Transfer of control for distinct software licences

Transfer of control for distinct software licences – IFRS 15 provides additional application guidance to help entities determine when control transfers for distinct licences of intellectual property, based on the nature of the promise to the customer. This application guidance is applicable for both perpetual and term software licences.

 

IFRS 15 states that entities provide their customers with either:

Transfer of control for distinct software licences

 

If the licence does not meet all three criteria, the licence is a right to use by default and the entity would recognise revenue at the point in time when the licence is delivered.

The key determinant of whether a licence is a right to access is whether the entity is required to undertake activities that affect the licenced … Read more

Goodwill or bargain on acquisition

Goodwill or bargain on acquisition – in short

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests and any fair value of the Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed.

If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognised in profit or loss as a gain on bargain purchase.

Business combinations

Business combinations are accounted for using the acquisition method. Cost of an acquisition is measured at the fair value of the assets given and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities assumed in a business combination (including contingent liabilities) are measured initially at their fair values at the acquisition date. There are no non-controlling interest in the Group’s subsidiaries.

The Dorolco acquisition – On xx October 202x Dorco Loan PLC acquired 100% of the Dorolco operations, by acquiring 100% of all voting shares in the legal entities now part of this Group.

Assets acquired and liabilities assumed – Because the holding companies established in structuring the Dorolco acquisition have been incorporated on behalf of this transaction, the opening balance sheet as at xx October 202x shown in the Consolidated Financial Statements as comparatives to the balance sheet as at 31 December 202x is the balance sheet at incorporation date. Shares issued were paid on acquisition date, except for the share option plan shares issued at closing date (1,000,000 shares issued, of which as at 31 December 202x 155,000 were not yet granted and paid up).

Read more

Note 1 Cash and cash equivalents

Definition of cash and cash equivalents

IAS 7.6 includes the following definitions:

Cash’:

  • Cash on hand (physical currency held), and
  • Demand deposits.

Cash equivalents’:

  • Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

IAS 7.7 then notes that cash equivalents are held for the purpose of meeting short term cash commitments rather than for investment or other purposes. IAS 7.7 also notes that:

‘…an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.’

Demand deposits

Demand deposits are not defined in IFRS. However, in order to qualify as cash, the related balance needs to have the same liquidity as cash itself, and so funds on ‘demand deposit’ need to be capable of being withdrawn at any time without penalty.

In general, deposits which can be withdrawn without penalty within 24 hours, or one working day, are regarded as being demand deposits. These include amounts deposited at financial institutions (such as funds in a bank current account), and may extend to cover deposits at non-financial institutions such as legal advisers, if funds are held for client in separate and designated accounts that can be called upon by the client at any time.

If a deposit does not qualify to be regarded as cash, it may qualify to be classified as a cash equivalent.

Consider this!

Questions arise about whether investments that can be withdrawn on demand (e.g. money market funds) could qualify to be regarded as cash equivalents.

In general, this is possible, but only in very limited circumstances.

This is because, in addition to the existence of the demand feature, all of the other requirements of IAS 7 need to be met. An interest bearing deposit at a financial institution might result in the amount of cash that would be received being known, and there might be an insignificant risk of changes in value (in particular in the current low interest rate environment), even if there is an early withdrawal penalty.

However, it is also necessary for it to be demonstrated that the investment is being held for the purpose of meeting short-term cash commitments rather than for investment or other purposes (IAS 7.7).

It may be difficult to reconcile this last requirement to the characteristics of the investment, particularly as its maturity (excluding the demand feature) increases.

Short term maturity

Read more

Determining a leases discount rate

Determining a leases discount rate

The definition of the lessee’s incremental borrowing rate states that the rate should represent what the lessee ‘would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment.’ In applying the concept of ‘similar security’, a lessee uses the right-of-use asset granted by the lease and not the fair value of the underlying asset.

This is because the rate should represent the amount that would be charged to acquire an asset of similar value for a similar period. For example, in determining the incremental borrowing rate on a 5 year lease of a property, the security for the portion of the asset being leased (i.e. the 5 year portion of its useful life) would be likely to vary significantly from the outright ownership of the property, as outright ownership would confer rights over a period of time that would typically be significantly greater than the 5-year right-of-use asset contained in the lease.

In practice, judgement may be needed to estimate an incremental borrowing rate in the context of a right-of-use asset, especially when the value of the underlying asset differs significantly from the value of the right-of-use asset.

An entity’s weighted-average cost of capital (‘WACC’) is not appropriate to use as a proxy for the incremental borrowing rate because it is not representative of the rate an entity would pay on borrowings. WACC incorporates the cost of equity-based capital, which is unsecured and ranks behind other creditors and will therefore be a higher rate than that paid on borrowings.

Read more

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.

Read more

What Is Fintech reporting IFRS 15

What Is Fintech or Financial Technology And Its Benefits?

New and fast-growing technologies like Financial Technology or Fintech have the potential benefits to collect and process data in real-time. This transforms how all businesses are working, how products and services are creating in the new economy, and how customers are engaging in this process. Every professional and commercial industry is affecting due by this change in workflows and business processes. The financial and economic sector is no exception.

Financial Technology or Fintech?

Fintech, short for Financial Technology, is a growing field and is now an economic revolution by the tech-savvy. It is the development of new technology to transform traditional institutions such as banks and insurance companies by uplift how they handle their finances and economic services. The process is not only digitizing money but also monetizing data to fit into the digitized world.

FinTech solutions have huge potential benefits for all businesses, especially new and existing small businesses. Small and medium-sized enterprises (SMEs) are essential for economic maturity and employment. However, others may find it difficult to get the financing they need to survive and thrive.

Example

Automated drafting of portfolio management commentaries – Analytics & Reporting (October 2018, Societe Generale Securities Services)

Addventa Fintech exclusive partnership for automated drafting of portfolio management commentaries based on artificial intelligence solutions.

Read more

Fair value of Cryptographic assets

Fair value of Cryptographic assets

The fair value of a cryptographic asset (‘CA’) might be accounted for or disclosed in financial statements. Fair value might be needed in a variety of situations, including:

Inventory of cryptographic assets held by a broker-trader applying fair value less costs to sell accounting

Expense for third party services paid for in cryptographic assets

Cryptographic assets classified as intangible assets in cases where the revaluation model is used

Expense for employee services paid for in cryptographic assets

Revenue from the perspective of an ICO issuer

Cryptographic assets acquired in a business combination

Disclosure of the fair value for cryptographic assets held on behalf of others

Cryptographic assets held by an investment fund (either measured at fair value or for which fair value is disclosed)

IFRS 13, ‘Fair Value Measurement’, defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”, and it sets out a framework for determining fair values under IFRS.

Read more

Lessee accounting under IFRS 16

Lessee accounting under IFRS 16

The key objective of IFRS 16 is to ensure that lessees recognise assets and liabilities for their major leases.

1. Lessee accounting model

A lessee applies a single lease accounting model under which it recognises all leases on-balance sheet, unless it elects to apply the recognition exemptions (see recognition exemptions for lessees in the link). A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make payments. [IFRS 16.22]

[IFRS 16.47, IFRS 16.49]

IFRS 16 Balance sheet Profit or loss

Read more

IFRS 16 Lessor accounting

IFRS 16 Lessor accounting

Lessors continue to classify leases as finance or operating leases.

1. Lessor accounting model

The lessor follows a dual accounting approach for lease accounting. The accounting is based on whether significant risks and rewards incidental to ownership of an underlying asset are transferred to the lessee, in which case the lease is classified as a finance lease. This is similar to the previous lease accounting requirements that applied to lessors. The lessor accounting models are also essentially unchanged from IAS 17 Leases. [IFRS 16.B53, IFRS 16.BC289]

Are the lessee and lessor accounting models consistent?

No. A key consequence of the decision to retain the IAS 17 dual accounting model for lessors is a lack of consistency with the new lessee accounting model. This can be seen in the case Lease classification below:

  • the lessee applies the right-of-use model and recognises a right-of-use asset and a liability for its obligation to make lease payments; whereas
  • the lessor continues to recognise the underlying asset and does not recognise a financial asset for its right to receive lease payments.

There are also more detailed differences. For example, lessees and lessors use the same guidance for determining the lease term and assessing whether renewal and purchase options are reasonably certain to be exercised, and termination options not reasonably certain to be exercised. However, unlike lessees, lessors do not reassess their initial assessments of lease term and whether renewal and purchase options are reasonably certain to be exercised, and termination options not reasonably certain to be exercised (see changes in the lease term in the link).

Other differences are more subtle. For example, although the definition of lease payments is similar for lessors and lessees (see lease payments in the link), the difference is the amount of residual value guarantee included in the lease payments.

  • The lessor includes the full amount (regardless of the likelihood that payment will be due) of any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.
  • The lessee includes only any amounts expected to be payable to the lessor under a residual value guarantee.

Read more