Accounting Policies to First IFRS FS – An entity must use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. Those accounting policies must comply with each IFRSs effective at the end of its first IFRS reporting period, unless there is a mandatory exception to retrospective application or an optional exemption from the requirements of IFRSs.
Performance obligations software contracts and cloud services contracts – Once an entity has identified the contract with a customer, it evaluates the contractual terms and its customary business practices to identify all the promised goods or services within the contract and determine which of those promised goods or services (or bundles of promised goods or services) will be treated as separate performance obligations. Performance obligations software contracts
Promised goods and services represent separate performance obligations if they are: Performance obligations in software and cloud services
• Distinct (by themselves or as part of a bundle of goods and services) Performance obligations in software and cloud services
Or Performance obligations in software and cloud services
Mergers and acquisitions (business combinations) can have a fundamental impact on the acquirer’s operations, resources and strategies. For most entities such transactions are infrequent, and each is unique. IFRS 3 ‘Business Combinations’ contains the requirements for accounting for mergers, which are challenging in practice.
This narrative provides a high-level overview of IFRS 3 and explains the key steps in accounting for business combinations in accordance with this Standard. It also highlights some practical application issues dealing with:
how to avoid unintended accounting consequences when bringing two businesses together, and
deal terms and what effect they can have on accounting for business combinations.
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.
IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.
An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see Simple case – Straightforward business combinationbelow). However, a business combination (M and A) may be structured, and an entity may obtain control of that structure, in a variety of ways.
Examples of business combinations structurings
Examples of ways an entity may obtain control
A business becomes the subsidiary of an acquirer
The entity transfers cash, cash equivalents or other assets(including net assets that constitute a business)
Net assets of one or more businesses are legally merged with an acquirer
The entity incurs liabilities
One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners
The entity issues shares
The entity transfers more than one type of consideration, or
Two or more entities transfer their net assets, or the owners of those entities transfer their equity interests to a newly created entity, which in exchange issues shares, or
The entity does not transfer consideration and obtains control for example by contract alone Some examples of this:
‘dual listed companies’ or ‘stapled entity structures’
acquiree repurchases a sufficient number of its own shares for an existing shareholder to obtain control
a condition in the shareholder agreement that prevents the majority shareholder exercising control of the entity has expired, or
a call option over a controlling interest that becomes exercisable.
A group of former owners of one of the combining entities obtains control of the combined entity, i.e. former owners, as a group, retain control of the entity they previously owned.
Therefore, identifying a business combination transaction requires the determination of whether:
what is acquired constitutes a ‘business’ as defined in IFRS3, and
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]
INTRO Repurchase agreements in IFRS 15 – An entity has executed a repurchase agreement if it sells an asset to a customer and promises, or has the option, to repurchase it. If the repurchase agreement meets the definition of a financial instrument, then it is outside the scope of IFRS 15. If not, then the repurchase agreement is in the scope of IFRS 15 and the accounting for it depends on its type – e.g. a forward, call option, or put option – and on the repurchase price.
A forward or a call option
If an entity has an obligation (a forward) or a right (a call option) to repurchase an asset, then a customer does not have control of the asset. This is because the customer is limited in its ability to direct the use of, and obtain the benefits from, the asset despite its physical possession. If the entity expects to repurchase the asset for less than its original sales price, then it accounts for the entire agreement as a lease. [IFRS 15.B66–B67]
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]
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:
type of good or service (eg major product lines)
market or type of customer
type of contract (eg fixed price vs time-and-materials contracts)
contract duration (short-term vs long-term contracts), or
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]
Certain interest rate benchmarks including LIBOR, EURIBOR and EONIA are being or have recently been reformed.
What are interest rate benchmarks?
Interest rate benchmark are used to determine
the amount of interest payable for a wide range of financial products such as derivatives, bonds, loans, structured products and mortgages, and
the valuation of financial products.
The most common examples of interest rate benchmarks used in financial contracts across the world are the London Interbank Offered Rate (LIBOR) and for the Euro, the Euro Interbank Offered Rate (EURIBOR) and Euro Overnight Index Average (EONIA).
Why are these benchmarks being reformed?
As benchmark rates are fundamental to so many financial contracts, they need to be robust, reliable and fit for purpose. Each of these interest rate benchmarks subject to reform were based on the rates at which banks lend to each other in the interbank market.
Financial regulatory authorities have expressed their concern that because interbank lending transactions have significantly decreased in recent years, the benchmark rates may no longer be representative or reliable.
This concern has resulted in recommendations made by the Financial Stability Board towards the global financial industry to reform the major interest rate benchmarks and to develop a set of alternative rates that are more representative of the current financial environment.
IFRS Reporting disclosure amendments
The amendments made to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures provide certain reliefs in relation to interest rate benchmark reform. The reliefs relate to hedge accounting and have the effect that the reforms should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement. Given the pervasive nature of hedges involving interbank offered rates (IBOR)-based contracts, the reliefs will affect companies in all industries.
the extent of the risk exposure that the entity manages that is directly affected by the interest rate benchmark reform
how the entity is managing the process of transition to alternative benchmark rates
a description of significant assumptions or judgements that the entity made in applying the reliefs, and
the nominal amount of the hedging instruments in those hedging relationships. [IFRS 7.24H]
Information about how the entity is managing the transition process will provide users with an indication of the extent to which management is prepared for the transition. For example, this could include explanations about differences in fallback provisions between the hedged item and the hedging instruments.
The amendments are not clear whether the disclosure of the extent of the risk exposure that the entity manages could be provided on a qualitative rather than quantitative basis. However, numerical disclosures may be more useful for users.
Entities should consider whether further disclosure of the impending replacement of IBOR should be provided in other parts of the annual report, for example in management’s discussion and analysis.
Example Disclosure reform of interest rate benchmarks
This Example Disclosure Related party transactions shows the disclosures an entity would have to add if it has a loan with an interest rate based on 3-month GPB LIBOR and a cash flow hedge in the form of a floating-to-fixed rate interest rate swap that is referenced to LIBOR. The disclosures assume that the entity has adopted the hedge accounting requirements of IFRS 9.
While primarily illustrating the disclosures required by the amendments made to IFRS 7 and other hedge accounting disclosures affected by IBOR reform, extracts of other disclosures from the main body of the publication have been included, to provide some context for the additional disclosures.
New or revised disclosures are highlighted with shading. This appendix does not illustrate disclosures that may be required if the terms of the loan and the swap have moved to new benchmark rates.
12 Financial risk management (extracts)
12(a) Derivatives (extracts)
(iv) Hedge effectiveness (extracts)
Hedge ineffectiveness for interest rate swaps is assessed using the same principles as for hedges of foreign currency purchases. It may occur due to:
the credit value/debit value adjustment on the interest rate swaps which is not matched by the loan
differences in critical terms between the interest rate swaps and loans, and
the effects of the forthcoming reforms to GBP LIBOR, because these might take effect at a different time and have a different impact on the hedged item (the floating-rate debt) and the hedging instrument (the interest rate swap used to hedge the debt). Further details of these reforms are set out below. [IFRS 7.22B(c), IFRS 7.23D]
Ineffectiveness of CUXX,XXX has been recognised in relation to the interest rate swaps in other gains or losses in profit or loss for 2020 (2019 CUXX,XXX). The significant increase in ineffectiveness in the current year was caused by the expectation that the interest rate swap and the hedged debt will move from GBP LIBOR to SONIA at different dates. [IFRS 7.24C(b)(ii)]
The group’s main interest rate risk arises from long-term borrowings with variable rates, which expose the group to cash flow interest rate risk. Group policy is to maintain at least 50% of its borrowings at fixed rate, using floating-to-fixed interest rate swaps to achieve this when necessary.
Generally, the group enters into long-term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the group borrowed at fixed rates directly. During 2020 and 2019, the group’s borrowings at variable rate were mainly denominated in Oneland currency units and US dollars. Except for the GBP LIBOR floating rate debt noted below, other variable interest rates were not referenced to interbank offered rates (IBORs) that will be affected by the IBOR reforms. [IFRS7.22A(a),(b), IFRS7.33(a),(b)]
Included in the variable rate borrowings is a 10-year floating-rate debt of CU10,000,000 (2019 CU10,000,000) whose interest rate is based on 3 month GBP LIBOR. To hedge the variability of in cash flows of this loan, the group has entered into a 10-year interest rate swap with key terms (principal amount, payment dates, repricing dates, currency) that match those of the debt on which it pays a fixed rate and receives a variable rate. [IFRS 7.24H(a)]
The group’s borrowings and receivables are carried at amortised cost. The borrowings are periodically contractually repriced (see below) and to that extent are also exposed to the risk of future changes in market interest rates.
The exposure of the group’s borrowings to interest rate changes and the contractual re-pricing dates of the borrowings at the end of the reporting period are as follows: [IFRS 7.22A(c), IFRS 7.34(a), IFRS 7.24H(b)]
Amounts in CU’000
% of total
Variable rate borrowings – GBP LIBOR
Variable rate borrowings – non-IBOR
Fixed rate borrowings – repricing or maturity dates:
– Less than one year
– 1 – 5 years
– Over 5 years
An analysis by maturities is provided in note 12(d) below. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total amount of borrowings.
Instruments used by the group
Swaps currently in place cover approximately 37% (2019 – 37%) of the variable loan principal outstanding. The fixed interest rates of the swaps range between 7.8% and 8.3% (2019 – 9.0% and 9.6%), and the variable rates of the loans are between 0.5% and 1.0% above the 90 day bank bill rate or LIBOR which, at the end of the reporting period, were 8.2% and x.x% respectively (2019 – 9.4% and x.x%). [IFRS 7.22B(a), IFRS 7.23B]
The swap contracts require settlement of net interest receivable or payable every 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. [IFRS 7.22B(a)]
Effects of hedge accounting on the financial position and performance
The effects of the interest rate swaps on the group’s financial position and performance are as follows:
Following the financial crisis, the reform and replacement of benchmark interest rates such as GBP LIBOR and other interbank offered rates (‘IBORs’) has become a priority for global regulators. There is currently uncertainty around the timing and precise nature of these changes. [IFRS 7.24H(b)]
To transition existing contracts and agreements that reference GBP LIBOR to SONIA, adjustments for term differences and credit differences might need to be applied to SONIA, to enable the two benchmark rates to be economically equivalent on transition.
Group treasury is managing the group’s GBP LIBOR transition plan. The greatest change will be amendments to the contractual terms of the GBP LIBOR-referenced floating-rate debt and the associated swap and the corresponding update of the hedge designation. However, the changed reference rate may also affect other systems, processes, risk and valuation models, as well as having tax and accounting implications. [IFRS 7.24H(c)]
The group has applied the following reliefs that were introduced by the amendments made to IFRS 9 Financial Instruments in September 2019:
When considering the ‘highly probable’ requirement, the group has assumed that the GBP LIBOR interest rate on which the group’s hedged debt is based does not change as a result of IBOR reform.
In assessing whether the hedge is expected to be highly effective on a forward-looking basis the group has assumed that the GBP LIBOR interest rate on which the cash flows of the hedged debt and the interest rate swap that hedges it are based is not altered by LIBOR reform.
The group has not recycled the cash flow hedge reserve relating to the period after the reforms are expected to take effect.
In calculating the change in fair value attributable to the hedged risk of floating-rate debt, the group has made the following assumptions that reflect its current expectations:
The floating-rate debt will move to SONIA during 2022 and the spread will be similar to the spread included in the interest rate swap used as the hedging instrument.
No other changes to the terms of the floating-rate debt are anticipated.
The group has incorporated the uncertainty over when the floating-rate debt will move to SONIA, the resulting adjustment to the spread, and the other aspects of the reform that have not yet been finalised by adding an additional spread to the discount rate used in the calculation. [IFRS 7.24H(d)]
Reform of interest rate benchmarks
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