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Disclosures Principles of consolidation and equity accounting for IAS 1

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Disclosures Principles of consolidation and equity accounting

This is a separated part of the example accounting policies, it is separated because of the size of this note and the specific nature of principles of consolidation and equity accounting.

Example accounting policies – Introduction

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 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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Disclosure financial assets and liabilities

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Disclosure financial assets and liabilities

– provides a narrative providing guidance on users of financial statements’ needs to present financial disclosures in the notes to the financial statements grouped in more logical orders. But there is and never will be a one-size fits all.

Here it has been decided to separately disclose financial assets and liabilities and non-financial assets and liabilities, because of the distinct different nature of these classes of assets and liabilities and the resulting different types of disclosures, risks and tabulations.

Disclosure financial assets and liabilities guidance

Disclosing financial assets and liabilities (financial instruments) in one note

Users of financial reports have indicated that they would like to be able to quickly access all of the information about the entity’s financial assets and liabilities in one location in the financial report. The notes are therefore structured such that financial items and non-financial items are discussed separately. However, this is not a mandatory requirement in the accounting standards.

Accounting policies, estimates and judgements

For readers of Financial Statements it is helpful if information about accounting policies that are specific to the entityDisclosure financial assets and liabilitiesand about significant estimates and judgements is disclosed with the relevant line items, rather than in separate notes. However, this format is also not mandatory. For general commentary regarding the disclosures of accounting policies refer to note 25. Commentary about the disclosure of significant estimates and judgements is provided in note 11.

Scope of accounting standard for disclosure of financial instruments

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IFRS 7 does not apply to the following items as they are not financial instruments as defined in paragraph 11 of IAS 32:

  1. prepayments made (right to receive future good or service, not cash or a financial asset)
  2. tax receivables and payables and similar items (statutory rights or obligations, not contractual), or
  3. contract liabilities (obligation to deliver good or service, not cash or financial asset).

While contract assets are also not financial assets, they are explicitly included in the scope of IFRS 7 for the purpose of the credit risk disclosures. Liabilities for sales returns and volume discounts (see note 7(f)) may be considered financial liabilities on the basis that they require payments to the customer. However, they should be excluded from financial liabilities if the arrangement is executory. the Reporting entity Plc determined this to be the case. [IFRS 7.5A]

Classification of preference shares

Preference shares must be analysed carefully to determine if they contain features that cause the instrument not to meet the definition of an equity instrument. If such shares meet the definition of equity, the entity may elect to carry them at FVOCI without recycling to profit or loss if not held for trading.

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IFRS 10 Special control approach

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IFRS 10 Special control approach

– determines which entities are consolidated in a parent’s financial statements and therefore affects a group’s reported results, cash flows and financial position – and the activities that are ‘on’ and ‘off’ the group’s balance sheet. Under IFRS, this control assessment is accounted for in accordance with IFRS 10 ‘Consolidated financial statements’.

Some of the challenges of applying the IFRS 10 Special control approach include:

  • identifying the investee’s returns, which in turn involves identifying its assets and liabilities. This may appear straightforward but complications arise when the legal ownership of assets diverges from the accounting depiction (for example, in financial asset transfers that ‘fail’ de-recognition, and in finance leases). In general, the assessment of the investee’s assets and returns should be consistent with the accounting depiction in accordance with IFRS
  • it may not always be clear whether contracts and other arrangements between an investor and an investee
    • create rights or exposure to a variable return from the investee’s performance for the investor; or
    • transfer risk or variability from the investor to the investee IFRS 10 Special control approach
  • the relevant activities of an SPE may not be obvious, especially when its activities have been narrowly specified in its purpose and design IFRS 10 Special control approach
  • the rights to direct those activities might also be difficult to identify, because for example, they arise only in particular circumstances or from contracts that are outside the legal boundary of the SPE (but closely related to its activities).

IFRS 10 Special control approach sets out requirements for how to apply the control principle in less straight forward circumstances, which are detailed below:  IFRS 10 Special control approach

  • when voting rights or similar rights give an investor power, including situations where the investor holds less than a majority of voting rights and in circumstances involving potential voting rights
  • when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements IFRS 10 Special control approach
  • involving agency relationships IFRS 10 Special control approach
  • when the investor has control only over specified assets of an investee
  • franchises. IFRS 10 Special control approach

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1 Best guide Debt instruments at FVOCI

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Debt instruments at FVOCI – A debt instrument is classified as subsequently measured at fair value through other comprehensive income (FVOCI) under IFRS 9 if it meets both of the following criteria:

  • Hold to collect and sell business model test: The asset is held withiSeries provision of distinct goods or servicesn a business model whose objective is achieved by both holding the financial asset in order to collect contractual cash flows and selling the financial asset; and
  • SPPI contractual cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

This business model typically involves greater frequency and volume of sales than the … Read more

Securitisation in 1 Best Complete Reading

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Securitisation entails pooling the cash flows and selling them to investors via a special purpose vehicle, turning ‘illiquid’ assets into a more ‘liquid’ asset.

Factoring without recourse

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Factoring without recourse – This is an illustration of how derecognition is applied in practice. The objective is to present the mechanics of applying the IFRS 9 requirements for derecognition of financial assets, starting with an analysis of the transaction using the flowchart [IFRS 9 B3.2.1], and culminating with the initial and subsequent accounting entries for both the transferor and transferee.

Background and assumptions

Entity G enters into an agreement to assign its portfolio of €20 million trade receivables without recourse to Factor H. The receivables have 60-day terms and are subject to normal warranties on the existence of the receivables at the date of transfer (for example, if a customer returns the goods purchased because they are faulty, … Read more

Factoring with recourse

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Factoring with recourse – This is an illustration of how derecognition is applied in practice. The objective is to present the mechanics of applying the IFRS 9 requirements for derecognition of financial assets, starting with an analysis of the transaction using the flowchart [IFRS 9 B3.2.1], and culminating with the initial and subsequent accounting entries for both the transferor and transferee.

Background and assumptions

Entity J enters into an agreement to assign its portfolio of €20 million trade receivables with recourse to factor K. The receivables have 90-day terms and are subject to normal warranties on the existence of the receivables at the date of the transfer (for example, if a customer returns the goods purchased because they … Read more

Modifications and Write-offs Financial assets

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Modifications Modifications and Write-offs Financial assets

If the contractual cash flows of a financial asset are modified or renegotiated in such a way that does not result in derecognition of that financial asset under IFRS 9 Financial Instruments, entities should recalculate the gross carrying amount of the financial asset on the basis of the renegotiated or modified contractual cash flows. A modification gain or loss would be recognised in profit or loss. Modifications and Write-offs Financial assets

An entity would also be required to consider whether the modification (renegotiation) provides evidence that there may have been a significant increase in credit risk. It is necessary to compare:

  • The credit risk at the reporting date (based on the modified contractual
… Read more

Factoring of trade debtors

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Factoring of trade debtors is by far the most common transaction entered into by non-financial entities that requires assessment against the derecognition criteria. Surprisingly, IFRS 9 does not mention it in its examples. Factoring of trade debtors can serve as a useful example to illustrate derecognition requirements. Factoring of trade debtors

Example: factoring with partial recourse that qualifies for derecognition

Entity A enters into a factoring agreement and sells its portfolio of trade debtors to the Factor. The face value and carrying amount of those debtors are €1 million and the selling price is €0.9 million. After the sale, Entity A absorbs first 1.8% of credit losses of the whole portfolio and the rest is absorbed by the Factor. The … Read more

Sale of specifically identified cash flows

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Sale of specifically identified cash flows – This is an illustration of how derecognition is applied in practice. The objective is to present the mechanics of applying the IFRS 9 requirements forSale of specifically identified cash flows derecognition of financial assets, starting with an analysis of the transaction using the flowchart [IFRS 9 B3.2.1], and culminating with the initial and subsequent accounting entries for both the transferor and transferee.

Background and assumptions

Entity A holds a portfolio of AAA-rated fixed-rate corporate eurobonds classified as at fair value through other comprehensive income, because they are considered available for sale. All bonds mature in approximately five years time.

The bonds are traded in a highly liquid market. Interest rates have fallen since entity A bought the … Read more