What happened in the reporting period

What happened in the reporting period

There is no requirement to disclose a summary of significant events and transactions that have affected the company’s financial position and performance during the period under review (or simply what happened in the reporting period). However, information such as this could help readers understand the entity’s performance and any changes to the entity’s financial position during the year and make it easier finding the relevant information. However, information such as this could also be provided in the (unaudited) operating and financial review rather than the (audited) notes to the financial statements.

Covid-19
At the time of writing, the biggest impact on the financial statements of entities all around the world is related to the COVID-19 pandemic. Most entities will be affected by this in one form or another and should discuss the impact prominently in their financial statements. However, as the events are still unfolding, this publication is not providing any illustrative examples or guidance. See how to account for Covid-19 to get an up-to-date discussion.

Going concern disclosures [IAS1.25]
When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.

Read more

Excellent Study IFRS 9 Eligible Hedged items

IFRS 9 Eligible Hedged items

the insured items of business risk exposures

Although the popular definition of hedging is an investment taken out to limit the risk of another investment, insurance is an example of a real-world hedge.

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on the cash flows or the value of assets and liabilities, and therefore, ultimately affect profit or loss. In order to manage these risk exposures, companies often enter into derivative contracts (or, less commonly, other financial instruments) to hedge them. Hedging can, therefore, be seen as a risk management activity in order to change an entity’s risk profile.

The idea of hedge accounting is to reduce (insure) this mismatch by changing either the measurement or (in the case of certain firm commitments) FRS 9 Eligible Hedged itemsrecognition of the hedged exposure, or the accounting for the hedging instrument.

The definition of a Hedged item

A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that

  1. exposes the entity to risk of changes in fair value or future cash flows and
  2. is designated as being hedged

The hedge item can be:

Only assets, liabilities, firm commitments and forecast transactions with an external party qualify for hedge accounting. As an exception, a hedge of the foreign currency risk of an intragroup monetary item qualifies for hedge accounting if that foreign currency risk affects consolidated profit or loss. In addition, the foreign currency risk of a highly probable forecast intragroup transaction would also qualify as a hedged item if that transaction affects consolidated profit or loss. These requirements are unchanged from IAS 39.

Read more

IAS 36 Determine if and when to test for impairment

IAS 36 Determine if and when to test for impairment – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps:

  • What?? – Determining the scope and structure of the impairment review (see the step-by-step IAS 36 impairment approach),
  • If and when? – Determining if and when a quantitative impairment test is necessary (discussed on this page),
  • How? – Understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary (see IAS 36 Impairment test – How?).

Step 3: IAS 36 Determine if and when to test for impairment

IAS 36 requires an entity to a perform a quantified … Read more

The step-by-step IAS 36 impairment of assets approach

When looking at the step-by-step IAS 36 impairment of assets approach it comes down to the following broadly organised steps: Assets in scope IAS 36

  • What?? – Determining the scope and structure of the impairment review,
  • If and when? – Determining if and when a quantitative impairment test is necessary, jump to this part here
  • How? – Understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary, jump to this part here.

The objective of IAS 36 Impairment of assets is to outline the procedures that an entity applies to ensure that its assets’ carrying values are not stated above their recoverable amounts (the amounts to be recovered through use or … Read more

Identify and separate Intangible assets

Identify and separate Intangible assets is one of the most important exercises in a IFRS 3 business combination. The acquirer recognises, separately from goodwill, the identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion. Identify and separate Intangible assets Identify and separate Intangible assets

An intangible asset that meets the contractual-legal criterion is identifiable even if the asset is not transferable or separable from the acquiree or from other rights and obligations. For example:

  1. an acquiree leases a manufacturing facility under an operating lease that has terms that are favourable relative to market terms. The lease terms explicitly

Read more

Potential to produce economic benefits

Potential to produce economic benefits – This is all about: An economic resource is a right that has the potential to produce economic benefits.

In the Conceptual Framework 2018, an asset is now specified as ‘a present economic resource controlled by the entity as a result of past events’. An economic resource, which previously had no definition, is defined as ‘a right that has the potential to produce economic benefits‘.

Previously an asset was defined as ‘a resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity’.

In other words, the potential to produce economic benefits now means that the flow of economic benefits no Read more

IFRS 13 Relief from royalty method

IFRS 13 Relief from royalty methodIFRS 13 Relief from royalty method – The ‘Royalty Relief’ (also known as Relief from Royalty) method is based on the notion that a brand holding company owns the brand and licenses it to an operating company.  One method to determine the market value of Intellectual Property assets like patents, trademarks, and copyrights is to use Relief from royalty method (also known as Royalty avoidance approach or Royalty Relief approach). This approach determines the value of Intellectual Property assets by estimating what it would cost the business if it had to purchase the Intellectual Property (IP) it uses from an outsider. Other valuation methods are provide here.

This approach requires the valuator to

  1. project future sales of the products
Read more

How is goodwill different from other intangible assets?

How is goodwill different from other intangible assets????

An asset, which has no physical existence such as corporate intellectual properties (patents, trademarks, business methodologies and copyrights), trademarks, patents, software, goodwill and brand recognition are known to be an “Intangible asset”. So goodwill is and is not an intangible asset. Goodwill is a residual, unidentifiable, not separable asset. Intangibles are not that but…. How is goodwill different from other intangible assets

Separate identifiable intangible assets acquired

That is because identifiable intangible assets acquired in a business combination are recognised separately from goodwill [IFRS 3 B31]. An intangible asset is ‘identifiable’ if it arises from contractual or other legal rights or if it is separable [IAS 38 12]. Under certain criteria also … Read more

Disclosures subsidiaries and NCI

Disclosures subsidiaries and NCI – IFRS 12 requires disclosures for each of an entity’s subsidiaries that have material non-controlling interests. Such disclosures assist users when estimating future profit or loss and cash flows (for example, by identifying the assets and liabilities that are held by subsidiaries, risk exposures of particular group entities, and those subsidiaries that have significant cash flows). The disclosures are as follows (new disclosures compared to the previous standard are in bold):

  • The subsidiary’s nameDisclosures subsidiaries and NCI
  • Its principal place of business (and country of incorporation, if different)Disclosures subsidiaries and NCI
  • The proportion of ownership interests held by non-controlling interestsDisclosures subsidiaries and NCI
  • The proportion of voting rights held by noncontrolling interests
Read more

IFRS 3 Identify a business

IFRS 3 Identify a business – An entity shall determine whether a transaction or other event is a business combination by applying the definition in IFRS 3, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. See also the accounting treatment acquisition of a business or asset(s) 

Guidance on identifying a business combination and the definition of a business are as follows:

The definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

Identifying a business combination [IFRS 3 B5 – B6] IFRS 3 Identify a business

IFRS 3 defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. An acquirer might obtain control of an acquiree in a variety IFRS 3 Identify a businessof ways, for example:

  1. by transferring cash, cash equivalents or other assets (including net assets that constitute a business);
  2. by incurring liabilities; IFRS 3 Identify a business
  3. by issuing equity interests; IFRS 3 Identify a business
  4. by providing more than one type of consideration; or
  5. without transferring consideration, including by contract alone.

A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not limited to:

  1. one or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer;
  2. one combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners;
  3. all of the combining entities transfer their net assets, or the owners of those entities transfer their equity interests, to a newly formed entity (sometimes referred to as a roll-up or put-together transaction); or
  4. a group of former owners of one of the combining entities obtains control of the combined entity.

Read more