IAS 16 Generation assets for Power and Utilities

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.

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IAS 36 Other impairment issues

IAS 36 Other impairment issues – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps: IAS 36 How Impairment test

  • What?? – Determining the scope and structure of the impairment review, explained here,
  • If and when? – Determining if and when a quantitative impairment test is necessary, explained here,
  • IAS 36 How Impairment test or understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary, which is explained here

IAS 36 Other impairment issues discusses other common application issues encountered when applying IAS 36, including those related to:

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IFRS vs US GAAP Nonfinancial liabilities

IFRS vs US GAAP Nonfinancial liabilities – The guidance in relation to nonfinancial liabilities (e.g., provisions, contingencies, and government grants) includes some fundamental differences with potentially significant implications.

For instance, a difference exists in the interpretation of the term “probable.” IFRS defines probable as “more likely than not,” but US GAAP defines probable as “likely to occur.” Because both frameworks reference probable within the liability recognition criteria, this difference could lead companies to record provisions earlier under IFRS than they otherwise would have under US GAAP. The use of the midpoint of a range when several outcomes are equally likely (rather than the low-point estimate, as used in US GAAP) might also lead to higher expense recognition under IFRS.

IFRS … Read more

Natural disasters Miscellaneous considerations

Natural disasters Miscellaneous considerations deals with several special IFRS accounting issues after a natural disaster.

Future operating losses Natural disasters Miscellaneous considerations

Entities may incur other losses directly or indirectly related to a natural disaster. An entity may anticipate having future operating losses for a period of time after a natural disaster. For example, an entity may have repair costs, lost revenue due to plant closures or losses due to an overall decline in the economy. Additional costs might be incurred in renting alternative production facilities, providing transport or accommodation for employees or outsourcing business functions.

Future operating losses and costs do not meet the definition of a liability (because they do not arise from a present obligation resulting Read more

Disclosure requirements IFRS 4 and IFRS 17

Disclosure requirements IFRS 4 and IFRS 17 – Explanation of recognized amounts from IFRS 4 to IFRS 17

1 Introduction Disclosure requirements IFRS 4 and IFRS 17

[IFRS 17 (98), IFRS 17 (93)-(96)]

Disclosure requirements IFRS 4 and IFRS 17IFRS 4 requires an entity to disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts. In order to comply with this objective, IFRS 4 outlines what should be disclosed regarding reconciliations, policies, methods and processes but provides limited guidance on how these disclosure requirements should be met.

IFRS 17 requirements are much more extensive. It requires the entity to provide specific reconciliations showing how the net carrying amounts of insurance contracts changed during the period as a Read more

Disclosure recognised insurance amounts

Disclosure recognised insurance amountsDisclosure recognised insurance amounts

or the clarification and explanation of recognised insurance amounts for a complex industry – insurance. An entity is required to disclose the following:

  • Reconciliations that show how the net carrying amount of contracts within the scope of IFRS 17 changed during each period (see 1 below)
  • Disclosures for contracts other than those to which the entity applies the premium allocation approach:
    • Analysis of insurance revenue recognized in the period for contracts (see 2 below) Disclosure recognised insurance amounts
    • Analysis of the effect of contracts initially recognized in each period (see 3 below) Disclosure recognised insurance amounts
    • Explanation of when the entity expects to recognize the contractual service margin (CSM) at
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Acquisition of insurance contracts

Acquisition of insurance contracts – Insurance contracts may be acquired in a transfer (often referred to as a portfolio transfer) or inAcquisition of insurance contracts a business combination, as defined in IFRS 3 Business Combinations.

In summary, insurance contracts acquired in a transfer or a business combination are classified and measured in the same way as those issued by the entity at the date of the combination or transfer, except that the fulfilment cash flows are recognised at that date.

1. Business combinations Acquisition of insurance contracts

IFRS 3 requires a group of insurance contracts acquired in a business combination to be measured at the acquisition date under IFRS 17, rather than at fair value [IFRS 3 31A], resulting in Read more

Insurance Contract modification and derecognition

Contract modification and derecognition – A contract that qualifies as an insurance contract remains so until all rights and obligations are extinguished (i.e., discharged, cancelled or expired) unless the contract is derecognised because of a contract modification [IFRS 17 B25]. Contract modification and derecognition

IFRS 4 contained no guidance on when or whether a modification of an insurance contract might cause derecognition of that contract. Therefore, prior to IFRS 17, most insurers would have applied the requirements, if any, contained in local GAAP. ConInsurance coveragetract modification and derecognition

1. Modifications of insurance contracts

An insurance contract may be modified, either by agreement between the parties or as result of regulation. If the terms are modified, an entity must Read more

Reinsurance contracts held

Reinsurance contracts held – A reinsurance contract is an insurance contract issued by one entity (the reinsurer) to compensate another entity for claims arising from one or more insurance contracts issued by the other entity (underlying contracts).

Reinsurance contracts held

IFRS 17 requires a reinsurance contract held to be accounted for separately from the underlying insurance contracts to which it relates. This is because an entity that holds a reinsurance contract (a cedant) does not normally have a right to reduce the amounts it owes to the underlying policyholder by amounts it expects to receive from the reinsurer.

A cedant measures reinsurance contracts it holds by applying a modified version of the general model or, if the contract is eligible, the premium allocation Read more

Onerous insurance contracts

Initial recognition Onerous insurance contracts

An insurance contract is onerous at the date of initial recognition if the fulfilment cash flows allocated to the contract, including any previously recognised acquisition cash flows and any cash flows arising from the contract at the date of initial recognition in total are a net outflow.

Onerous contract loss recognised immediately in profit or loss

Risk adjustment

Present value of

estimated cash inflows

Present value of

estimated cash outflows

The onerous contract test is performed at the level of the IFRS 17 group (as described in Level of aggregation). Under existing IFRS 4 reporting, entities apply liability adequacy tests at an aggregation level determined by previously grandfathered accounting policies. IFRS 17 is likely to

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