ifrs update not-for-profit

1: IFRS Update �Not-for-profit�

2: Overview of presentation a recap of the major issues; lessons learned so far; case studies; and preparing your first set of accounts under the new standards

3: Structure of framework IFRSs will form the 1-99 series ie AASB1 = IFRS1 IASs will form the 100 � 999 series ie AASB 138 = IAS 38 Existing standards not for retraction will form the 1000+ series ie AASB 1031 = AASB 1031 � 'materiality' Consequential changes series by year i.e. 2004-1, 2005-1 etc. AASB 1048

4: Key dates � December Y/E

5: Key dates � June Y/E

6: Main requirements of AASB 1 First set of A-IFRS accounts Recognition Derecognition Reclassifications Disclosures Exemptions

7: Scope First financial report Interim financial report Explicit statement

8: Case study 1

9: Key definitions Date of transition to A-IFRS Deemed cost

10: Recognition and measurement Opening B/S Accounting policies: Current A-IFRS standards Recognition Derecognition Reclassificaton

11: Exemptions from other A-IFRS Business combinations: Retrospective application AASB 121 Derecognition Goodwill Retained earnings Deemed cost

12: Exemptions from other A-IFRS Value of goodwill: Adjustments Contingencies Impairment

13: Exemptions from other A-IFRS Deemed cost: Cost Revalued GAAP amount Fair value PPE Investment properties Intangibles

14: Exemptions from other A-IFRS Employee benefits: Defined benefit plans: Corridor approach Cumulative actuarial gains/losses Cumulative translation differences: Deemed to be zero Subsequent exclusions

15: Exemptions from other A-IFRS Decommissioning and restoration: UIG interpretation 1 Measurement of liability Present value of liability Accumulated depreciation

16: Case study 2

18: Presentation and disclosure Comparative information Exemptions: AASB 132, AASB 139, AASB 6, AASB 4, AASB 1023 and AASB 1038 Previous GAAP Disclose basis of preparation Disclose main adjustments Date of transition

19: Presentation and disclosure Reconciliations: Equity: Date of transition End of last GAAP period Profit and loss Impairment losses

20: Presentation and disclosure AASB 108 Designation of financial assets and financial liabilities: Fair value Deemed cost: Disclosures

21: AASB 102: Inventories NRV Current replacement cost Inventories held for distribution

22: AASB 102: Inventories Cost of inventories Subsequent measurement of inventories Not reliant on the inventories ability to generate net cash inflows

23: AASB 108: Accounting Policies, changes in Accounting estimates & errors Voluntary changes Prior period errors Accounting estimates

24: Main requirements of AASB 116 prescribes requirements for recognition and measurement at recognition; prescribes measurement after recognition, and derecognition of PPE assets; prescribes requirements for depreciation of PPE assets; requires that all PPE assets be subjected to the requirements of AASB 136 Impairment of Assets; and requires disclosures about PPE.

25: Differences between AASB 116 and existing standards Tangible assets Revaluations individual assets Deferred settlement discounted to P.V cash price equivalent Ceasing to revalue Assets acquired at zero or nominal value

26: Case study 3

27: Case study solution � Profit entity

28: Case study solution � Not-for-profit entity

29: Key definitions PPE Recoverable amount Residual value Useful life

30: Scope Excludes: AASB 5; AASB 140; AASB 141; and AASB 6.

31: Recognition Criteria: probable; ad reliable. Spare parts: consumables Unit of measure Measurement at recognition

32: Case study 4

33: Recognition Elements of cost: purchase price; costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

34: Recognition Measurement of cost: cash price equivalent deferred payment: excess recorded as interest AASB 123

35: Subsequent costs Servicing Repairs and maintenance

36: Case study 5

37: Measurement after recognition Cost model Revaluation model: regularity

38: Case study 6

39: Measurement after recognition Classes of assets: land; land and buildings; machinery; ships; aircraft; motor vehicles; furniture and fixtures; and office equipment.

40: Measurement after recognition Revaluation increases and decreases: classes of assets; increments; decrements; and offsets.

41: Case study 7

42: Case study 7 - solution Original depreiaction $1m/20 years = $50,000 p.a. Current depreciation $1.35m/18 years = $75,000 p.a. Difference $25,000 p.a.

43: Depreciation Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately Depreciable amount Depreciable period

44: Depreciation Review of residual value and useful life AASB 108 Depreciation method Review of depreciation method

45: Case study 8

46: Derecognition The carrying amount of an item of PPE shall be derecognised: on disposal; or when no future economic benefits are expected from its use or disposal. Treatment of gain/loss

47: Disclosures Class of PPE: measurement basis depreciation methods useful lives carrying amounts reconciliations

48: Disclosures Other disclosures: restrictions construction expenses contractual commitments compensation

49: Disclosures AASB 108 Revaluations: date assumptions calculation of fair values carrying amount under cost model

50: Case study 9

51: Case study 9 - solution Frequency of revaluations Assess at each reporting date: external indicators; and internal indicators.

52: Assets removed from PPE Investment properties: definition construction of investment properties initial recognition subsequent measurement Software costs

53: Assets removed from PPE AASB 5 definition measurement depreciation presentation

54: AASB 123 Borrowing Costs Benchmark treatment Alternative treatment Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined in accordance with this Standard.

55: AASB 117 Straight lining operating leases Make good provisions

56: Case study 10

57: Case study 10 (a) - solution

58: Case study 10 (b) - solution

59: AASB 117 � make good provisions AASB 137 requires a provision for make good costs shall be recognised when: an entity has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.

60: Financial statement impact

61: AASB 119 � Employee provisions Short-term v long-term Sick leave Accumulating Non-accumulating Accounting for: Short-term benefits Long-term benefits

62: AASB 119 � Example An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current year�s entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 20X1, the average unused entitlement is two days per employee. The entity expects, based on past experience which is expected to continue, that 92 employees will take no more than five days of paid sick leave in 20X2 and that the remaining eight employees will take an average of six and a half days each.

63: AASB 119 � Defined benefit sup�n Corridor approach All actuarial gains/losses Past service cost Example

64: Main requirements of AASB 136 Ensures assets are not carried at amounts in excess of their recoverable amounts Concept of �cash-generating units� Impairment indicators Finite and indefinite useful lives Treatment of goodwill

65: Differences between AASB 136 and AASB 1010 AASB 136 applies to all assets Impairment indicators Discounted cash flows

66: Key definitions Active market Cash-generating unit Recoverable amount

67: Asset impairment Annual testing for: indefinite lives; not yet available for use; and goodwill. Impairment indicators: External sources Internal sources

68: Recoverable amount Net fair value Value in use Depreciated Replacement cost Cash-generating unit Useful life

69: Example White Cross (W.C) (a charitable organisation) owns it office building which was constructed 5 years ago and has a carrying amount of $450,000 on their books. W.C. depreciates the building at 5% on a straight line basis. On reviewing their impairment indicators W.C. has found one present for the building. An expert has valued the NRV of the building to be $400,000 and the current replacement cost to be $600,000. Is the building impaired?

70: Solution AASB 136 paragraph AUS 32.1 Depreciated replacement cost = $600k - 600k * 5% * 5 years = $600k � 150k = $450k

71: Formula Recoverable Amount = Higher of Net Fair Value or Value in Use/Depreciated replacement cost

72: Impairment loss Generally recognised in P&L Depreciation/amortisation charge adjusted Liability?

73: Cash-generating units Where an asset belongs to a cash-generating unit and there is an indication it is impaired the entity shall determine the recoverable amount of the cash-generating unit to which the entity belongs

74: Case study 11

75: Goodwill Allocated to a cash-generating unit Apportioned to the asset or part of the unit sold

76: Timing of impairment tests Annual Where impairment indicators exist

77: Other Treatment of corporate assets Impairment losses for cash-generating units: Goodwill Other assets

78: Case study 12

79: Case Study 12 - Solution

80: Reversing impairment losses Indicators Individual assets Cash-generating units

81: Case study 13

82: Case Study 13 - Solution

83: Case Study 13 � Solution contd

84: Reversing impairment losses Goodwill

85: Disclosures More extensive than AASB 1010!

86: Conclusion First Time Adoption Determining Cash Generating Units Calculating Value in Use

87: AASB 138 - Intangibles Prohibition on internally generated brands, mastheads etc. Revaluation only with reference to an active market Treatment of R&D

88: First time adoption of AASB 7 1 Jan 2007 Early adoption Comparatives

89: Main requirements of AASB 7 Presentation and disclosure requirements for financial instruments including: significance on an entity�s financial position and performance; and qualitative and quantitative information about exposure to risks.

90: Scope The Standard applies to all types of financial instruments, both recognised and unrecognised, except: AASB 127, AASB 128 and AASB 131; AASB 119; AASB 3; AASB 4; and AASB 2. Application to different entities.

91: AASB 7 Vs AASB 132 AASB 7 will supersede the disclosure requirements of AASB 130 and AASB 132 enhanced balance sheet and income statement disclosures both quantitative and qualitative disclosures required parent entity disclosures

92: Definitions Credit risk Currency risk Interest rate risk Liquidity risk Market risk Other price risk

93: Key requirements of AASB 7 Balance sheet financial assets at fair value through profit or loss; held-to-maturity investments; loans and receivables; available-for-sale financial assets; financial liabilities at fair value through profit or loss; and financial liabilities measured at amortised cost.

94: Key requirements of AASB 7 Income statement disclosures for: loan or receivable (or group of loans or receivables) at fair value through profit or loss; and financial liability at fair value through profit or loss.

95: Key requirements of AASB 7 Reclassifications Derecognition Collateral Defaults and breaches

96: Key requirements of AASB 7 Income statement disclosures for financial instruments: net gains or net losses; total interest income and total interest expense; fee income and expense; interest income on impaired financial assets; and the amount of any impairment loss for each class of financial asset.

97: Key requirements of AASB 7 Hedge accounting: a description of each type of hedge; a description of the financial instruments designated as hedging instruments and their fair values at the reporting date; the nature of the risks being hedged; fair value of hedges; and Hedge ineffectiveness in P&L.

98: Key requirements of AASB 7 Qualitative disclosures: Credit risk Liquidity risk Market risk

99: First time adoption of AASB 132 1 Jan 2005 Early adoption Comparatives

100: Main requirements of AASB 132 clarifying the liability and equity classification of financial instruments; prescribing conditions under which assets and liabilities may be set-off; and requiring disclosure of fair value for each class of financial assets and financial liabilities.

101: Scope The Standard applies to all types of financial instruments, both recognised and unrecognised, except: AASB 127, AASB 128 and AASB 131; AASB 119; AASB 3; AASB 4; and AASB 2.

102: Differences between AASB 132 and 1033 Converting instruments: securities that vary with changes in their fair value, but conversion is not mandatory; and resetting preference shares. In-substance defeasance Fair value disclosures Puttable financial instruments

103: Differences between AASB 132 and 1033 Fair value and reliability Derivative disclosures Interest rate disclosures: Fourth approach weighted average rates or a range of rates may be presented for each class of financial instrument

104: Key definitions Financial instrument Financial asset Financial liability Equity instrument

105: Liabilities and Equity the instrument is an equity instrument if, and only if: The instrument includes no contractual obligation: to deliver cash or another financial asset to another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer.

106: If the instrument will or may be settled in the issuer�s own equity instruments, it is: a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. Liabilities and Equity (cont.)

107: Case study 14

108: Settlement options When a derivative financial instrument gives one party a choice over how it is settled (e.g. the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an equity instrument.

109: Case study 15

110: Compound financial instruments The issuer of a non-derivative financial instrument shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments in accordance with the substance of the contractual arrangement and the definitions of a financial liability.

111: Compound financial instruments: Example 2,000 convertible bonds. The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.

112: Compound financial instruments: Example

113: Other issues Treasury shares Interest, Dividends, Losses and Gains Offsetting a Financial Asset and a Financial Liability legally enforceable right to set off the recognised amounts; and intention either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

114: AASB 132 Disclosures Refer detailed notes and AASB 7 discussion

115: First time adoption of AASB 139 1 Jan 2005 Early adoption Comparatives Initial values Grandfather rules

116: Main requirements of AASB 139 The Standard establishes principles for recognising and measuring financial assets and financial liabilities including derivatives and certain embedded derivatives

117: Contents of AASB 139 Measurement & accounting for financial assets & liabilities Derecognition of financial assets & liabilities Derivatives & embedded derivatives Hedge accounting

118: Differences to existing standards AASB 139 does not supersede any equivalent Australian Accounting Standard

119: Scope The Standard applies to all types of financial instruments, both recognised and unrecognised, except: AASB 127, AASB 128 and AASB 131; AASB 119; AASB 3; AASB 4; and AASB 2.

120: Key Definitions � AASB 139 Derivative Firm commitment Forecast transaction Hedge effectiveness Amortised cost Effective interest method

121: Amortised cost and effective interest method Example: A $1M 3 year bond with a coupon rate of 6% is purchased 1 July 2005 at 5% discount, yield of 7.9% calculated as follows:

122: Solution

123: Categories of financial instruments On recognition of financial instruments they are to be classified into one of the following: - held for trading (HFT) - held to maturity (HTM) - loans & receivables - available for sale (AFS)

124: Categories of financial instruments Classification determines method of measurement & movement recognition

125: Held for trading (HFT) HFT defined as: - acquired or incurred principally for the purpose of selling or repurchasing it in the near term - part of portfolio that are managed together for which there is evidence of recent pattern of short term profit taking - a derivative (except hedging instrument)

126: Held for trading (HFT) Financial asset or liability designated when initially recognised to be carried at fair value except those equity instruments without an active market Measured at fair value with changes in fair value taken to profit or loss Classification irreversible

127: Held to maturity (HTM) HTM's are defined as non derivative financial assets with fixed or determinable payments & fixed maturity that an entity has the intention of holding to maturity other than: - instruments designated to be held at fair value on recognition & fair value movement taken to P/L - instruments designated as for sale - loans & receivables

128: Held to maturity (HTM) Measured at amortised cost subject to impairment

129: Loans & receivables Are non-derivative financial assets with fixed or determinable payments that are not quoted other than: - those for immediate or near term sale which are classified for trading or designated on recognition to carried at fair value with movements recognised in P/L

130: Loans & receivables - those designated for sale - interest in a mutual fund or similar Measured at amortised cost, subject to impairment

131: Available for sale (AFS) Non derivative financial assets designated available for sale or not classified in other categories Measured at fair value with change in value recognised directly in equity

132: Available for sale (AFS) On derecognition related amount in equity is transferred to P/L Most losses brought to account in P/L immediately

133: Case study 16

134: Case study 16 � solution (a)

135: Case study 16 � solution (b) sale

136: Case study 16 � solution (b) cont.

137: Case study 16 � discussion issues Invested in a number of different shares? Invested in non-listed shares?

138: Other issues Term deposits? Cash Management accounts?

139: 2005-4 Application date Fair value through profit and loss restricted, must result in more relevant information because either: significantly reduces a measurement or recognition inconsistency; or performance is evaluated on a fair value basis

140: Impairment Specific guidance of indicators of impairment of financial assets Indicators include: - breach of contract such as default or delinquency - lender granting concessions - probable bankruptcy of borrower - disappearance of active market - adverse change in status of borrower

141: Impairment Can adjust carrying value directly or via allowance & reverse same way Impairment losses must be based on objective evidence Effect of disallowing general provisions e.g. against doubtful debts Assessment on collective basis

142: Debtor provisioning Highglo Ltd has a policy of providing for 2% of debtors as doubtful Glolow has a policy of providing the following percentage of debtors as doubtful: Over 90 days 20% 60-90days 10% 30-60 days 5% 0-30 days 0%

143: Case study 17

144: Case study 17 � discussion issues Bond with a yearly ded�n 2.5% Reliable measurement of expected repayment is possible

145: Case study 18

146: Action points establish procedures to identify all financial instruments and inventory all instruments noting terms and conditions consider classifications consider whether entity intends to designate an initial recognition as at fair value through P/L consider systems to classify & fair value account

147: Action points consider knowledge & resources needed for fair value accounting assess impact on hedging strategies, documentation & monitoring related systems changes create checklists for checking for existence of embedded derivatives

148: IFRS accounts � Income Statement

149: IFRS accounts � Income Statement (cont)

150: IFRS accounts � Balance Sheet

151: IFRS accounts � Balance Sheet

152: IFRS accounts � Changes in Equity

153: IFRS accounts � Cash Flow

154: IFRS accounts � Cash Flow

155: Questions?