Interaction Defined Benefit Asset and Minimum Funding Requirements

Illustrative examples

These examples accompany, but are not part of, IFRIC 14.

Example 1 – Effect of the minimum funding requirement when there is an IAS 19 surplus and the minimum funding contributions payable are fully refundable to the entity

IE1 An entity has a funding level on the minimum funding requirement basis (which is measured on a different basis from that required under IAS 19) of 82 per cent in Plan A. Under the minimum funding requirements, the entity is required to increase the funding level to 95 per cent immediately. As a result, the entity has a statutory obligation at the balance sheet date to contribute 200 to Plan A immediately. The plan rules permit a full refund of any surplus to the entity at the end of the life of the plan. The year-end valuations for Plan A are set out below. Continue Reading “Interaction Defined Benefit Asset and Minimum Funding Requirements”

Service Concession Arrangements

Illustrative examples

These examples accompany, but are not part of, IFRIC 12.

Example 1: The grantor gives the operator a financial asset

Arrangement terms

IE1 The terms of the arrangement require an operator to construct a road—completing construction within two years—and maintain and operate the road to a specified standard for eight years (ie years 3–10). The terms of the arrangement also require the operator to resurface the road at the end of year 8—the resurfacing activity is revenue-generating. At the end of year 10, the arrangement will end. The operator estimates that the costs it will incur to fulfil its obligations will be: Continue Reading “Service Concession Arrangements”

Restatement for effects of hyperinflation

This example accompanies, but is not part of, IFRIC 7.

IE1 This example illustrates the restatement of deferred tax items when an entity restates for the effects of inflation under IAS 29 Financial Reporting in Hyperinflationary Economies. As the example is intended only to illustrate the mechanics of the restatement approach in IAS 29 for deferred tax items, it does not illustrate an entity’s complete IFRS financial statements. Continue Reading “Restatement for effects of hyperinflation”

Dismantle, remove and restore items of PPE

Many entities have obligations to dismantle, remove and restore items of property, plant and equipment and in IFRIC 1 such obligations are referred to as ‘decommissioning, restoration and similar liabilities’ [IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities].

Under IAS 16 Property, Plant and Equipment, the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains requirements on how to measure decommissioning, restoration and similar liabilities.

IFRIC 1 provides guidance on how to account for the effect of subsequent changes in the measurement of existing decommissioning, restoration and similar liabilities. Continue Reading “Dismantle, remove and restore items of PPE”

Accounting for government levies

What is a levy?

A levy is defined as an outflow of resources (embodying economic benefits) that is imposed by governments (including government agencies and similar bodies whether local, national or international) on entities in accordance with legislation (i.e., laws and/or regulations)1.

When do I record a liability to pay a levy? Continue Reading “Accounting for government levies”

Consolidation of a foreign operation

In the past all kinds of different methods of translating foreign currency financial statements existed, called current rate method and temporal rate method.

IAS 21.39 defines the current (very practical) approach to translation of foreign currency financial statements for consolidation in the presentation currency as follows:

‘The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

  1. assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position;
  2. income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
  3. all resulting exchange differences shall be recognised in other comprehensive income.’

An important additions is that for (b) it is also allowed to use a rate that approximates the exchange rates at the dates of the transactions, the average rate for the period (year, quarter, month). However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate [IAS 21.40]. Continue Reading “Consolidation of a foreign operation”

Insurances risk adjustment for non-financial risks

The risk adjustment to the estimates of future cash flows reflects the compensation an insurance company expects for bearing the uncertainty about the amount and timing of the cash flows that arise from non-financial risks.

Risk adjustment = compensation that makes an entity indifferent between:

Fulfilling a
liability with a range of possible outcomes:

eg, 50% probability for CU 50 and 50% probability for CU 500


Fulfilling a liability with the same expected present value (CU 275 in this example) but generating fixed cash flows

Continue Reading “Insurances risk adjustment for non-financial risks”

Service or insurance contract?

Some contracts meet the definition of an insurance contract but their primary purpose is to provide services for a fixed fee. An entity issuing such contracts may choose to apply IFRS 15 to them if, and only if all of the following conditions are met:

Identification of Fixed fee contracts for services:

All of the following three conditions apply to a fixed fee contract for services: Continue Reading “Service or insurance contract?”

Example of a significant financing component in a sales contract

This is an example of the workings of IFRS 15.60 – 64.

A vendor enters into a contract with a customer to build and supply a new machine. Control over the completed machine will pass to the customer in two years’ time (the vendor’s performance obligation will be satisfied at a point in time). The contract contains two payment options. Either the customer can pay CU 5 million in two years’ time when it obtains control of the machine, or the customer can pay CU 4 million on inception of the contract.

The customer decides to pay CU 4 million on inception. Continue Reading “Example of a significant financing component in a sales contract”