Contingencies

Contingencies – Best and complete 2 read

30/06/202112/07/2019 by 75385885

Contingencies are an interesting subject in accounting because for example within IAS 37 the term ‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

So contingencies may exists as to the recognition or disclosure of assets and liabilities, but also for contingent consideration in IFRS 3 Business combinations, contingent settlement provisions included in financial instruments (arising on liquidation or in puttable instruments) and/or contingently issuable shares in IAS 33 Earnings per share, just to name a few.

Recognition criteria for provisions and contingent liabilities

Provisions can be distinguished from other liabilities (e.g. trade payables and accruals) due to the uncertainty concerning the timing or amount of the future expenditure required in settlement.

In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within IAS 37 the term ‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

IAS 37.14 requires a provision be recognised when all of the following apply:

an entity has a present obligation (legal or constructive) as a result of a past event
it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
a reliable estimate can be made of the amount of the obligation

Provisions are measured at the best estimate of the expenditure required to settle the present obligation at the reporting period:

including any considerations for risks and uncertainties
including time value of money (if material)
including future events when there is sufficient objective evidence that they will occur
excluding gains from the expected disposal of assets

Provisions are to be reviewed at the end of each reporting period and adjusted to reflect the current best estimate.

Contingently issuable ordinary shares for IAS 33 EPS

25/06/202125/06/2021 by 75385885

Contingently issuable ordinary shares

For EPS purposes, contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other consideration on the satisfaction of specified conditions in a contingent share agreement. [IAS 33 Definition]

This narrative builds on the basic principles introduced in EPS or earnings per share, and sets out the specific basic and diluted EPS implications of the following types of instrument(s).

These conditions do not include service conditions under IFRS 2 Share-based Payment and the passage of time. Therefore, shares that are issuable subject only to the passage of time, and unvested shares and options that require only service for vesting, are not considered contingently issuable. A different set of requirements applies to shares that are subject only to a service condition for vesting (see Unvested ordinary shares and EPS). [IAS 33.21(g), IAS 33.24, IAS 33.48]

Contingently issuable ordinary shares, as discussed in this chapter, are commonly seen in the context of share-based payment arrangements with performance conditions (including market and non-market performance conditions), or contingent consideration in business combinations. Additional considerations in the context of share-based payment arrangements are set out in EPS Impact and Share-based payments.

Although it is not specifically defined in IAS 33, a related class of instruments is contingently issuable POSs (see Contingently issuable ordinary shares).

EPS implications

Better Communication in Financial Reporting

15/04/202109/04/2021 by 75385885

Better Communication in Financial Reporting

Better Communication in Financial Reporting is an IFRS.org initiative to focus financial reporting on users. There is a general view that financial reports have become too complex and difficult to read and that financial reporting tends to focus more on compliance than communication. See also narrative reporting as a discussion on alternative ways of reporting.

At the same time, users’ tolerance for sifting through information to find what they need continues to decline.

This has implications for the reputation of companies who fail to keep pace. A global study confirmed this trend, with the majority of analysts stating that the quality of reporting directly influenced their opinion of the quality of management.

To demonstrate what companies could do to make their financial report more relevant, there are several suggestions to ‘streamline’ the financial statements to reflect some of the best practices that have been emerging globally over the past few years. In particular:

Information is organized to clearly tell the story of financial performance and make critical information more prominent and easier to find.
Additional information is included where it is important for an understanding of the performance of the company. For example, we have included a summary of significant transactions and events as the first note to the financial statements even though this is not a required disclosure.

Improving disclosure effectiveness

Terms such as ’disclosure overload’ and ‘cutting the clutter’, and more precisely ‘disclosure effectiveness’, describe a problem in financial reporting that has become a priority issue for the International Accounting Standards Board (IASB or Board), local standard setters, and regulatory bodies. The growth and complexity of financial statement disclosure is also drawing significant attention from financial statement preparers, and more importantly, the users of financial statements.

Leveraged buyout IFRS 3 best reporting

06/04/202113/04/2020 by 75385885

Leveraged buyout IFRS 3 best reporting – In corporate finance, a leveraged buyout (LBO) is a transaction where a company is acquired using debt as the main source of consideration. These transactions typically occur when a private equity (PE) firm borrows as much as they can from a variety of lenders (up to 70 or 80 percent of the purchase price) and funds the balance with their own equity. Leveraged buyout IFRS 3 best reporting 1 The process and business reason The use of leverage (debt) enhances expected returns to the private equity firm. By putting in as little of their own money as possible, PE firms can achieve a large return on equity (ROE) and internal rate of return … Read more

IAS 16 Generation assets for Power and Utilities

24/03/2021 by 75385885

Generation assets for Power and Utilities

– are often large and complex installations. They are expensive to construct, tend to be exposed to harsh operating conditions and require periodic replacement or repair. This environment leads to specific accounting issues.

1 Fixed assets and components

IFRS has a specific requirement for ‘component’ depreciation, as described in IAS 16 Property, Plant and Equipment. Each significant part of an item of property, plant and equipment is depreciated separately. Significant parts of an asset that have similar useful lives and patterns of consumption can be grouped together. This requirement can create complications for utility entities, because many assets include components with a shorter useful life than the asset as a whole.

Identifying components of an asset

Generation assets might comprise a significant number of components, many of which will have differing useful lives. The significant components of these types of assets must be separately identified. This can be a complex process, particularly on transition to IFRS, because the detailed record-keeping needed for componentisation might not have been required in order to comply with national generally accepted accounting principles (GAAP). This can particularly be an issue for older power plants. However, some regulators require detailed asset records, which can be useful for IFRS component identification purposes.

An entity might look to its operating data if the necessary information for components is not readily identified by the accounting records. Some components can be identified by considering the routine shutdown or overhaul schedules for power stations and the associated replacement and maintenance routines. Consideration should also be given to those components that are prone to technological obsolescence, corrosion or wear and tear that is more severe than that of the other portions of the larger asset.

First-time IFRS adopters can benefit from an exemption under IFRS 1 First-time Adoption of International Financial Reporting Standards. This exemption allows entities to use a value that is not depreciated cost in accordance with IAS 16, and IAS 23 Borrowing Costs as deemed cost on transition to IFRS. It is not necessary to apply the exemption to all assets or to a group of assets.

The measurement period in business combinations – the best 1 year window to complete

02/03/202002/08/2019 by 75385885

The measurement period in business combinations explains the one year window allowed in properly accounting for business combinations or as they have been called in the past acquisitions/M&A etc. The accounting for a business combination requires substantial effort and resources. The initial accounting often is incomplete at the end of the reporting period in which the business combination happens. This is because the acquirer has been unable to obtain all pertinent information necessary to evaluate the conditions that existed as of the acquisition date. As a result, the acquirer may have to record provisional amounts for certain assets or liabilities — for instance, independent valuations for intangible assets may not yet be finalised. The measurement period in business combinations The … Read more