Jan 2017 First Interim Reporting date 31 Mar 2017 First Annual Reporting date 31 Dec 2017 Interim reporting under IFRS Opening balance sheet Previous GAAP reporting

IFRS Transition in KSA So far 37 standards have been reviewed by SOCPA, and 14 standards have been endorsed for issuance in the local environment with modifications. Details are as follows: Stage 1 Endorsed without modification Endorsed with few modifications IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors Conceptual Framework for Financial Reporting IFRIC 10 - Interim Financial Reporting and Impairment IAS 1 - Presentation of Financial Statements IFRIC 17 - Distributions of Non-cash Assets to owners IAS 7 - Statement of Cash Flows IAS 10 - Events After the Reporting Period IAS - 24 Related Party Disclosures IAS 34 - Interim Financial Reporting IFRS 8 - Operating Segments

IFRS Transition in KSA IFRS11 Joint arrangements Stage 2
Endorsed without modification Endorsed with few modifications IFRIC 14 - The limit on a defined benefit asset, minimum funding requirements and their interaction IAS 19 - Employee Benefits IAS 2 – Inventories IAS 26 - Accounting and Reporting by Retirement Benefit Plans IFRS 3 - Business Combinations IFRS 2 - Share-based payment SIC 32 - Intangible Assets- Web Site Costs IAS 16 - Property, Plant and Equipment IAS 27 - Separate Financial Statements IAS 23 - Borrowing Costs IAS 28 - Investments in Associates IAS 38 - Intangible Assets IFRS 10 - Consolidated Financial Statements IFRS 12 - Disclosure of interests in Other Entities IFRS11 Joint arrangements

IFRS Transition in KSA Stage 3 Endorsed without modification
Endorsed with few modifications IAS 36 – Impairment of Assets IAS 40 – Investment Property IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations IAS 41 - Agriculture IFRS 13 Fair Value Measurement IAS 32 - Financial Instruments IFRS 9 - Financial Instruments IFRS 7 - Financial Instruments: Disclosure IFRIC 2 - Members’ Shares in Co-operative Entities and Similar Instruments IFRS 1 – First time adoption of IFRS IFRIC 16 - Hedges of Net Investment in a Foreign Operation IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments

Statement of Compliance
These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) as endorsed by SOCPA / adopted in KSA and other standards and pronouncements endorsed by SOCPA.

Modifications in IFRS as suggested by SOCPA

IAS 1 – Presentation of Financial Statements Inclusion of requirement to present liabilities for Zakat payable Inclusion of requirement to present revenue in three categories: revenue from operations, finance revenue (if it is not its main operations) and other revenues. Inclusion of requirement for additional disclosure about finance cost. Finance cost or interest expense must be sub-classified into different types, such as those arise from finance lease, borrowing, installment purchases, Murabaha, and application of time value of money etc. IAS 7 - Statement of Cash Flows Requirement to present Zakat paid with cash flows arising from taxes on income and shall be classified as cash flows from operating activities unless it can be specifically identified with financing and investing activities. IAS 24 - Related Party Disclosures Definition of “close members of the family of a person” has been modified as: (a) that person’s children and spouse or domestic partner; (b) children of that person’s spouses or domestic partner; and (c) parents, grandparents, brothers and sisters, grand children and other dependants of that person or that person’s spouse or domestic partner. IAS 19 - Employee Benefits Requirement to provide disclosure about components of the assets of the employee defined benefit plan. IAS 1 Zakat Payable requirement This additional requirement is added because Saudi companies are required to pay Zakat. Revenue categories: This requirement is added because it reflects the current practice of Saudi companies that distinguish between revenue from main operations and other revenues. Additionally, it fulfills the information needs of those investors whose investment decisions are affected by their understanding of the nature of the entity’s operations and types of its revenues. Finance Cost disclosures The disclosure is required because it provide important information to those investors whose investment decisions are affected by the availability of detailed information about the different kinds of financing costs during a period. IAS 7 no reasons given IAS 24 definition of close family members modified to reflect the definition suitable of the Saudi environment. IAS 19 requirement to disclose assets of employee benefits. This disclosure is required because of its effect on investors’ decision in the Saudi environment.

IAS 16 - Property, Plant and Equipment Requirement to use the service of an independent person to perform the valuation when the entity chooses the revaluation model for an entire class of the property, plant and equipment. The person (valuer) should be a certified valuer who is independent of the entity and holds a recognized, relevant professional qualification and has recent experience in the location and category of property, plant and equipment being valued. The name and qualification of the valuer is to be disclosed. Requirement to disclose about the cost of testing and trial operation of the entity’s assets. IAS 23 - Borrowing Costs Requirement to disclose separately the finance costs according to their sources such as conventional borrowing, Tawarruq etc. IAS 38 - Intangible Assets For fair value model, requirement to use of a valuer who is independent of the entity and holds a recognized and relevant professional qualification and has recent experience in the location and category of the intangible assets being valued. Name and qualification of valuer need to be disclosed. IFRS 12 - Disclosure of Interests in Other Entities Requirement to disclose name of other entities in which the entity has interest. Requirement to provide disclosures about the investees if they are not listed in Saudi stock market. IAS 16 The requirements of the qualification of valuer and the disclosure of his name have been added to increase the confidence in financial statement since the valuation profession in Saudi Arabia is an emerging profession. Cost of testing of trial operation The paragraph is added because of the materiality of such costs in some industry in Saudi Arabia such as oil and gas, which are not currently addressed appropriately in the standard. IAS 23 This additional disclosure is required because of the importance of distinguishing between different finance costs to the investor’s decisions in Saudi environment. IAS 38 The requirements of the qualification of valuer and the disclosure of his name have been added to increase the confidence in financial statement since the valuation profession in Saudi Arabia is an emerging profession. IFRS 12 disclosures about investees have been added because of the importance of the additional disclosure to local investors who may not be able to obtain access to the financial statements of the investees.

IAS 40 – Investment Property Requirement to use the service of an independent person to perform the valuation when the entity chooses the revaluation model for an entire class of the property, plant and equipment. The person (valuer) should be a certified valuer who is independent of the entity and holds a recognized, relevant professional qualification and has recent experience in the location and category of property, plant and equipment being valued. The name and qualification of the valuer is to be disclosed. IAS 41 - Agriculture Replacing all non shariah compliant examples like pigs, wine etc. IAS 32 / IFRS 7 – Financial Instruments Requirement to disclose additional details about nature of financing and investments e.g. Morabaha, Ijarah, conventional mode etc. IFRS 1 – First time adoption of IFRS Revaluation surplus of property, plant and equipment shall be recognized in the revaluation surplus account in the equity, and then treated according to IAS 16 requirements. The requirements of the qualification of valuer and the disclosure of his name have been added to increase the confidence in financial statement since the valuation profession in Saudi Arabia is an emerging profession. IFRS 1 – Surplus on revaluation – emphasis added so that not to make such surplus available of immediate dividend distribution

Key differences between SOCPA GAAP and IFRSs

Area SOCPA IAS 16 Challenges Property, plant and equipment Carried at cost less accumulated depreciation and impairment losses. Revaluation is prohibited under SOCPA IAS 16 allows entities to carry assets at cost less accumulated depreciation and impairment losses if any or at their fair values (changes in fair values are recognised in a separate revaluation reserve under equity of the entity). Revaluation may result in strengthening of financial position (improve ratios). Consider cost and efforts involved in revaluation. Component accounting not covered under SOCPA Under IFRS, fixed assets are required to be componentized and depreciated based on each component’s useful life. Need to consider capabilities of current accounting systems to perform component accounting. Treatment of site restoration costs not covered under SOCPA Provision for site-restoration and dismantling cost is required under IAS 37. To the extent it relates to the fixed asset, the changes are added/deducted (after discounting) from the asset in the relevant period. Development of models to calculate restoration costs and discounting of such costs on periodic basis.

Area SOCPA IAS 16 Challenges Property, plant and equipment Depreciation is not calculated on the fixed assets that were determined to be disposed of immediately upon taking that decision. However, there is no mention of idle assets. Opinion issued by SOCPA - assets that were permanently idle and still in the entity’s possession – if material – should be separated from other assets and their depreciation should be suspended Should be depreciated even it is idle, but not if it is held for sale (covered under IFRS 5) Reassessment of useful life, residual values and depreciation methods performed only when events or circumstances indicate. Estimates of useful lives would need to be revisited at the end of every year; Residual values of fixed assets need to be assessed and revised at the end of each reporting period and on adoption Residual values maybe significant for plant but insignificant for other assets. Management would require a review of historical trends and assistance from operations management to estimate the residual values of assets.

Area SOCPA IAS 2 Challenges Inventories Weighted average method is recommended for valuation. First in First out (FIFO) or Last in First Out method (LIFO) available as allowed alternative methods, disclosure required for differences between weighted average method and allowed alternative method. Choice available between FIFO or weighted average cost method. LIFO is prohibited. Might have substantial impact on entities using LIFO and would require system changes and staff training Reversal of inventory write-downs is not covered under SOCPA NRV estimates are made at each reporting period end and increase in NRV from previous reporting period may result in reversal of write-down that is allowed under IFRS. Capitalisation of borrowing costs not covered under SOCPA Entities may capitalize borrowing cost in cost of inventories manufactured that take substantial period of time to get ready.

Area SOCPA IAS 36 Challenges Impairment of assets SOCPA lists factors that should be considered to assess impairment, however initially the impairment is assessed by comparing the gross undiscounted cash flows from the assets with its carrying value. If gross cash flows are higher than carrying amount = no impairment If gross cash flows are lower than carrying amount = impairment is recognized based on discounted cash flows. Entities are required to assess at the end of each reporting period whether there is any indication of impairment. Certain assets require impairment test at least annually IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount is calculated – which is higher of fair value less costs of disposal or value in use. The difference between recoverable amount and carrying value is impairment. Entities need to built in impairment assessment in their financial reporting close process to ensure impairment assessments/ reviews are performed at each reporting date. Assets requiring annual impairment test: Intangible assets with indefinite useful life Intangible assets that are not yet available for use Goodwill acquired in business combination

Area SOCPA IAS 38 Challenges Intangible assets Certain incorporation costs are capitalized Intangibles are carried at historical cost less amortization. Incorporation costs are not allowed for capitalisation under IFRS Can be held at cost less impairment or at fair value Entities may consider not to capitalise future incorporation costs Investment properties Investment properties are measured at cost under SOCPA SOCPA allows disclosure of the fair value information in the explanatory notes to the financial statements Investment property is initially measured at cost IFRS allows accounting policy choice for subsequent measurement to carry investment property at either cost or fair value. IFRS 13 guidance applies for fair valuation. Entities may choose to fair value investment properties that may result in better financial position but need to consider the requirement of fair value exercise at each reporting period. Expenditures relating to activities that occur only once and relate to opening a new business location, or providing a new product or service, or commencing a business in a new geographic location, or providing a service to a new class of customers, or commencing new procedures in an existing location, or commencing new operations. It includes activities relating to establishing a new enterprise such as underwriting fees, lawyers, administrators, consultants and accountants fees, various fees relating to registering a company, advertising and promotion expenses relating to establishing a company, costs of the share certificates and expenditure to obtain licenses. Incorporation costs do not include expenditure that are covered by their own accounting standards such as fixed assets and administrative and marketing expenses

Area SOCPA IAS 12 Zakat and Taxation Zakat is charged to the income statement if the Company is wholly owned by Saudi shareholders otherwise it is charged to the equity Income tax is charged to the income statement if the Company is wholly owned by non-local shareholders otherwise it is charged to the equity Current and deferred tax are recognized as income or expense in profit and loss except to the extent that the tax arises from: A transaction or event that is recognized outside profit or loss (whether in other comprehensive income or in equity) A business combination Deferred tax requirements are similar to IFRS however limited compliance noted to date. Under IAS 12, the Company needs to recognize deferred tax on all temporary differences Currently banks and insurance companies that report under IFRS in KSA do not account for deferred Zakat and this may not be possible due to Sharia requirements.

Area SOCPA IAS 19 Challenges Employee benefits Limited guidance available on employment benefits, however the standards do require discounting of long term obligations to reflect the current costs. Practically, companies are accounting for the End of Service Benefits (EOSB) obligations based actual payments that the Company would require to make – few companies are using the actuarial valuations also. Employee benefits need to be reviewed to evaluate if they are defined benefit or defined contribution schemes. Liability for defined benefit schemes (like termination benefits / end of service benefits) would need be determined through an actuarial valuation Employee benefits would also be need to segregated as long term / short term benefits and long term employee benefits would need to be discounted. Entities with significant number of employees (i.e. construction companies) may have significant EOSB recognised in their balance sheet. This would need to be valued in accordance with IAS 19 and will require actuarial assistance. There may be limited expertise available to determine liability of defined benefit plan under actuarial valuation.

Area SOCPA IAS 39, IFRS 9 Challenges Financial Instruments SOCPA has issued a separate standard dealing with investment in securities – however the guidance is limited and detailed aspects are not covered. Practically companies are applying IFRS where guidance in SOCPA is not available. Separate standards for accounting and disclosure of Financial instruments has been issued which contains extensive guidance. The standards are being further enhanced and looks into all aspects of financial instruments like classification, recognition and measurement, de-recognition, impairment etc. There may be limited expertise available for valuation of complex instruments such as embedded derivatives and accounting treatment of hedge transactions, so the entities will need to plan this ahead.

Area SOCPA IAS 39, IFRS 9 Challenges Financial Instruments No guidance available regarding accounting of derivatives. Limited guidance on hedge accounting Detailed guidance available for accounting for derivatives and hedges Financial instruments can be classified as : Trade securities Available for sale Held to Maturity Financial instruments can be classified as: At fair value through profit or loss (which includes trading and designated instruments) Held-to-maturity Loan and receivables

Area SOCPA IAS 17 & IFRIC 4 Challenges Leases Standard is prescriptive – should satisfy one of the following four conditions to be classified as finance lease 90% of the value of the assets 75% of the life of the assets Bargain purchase option Transfer of ownership at the end of the lease term Principle based - substance over form requirement – transfer of substantially all risks and rewards incident to ownership is to be considered while deciding the classification of the lease IFRIC 4 requires identification of arrangements which do not take the legal form of a lease but which convey rights to use assets in return for a series of payments. Such arrangements should be accounted for in accordance with IAS 17 Need to review existing contracts to consider whether they fall under IFRIC 4 to account for as finance leases. Future agreements would need to be evaluated and consideration to be given to IFRIC 4 while drafting the terms and conditions; Land and building are not separately accounted for as operating and finance leases, but are considered in conjunction. Where a lease of the land and buildings has been treated as an operating lease under SOCPA, it may be that the buildings element, when considered separately, will be classified as a finance lease under IFRS. Accounting processes and methods need to be updated to ensure leases for lands and buildings are separately accounted for. Lease rentals are recognised in the income statement on straight line basis but future escalations are not considered. Lease rentals should be recognized in the income statement on a straight line basis (factoring future escalations)

Area SOCPA IFRS Interim Financial Reporting Minimum contents Balance sheet Income statement Cash flows statement Selected explanatory notes Condensed statement of financial position Condensed comprehensive income Condensed statement of changes in equity Condensed cash flow statement Selected explanatory not A statement that results for the interim period may not give an accurate indicator of the annual operating results is required to be included No such statement is required The comparative balance sheet reflects the balances as at the end of the corresponding period. The comparative balance sheet reflects the balances as at the end of the last financial year.

Area SOCPA IFRS General Disclosures for critical accounting judgments are not required. Disclosures for critical accounting judgments are required. Disclosures for extra ordinary items is required. IAS 1 prohibits any items to be disclosed as extraordinary items. Required to present expenses based on function (for example, cost of sales, administrative). Entities may present expenses based on either function or nature (for example, salaries, depreciation). However, if function is selected, certain disclosures about the nature of expenses must be included in the notes. Cash flow statement - only specifies indirect method Cash flow statement- specifies both direct and indirect methods. Direct method is preferred.

Area SOCPA IFRS General Capitalization of borrowing costs for qualifying assets limited to fixed assets that take substantial period of time to get ready for its intended use or sale. IFRS also includes inventories that require substantial period of time to bring them in saleable condition, in addition to fixed assets. Related parties Relatives [family members] up to the 4th degree. Transaction oriented – e.g. disclosure to identify controlling party not needed as long as there were no transactions. No mention of disclosure for management compensation. Comprehensive definition of close family members. Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been transactions between them. Detailed disclosures required for all types of management compensation. Agriculture Does not allow that biological assets/producing should be measured at fair value. Measure biological assets/producing cattle (non-current assets) at fair value.

IFRS 1 – First time adoption of IFRS

Overview IFRS 1 applies when an entity first adopts IFRS in its annual financial statements Adopts an opening IFRS statement of financial position approach. Requires an unreserved, explicit statement of compliance with IFRS. Aims to ensure that the information in an entity’s first IFRS financial statements and interim reports is transparent and comparable over all the periods presented. General principle: A first-time adopter recognises and measures all assets and liabilities in its first IFRS financial statements as if it had always applied IFRS

Requirements Indicative process for planning the transition:
1. Apply IFRS effective at the reporting date. 2. Prepare an opening statement of financial position at date of transition 3. Recognise/derecognise assets and liabilities in accordance with IFRS 4. Measure recognised assets and liabilities in the opening IFRS statement of financial position in accordance with IFRS 5. Determine estimates in accordance with IFRS 1. IFRS 15 deferred for one year

Requirements 6. The effect of changes in accounting policies is recognised in equity in the opening statement of financial position 7. Presentation and disclosures shall be in accordance with IFRS including reclassifications 8. Comparative information shall be in full accordance with IFRS 9. Optional exemptions should be considered and mandatory exceptions should be applied. 10. Equity and profit or loss reconciliations between previous GAAP and IFRS are to be provided.

Mandatory Exemptions Estimates
De-recognition of non-derivative financial instruments Hedge accounting Non-controlling interests Classification and measurement of financial assets Impairment of financial assets Embedded derivatives Government loans

Optional Exemptions Share-based payments Insurance contracts
Deemed cost Leases Cumulative translation differences Investments in subsidiaries, joint ventures and associates Assets and liabilities of subsidiaries, associates and joint ventures Compound financial instruments Designation of previously recognised financial instruments Fair value measurement of financial assets or financial liabilities at initial recognition

Optional Exemptions Decommissioning liabilities
Service concession arrangements Borrowing costs Transfer of assets from customers Extinguishing financial liabilities with equity instruments Severe hyperinflation Stripping costs in the production phase of a surface mine Designation of contracts to buy or sell a non-financial item Revenue (IFRS 15) Business Combinations

Disclosures No exemption from the disclosure requirements in other IFRSs Disclosures form a link between previous GAAP financial statements and the first IFRS financial statements

Interim financial statements
A first-time adopter will also have to ensure that its interim financial reports in the year of adoption of IFRS contain sufficient information about events or transactions that are material to an understanding of the current interim period. Since a first-time adopter has not previously issued a complete set of annual IFRS financial statements, this means that significantly more information may be required in these IFRS interim reports than would normally be included in an interim report prepared in accordance with IAS 34.

Interim financial statements
For interim reporting, entities should be aware that they are not required to repeat all of the incremental IFRS information for each interim period during that first IFRS reporting year (IFRS ). The opening statement of financial position and accompanying reconciliations of equity and total comprehensive income at the date of transition to IFRS is a requirement for only the first interim and annual financial reports; they are not required in the second and third interim financial reports.

Implications Examples of additional assets/liabilities that may need to be recognised: Pension assets and liabilities Deferred tax assets and liabilities Finance lease assets and liabilities Legal/constructive provisions Derivative financial instruments Acquired intangible assets Internal development costs Share-based payments Intangible assets in business combination not recognisable under IAS 38 – adjust goodwill

Implications Examples of derecognition of previously recognised assets/liabilities: Provisions without legal/constructive obligation General reserves Deferred tax assets where recovery is not probable Intangible assets that fail the recognition criteria

Implications Examples of assets/liabilities that might be reclassified: Treasury shares as assets, moved to equity Financial assets to one FV or amortised cost Financial instruments ‘split’ between equity and liability components Disclosure of gross assets/liabilities that were previously offset Analysis of assets/liabilities into current/non-current Securities as cash equivalents in the Cash Flow Statement Non-current assets held for sale (IFRS 5)

Implications Examples of assets/liabilities that might be measured differently: Revaluation of PPE, Investment property, biological assets Financial instruments to fair value or amortised cost Employee benefit obligations Best estimate provisions under IAS 37 Impairment of assets Valuation of inventories Assets held for sale (IFRS 5) Share based payments – Liability under IFRS 2

Frequently asked questions
Is an entity required to provide all of the relevant disclosures necessary in annual IFRS financial statements in its first interim IFRS financial statements? No. While the first interim IFRS financial statements in the year of adoption will be more extensive than previous interim financial statements prepared in accordance with SOCPA GAAP, there is no requirement that the first condensed interim financial statements include all of the disclosures required in annual IFRS financial statements. Judgment will be required in determining what additional disclosures will be necessary in the first interim IFRS financial statements in the year of adoption. The annual disclosure requirements in the relevant IFRSs may be useful when considering which additional disclosures should be provided.

2. What are the minimum requirements that must be complied with in the first interim IFRS financial statements? Required financial statements a condensed balance sheet at March 31, 2017, December 31, 2016 and December 31, 2015; a condensed statement of comprehensive income for the 3 months ended March 31, 2017 and 2016; a condensed statement of changes in equity for the 3 months ended March 31, 2017 and 2016; and a condensed statement of cash flows for the 3 months ended March 31, 2017 and 2016. Reconciliations of equity under SOCPA GAAP to equity under IFRSs at: • the date of transition, being January 1, 2016; • the end of the comparative interim period, being March 31, 2016; and • the end of the comparative annual period, being December 31, 2016. Reconciliations of total comprehensive income under SOCPA GAAP to total comprehensive income under IFRSs for: the comparative interim period, being the 3 months ended March 31, 2016; and the comparative annual period ended December 31, 2016. IFRS 1.33 explicitly requires a first-time adopter to disclose information material to an understanding of the current interim period if that information has not been disclosed in the most recent annual financial statements prepared in accordance with SOCPA GAAP. Significant judgment often will be necessary to determine areas that may require additional disclosures. Unlike for the first IFRS annual financial statements or complete interim set, IFRSs are not explicit as to whether an opening balance sheet should be presented in the first interim IFRS financial statements as a primary financial statement or in the notes.

3. Are all accounting policies required to be included in the first interim IFRS financial statements? Yes, when a first-time adopter prepares its first interim IFRS financial statements that claim compliance with IAS 34, these financial statements should include a complete set of significant accounting policies.

4. What headings, sub-totals and line items are required in the first interim IFRS financial statements? If a first-time adopter publishes a set of condensed interim financial statements in accordance with IFRSs, then these financial statements contain, as a minimum, each of the headings and sub-totals that were included in its most recent annual financial statements. A first-time adopter applies this requirement by including at least all of the headings and sub-totals that are expected to be included in its first annual IFRS financial statements.

5. Can I restate amounts in the financial statements for subsequent information which has come to light? Generally no, the estimates used in preparing the balance sheet at the date of transition to IFRSs (and in preparing the comparative amounts to be included in the first IFRS financial statements) must be consistent with those used under the previous GAAP, unless there is objective evidence that those estimates were in error. This requirement is consistent with the principles in IAS 10 Events after the Reporting Period for determining whether events arising after the balance sheet date are adjusting or non-adjusting.

Illustrative example: estimates A company has a 31 December year end. Included in its financial statements for the year ended 31 December 2015, prepared under SOCPA GAAP, was an amount owing from X which, given the information available at the balance sheet date, was considered to be recoverable. Late in 2016, X was declared insolvent and the amount was written off in the financial statements for the year ended 31 December The company is preparing its first IFRS financial statements for the year ended 31 December Although it is now known that the amount owing from X was not recoverable it will still need to be included in the company’s opening IFRS balance sheet and the write off reported as a loss in the comparative income statement in the 2017 financial statements.

Thank you Questions & Comments asifiqbal@socpa. org
Thank you Questions & Comments Disclaimer The views expressed in this presentation are those of the presenter. Official positions of the SOCPA are determined only after extensive due process and deliberation.

SOCPA IFRS Transition Project

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