Example accounting policies

Example accounting policies

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.Example accounting policies

Example accounting policies guidance

Whether to disclose an accounting policy

1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]

2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.

3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.

Change in accounting policy – new and revised accounting standards

4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]

5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]

6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.

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Initial Coin Offering

Initial Coin Offering

An Initial Coin Offering (‘ICO’) is a form of fundraising that harnesses the power of cryptographic assets and blockchain-based trading. Similar to a crowdfunding campaign, an ICO allocates (issues or promises to issue) digital token(s) instead of shares to the parties that provided contributions for the development of the digital token. These ICO tokens typically do not represent an ownership interest in the entity, but they often provide access to a platform (if and when developed) and can often be traded on a crypto exchange. The population of ICO tokens in an ICO is generally set at a fixed amount.

It should be noted that ICOs might be subject to local securities law, and significant regulatory considerations might apply.

Each ICO is bespoke and will have unique terms and conditions. It is critical for issuers to review the whitepaper (A whitepaper is a concept paper authored by the developers of a platform, to set out an idea and overall value proposition to prospective investors. The whitepaper commonly outlines the development roadmap and key milestones that the development team expects to meet) or underlying documents accompanying the ICO token issuance, and to understand what exactly is being offered to investors/subscribers. In situations where rights and obligations arising from a whitepaper or their legal enforceability are unclear, legal advice might be needed, to determine the relevant terms.

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5 steps in IFRS 15 – best quick read

5 steps in IFRS 15

Under IFRS 15 Revenue from contracts with customers, entities apply the 5 steps in IFRS 15 to determine when to recognize revenue, and at what amount. The model specifies that revenue is recognized when or as an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognized:

  • over time, in a manner that best reflects the entity’s performance; or
  • at a point in time, when control of the goods or services is transferred to the customer.

IFRS 15 provides application guidance on numerous related topics, including warranties and licenses. It also provides guidance on when to capitalize the costs of obtaining a contract and some costs of fulfilling a contract (specifically those that are not addressed in other relevant authoritative guidance – e.g. for inventory).

5 steps in IFRS 15 – What is IFRS 15?

Step 1: Identify the contract with a customer

A contract with a customer is in the scope of IFRS 15 when the contract is legally enforceable and certain criteria are met. If the criteria are not met, then the contract does not exist for purposes of applying the general model of IFRS 15, and any consideration received from the customer is generally recognized as a deposit (liability). Contracts entered into at or near the same time with the same customer (or a related party of the customer) are combined and treated as a single contract when certain criteria are met.

A contract with a customer is in the scope of IFRS 15 when it is legally enforceable and meets all of the following criteria. [IFRS 15.9]

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IFRS 15 Revenue Disclosures Examples

IFRS 15 Revenue Disclosures Examples

IFRS 15 Revenue Disclosures Examples provides the context of disclosure requirements in IFRS 15 Revenue from contracts with customers and a practical example disclosure note in the financial statements. However, as this publication is a reference tool, no disclosures have been removed based on materiality. Instead, illustrative disclosures for as many common scenarios as possible have been included.

Please note that the amounts disclosed in this publication are purely for illustrative purposes and may not be consistent throughout the example disclosure related party transactions.

Users of the financial statements should be given sufficient information to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To achieve this, entities must provide qualitative and quantitative information about their contracts with customers, significant judgements made in applying IFRS 15 and any assets recognised from the costs to obtain or fulfil a contract with customers. [IFRS 15.110]

Disaggregation of revenue

[IFRS 15.114, IFRS 15.B87-B89]

Entities must disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. It will depend on the specific circumstances of each entity as to how much detail is disclosed. The Reporting entity Plc has determined that a disaggregation of revenue using existing segments and the timing of the transfer of goods or services (at a point in time vs over time) is adequate for its circumstances. However, this is a judgement and will not necessarily be appropriate for other entities.

Other categories that could be used as basis for disaggregation include:IFRS 15 Revenue Disclosures Examples

  1. type of good or service (eg major product lines)
  2. geographical regions
  3. market or type of customer
  4. type of contract (eg fixed price vs time-and-materials contracts)
  5. contract duration (short-term vs long-term contracts), or
  6. sales channels (directly to customers vs wholesale).

When selecting categories for the disaggregation of revenue entities should also consider how their revenue is presented for other purposes, eg in earnings releases, annual reports or investor presentations and what information is regularly reviewed by the chief operating decision makers. [IFRS 15.B88]

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Better Communication in Financial Reporting

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.

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Best guide IFRS 16 Lessee modifications

Best guide IFRS 16 Lessee modifications

summarises the process surrounding changes in lease contracts that identify as lease modification.

A lessee that chooses not to apply the practical expedient (IFRS 16 option for rent concessions arising directly from the COVID-19 pandemic that are not going to be accounted for as lease modifications), or agrees changes to its lease contracts that do not qualify for the practical expedient, assesses whether there is a lease modification.

Overview

A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions meets the standard’s definition of a lease modification.

A lessee accounts for a lease modification as a separate lease if both of the following conditions exist:

  • the modification increases the scope of the lease by adding the right to use one or more underlying assets; and
  • the consideration for the lease increases by an amount equivalent to the stand- alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.

For a modification that is not a separate lease, at the effective date of the modification the lessee accounts for it by remeasuring the lease liability using a discount rate determined at that date and:

  • for modifications that decrease the scope of the lease: decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease, and recognising a gain or loss that reflects the proportionate decrease in scope; and
  • for all other modifications: making a corresponding adjustment to the right-of- use asset.

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Beware of COVID 19 Rent concessions IFRS accounting

Beware of COVID 19 Rent concessions IFRS accounting

IFRS 16 amendments Corona Rent concessions provide relief to lessees in accounting for rent concessions.

IFRS 16 Rent concession amendments in a nutshell

The lessee perspective

The amendments to IFRS 16 add an optional practical expedient that allows lessees to bypass assessing whether a rent concession that meets the following criteria is a lease modification:

  • it is a direct consequence of COVID-19; Beware of COVID 19 Rent concessions IFRS accounting
  • the revised lease consideration is substantially the same as, or less than, the original lease consideration;
  • any reduction in the lease payments applies to payments originally due on or before June 30, 2021; and
  • there is no substantive change to the other terms and conditions of the lease.

Lessees who elect this practical expedient account for qualifying rent concessions in the same way as changes under IFRS 16 that are not lease modifications. The accounting will depend on the nature of the concession, but one outcome might be to recognize negative variable lease payments in the period in which the lessor agrees to an unconditional forgiveness of lease payments.

Lessees are required to apply the practical expedient consistently to similar leases and similar concessions. They must also disclose if they elected the practical expedient and for which concessions, as well as the amount recognized in profit and loss in the reporting period to reflect changes in lease payments that arise from rent concessions to which they have applied the practical expedient.

The amendments are effective for reporting periods beginning after June 1, 2020, with early application permitted.

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1st and best IFRS Accounting for client money

IFRS Accounting for client money

If an entity holds money on behalf of clients (‘client money’):

  • should the client money be recognised as an asset in the entity’s financial statements?
  • where the client money is recognised as an asset, can it be offset against the corresponding liability to the client on the face of the statement of financial position?

DEFINITION: Client money

“Client money” is used to describe a variety of arrangements in which the reporting entity holds funds on behalf of clients. Client money arrangements are often regulated and more specific definitions of the term are contained in some regulatory pronouncements. The guidance in this alert is not specific to any particular regulatory regime.

Entities may hold money on behalf of clients under many different contractual arrangements, for example:

  • a bank may hold money on deposit in a customer’s bank account;
  • a fund manager or stockbroker may hold money on behalf of a customer as a trustee;
  • an insurance broker may hold premiums paid by policyholders before passing them onto an insurer;
  • a lawyer or accountant may hold money on behalf of a client, often in a separate client bank account where the interest earned is for the client’s benefit.

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Construction contract – How 2 best account for it in IFRS 15

A construction contract is a contract specifically negotiated for the construction of (a combination of) assets that are closely interrelated in terms of design