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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.
• A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.
• risks and uncertainties are taken into account in the measurement of a provision.
• if measured using risk adjusted cash flow forecasts a provision is discounted to its present value.
• Measure provision at ‘best estimate’ of the amount required to settle the obligation at the reporting date, ie– amount an entity would rationally pay to
settle the obligation at the end of the reporting period; or
– to transfer it to a third party at that time• Review provisions at each reporting date and
adjust them to reflect the current best estimate at that reporting date– unwinding of the discount is a finance cost
• If large population of items, best estimate reflects probability weighting of all possible outcomes.
• If single obligation, best estimate is the adjusted individual most likely outcome
• Present value using pre-tax discount rate/s that reflect current market assessments of the time value of money (& risks specific to the liability if not already reflected in estimated cash flows).
7Examples—measurement of provisions• Ex 1: A has 1,000 units of a product sold with
active warranties (ie A will repair defects found up to 6 months after sale). Probabilities & repair cost: major defect = 5% chance of CU400 repair; minor defect = 20% chance of CU100 repair; 75% chance of no defects.
• Best estimate (expected value) = CU40,000Calculation: (75% x 1,000 units x nil) + (20% x 1,000 units x CU100) + (5% x 1,000 units x CU400)
• Ex 2: Personal injury lawsuit brought by customer. Lawyers estimate 30% chance compensation = CU2,000,000 & 70% chance = CU300,000.
• Ruling expected in 2 years. Discount rate = 4% per year (ie 2‑year government bonds = 5% less 1% risks specific to liability).
Individual most likely outcome = CU300,000. Because only other possible outcome is higher, the best estimate to settle the obligation at 31/12/20X1 will be higher than PV of the most likely outcome of CU300,000, eg PV of CU810,000 at 4% = ±CU748,890
• Ex 3: Provision for a lawsuit = CU40,000 at 31/12/20X1 & remeasured to CU90,000 at 31/12/20X2. CU3,000 of the increase = unwinding of the discount & the remainder is for better information becoming available. The increase of CU50,000 will be recognised as an expense in the determination of the entity’s profit or loss for the year ended 31/12/20X2– CU3,000 = finance cost– CU47,000 = change in estimate
• When disclosure of some or all information normally required by IAS 37 can be expected to prejudice seriously the position of the entity in a dispute then disclose only general nature of the dispute and reason why alternative disclosures made. Note: no recognition and measurement alternative.
• such a situation is expected to be an extremely rare case.
• IAS 37 and Section 21 Provisions and Contingencies of the IFRS for SMEs share similar principles, but the IFRS for SMEs is drafted in simplified language.
• Measuring a provision requires estimating the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.
• the risks and uncertainties that inevitably surround many events and circumstances are taken account in measuring a provision (eg measure a provision at its expected value by weighing all possible outcomes by their associated probabilities).
• A lease is an agreement that conveys to the lessee a right to use an asset for a period of time.
• For accounting purposes, leases are classified as finance leases or operating leases.
• finance leases are accounted for as in-substance purchases (ie recognise the asset ‘acquired’ (eg PPE) and the obligation to make lease payments—a liability)
• operating leases are accounted for as executory contacts—generally no asset/liability recognition
• The leased asset remains in the statement of financial position of the lessor.
• Operating lease payments are usually recognised in profit or loss on a straight-line basis.
• From the perspective of the lessee, if payments are subject to escalation, straight-line recognition is profit or loss may give rise to a liability on the statement of financial position
• the liability reduces as future payments are made
Example—finance leaseOn 1/1/20X1 enter into 5-yr non‑cancellable lease over a machine. Machine’s cash cost = 100,000, economic life = 10 yrs and residual value = 0.Annual lease payments on 31/12: 4 × 23,000 & 23,539 at end of yr 5 when ownership transfers to the lessee.The interest rate implicit in the lease is 5% p.a. which approximates lessee’s incremental borrowing rate.
• A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. – the lease payment & the sale price are usually
interdependent because they are negotiated as a package
– the accounting treatment of a sale and leaseback transaction depends on the type of lease (finance or operating).
• the seller-lessee defers recognition of income (ie does not recognise any excess of sales proceeds over the carrying amount in profit or loss immediately)
• Deferred income is recognised in profit or loss over the lease term
• Section 20 Leases of the IFRS for SMEs does not require lease payments in an operating lease that are structured to increase in line with expected general inflation to be recognised by the lessee or lessor on a straight-line basis, unlike IAS 17.
• IAS 19 specifies accounting for and disclosure of employee benefits by employers.
• It is applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies.
• Information about employee benefits expenses and obligations can help users assess the extent and uncertainty of an entity’s future employee benefit cash outflows. Uncertainties can be significant (eg some pension promises).
• Ex 1: An employee is entitled to 5 days paid sick leave a year. Unused sick leave is carried forward for 1 calendar year. It is allocated on a FIFO basis. No sick leave is expected to lapse.Employee 1 earns 400 per working day. Sick leave record: 4.5 days accumulated at 1/1/20X1; 2 days taken in 20X1. Salary increase = 5% effective 1/1/20X2.
31/12/20X1 liability = CU2,100 (ie CU400 wage rate × 1.05 increase × 5 (max) days due at 31/12/20X1 & expected to be taken in 20X2.
• Ex 2: Same as Ex 1 except sick leave cannot be carried forward to the next calendar year & does not vest (ie is not paid out in cash). No liability at 31/12/20X1 (no obligation).
• Ex 3: Similar to Ex 1 and Ex 2 except sick leave is paid out in cash in January 20X2 payroll at 20X1 salary rate. 31/12/20X1 liability = CU1,200 (ie CU400 wage rate × 3 (5 earned less 2 taken) days due at 31/12/20X1 & paid out in 20X2.
• Ex 4: A pays 3% of year’s profit (before profit sharing) to employees who serve throughout the current year & who will continue to serve throughout the following year. A expects to save 10% through staff turnover. The bonus will be paid on 31/12/20X2.Profit for 20X1 before profit sharing = CU1,000,000.
• Post-employment benefits are payable after the completion of employment.
• Two types:
• defined contribution plan, entity pays fixed contributions to a separate entity (a fund) and has no legal or constructive obligation to pay further contributions if the fund cannot pay the employee.
• all other post-employment plans are defined benefit plans.
• The primary differences between IAS 19 and Section 28 Employee Benefits are:
• Section 28 allows simplification of measurement principles meaning that external specialists may not need to be engaged (ie full application of the projected unit credit method may not be required)
• To measure the liability for a defined benefit post-employment plan (eg mortality, employee turnover, age at and date of retirement, future salary and benefit levels, future medical costs, the discount rate and fair value of plan assets).
• extensive disclosures required to: explain characteristics of the plan and associated risks; identify and explain related amounts in financial statements; possible affects on the amount, timing and uncertainty of future cash flows.
• Measuring obligations for profit-sharing plans often require estimates of expected payments to employees and expected forfeitures if loyalty period applies.
• Accumulating compensated absence schemes (eg some sick leave, holiday leave, maternity leave, military leave and long-service leave schemes) require estimates of expected employee compensated absences.
Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter.
Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.
The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.