Résume IFRS Meleke

8/7/2019 Résume IFRS Meleke

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IASB Standards & Interpretations ² IFRS in Europe &Belgium

1. IASB objectives

Develop, in the public interest, a single set of high quality, understandable and

enforceable global accounting standards that require high quality, transparent, andcomparable information in financial statements and other financial reporting to help

participants in the various capital markets of the world and other users of the information

to make economic decisions;

To promote the use and rigorous application of those standards;

To work actively with national standard setters to bring about convergence of national

accounting standards and IFRSs to high quality solutions.

2. IFRS in Europe

All EU companies listed on a regulated market have to prepare their consolidated financial

statements in accordance with International Financial Reporting Standards as from 2005 at thelatest ( European Regulation 1606/2002 dated July 19, 2002). There exists the possibility to extend the

obligation or to permit the application of IFRS to:

- Non-listed companies for consolidated financial statements;

- Individual financial statements.

3. IFRS in Belgium

Royal decree 4 December 2003 Consolidated financial statements of listed entities- allowed before 2005;- required from 2005 onwards;

Individual financial statements are not permitted.Royal decree 5 December 2004 Non listed credit institutions shall apply IFRS for their

consolidated financial from 2006 onwards.Royal decree 18 January 2005 Non listed entities are allowed to use IFRS for their

consolidated financial statements. Once taken, the decisionis irrevocable.

Royal decree 21 June 2006 All Belgian listed Real Estate Investment Trusts (SICAFImmobilière) shall apply IFRS also for the preparation of their individual financial statements as from 2007.



IAS 1 ² Presentation of Financial Statements

1. Components of a complete set of FS

Statement of financial position Balance sheet (B/S)Statement of comprehensive income In a single statement of comprehensive income, or in

two statements:- a statement displaying components of profit or loss

( s eparate income s tatement );- a second statement beginning with profit or loss

and displaying components of othercomprehensive income (´s tatement of comprehen s ive incomeµ ).

Statement of changes in equity All changes in equity must be recorded. Changes inequity other that those with equity holders are recordedin the ´s tatement of recognized income and expen s e s µ .

Statement of cash flowsNotes Summary of significant accounting policies and other

explanatory information.

2. Statement of financial position (Balance Sheet): Structure and content

A clear distinction between non-current and current is required. A presentation based on the

degree of liquidity is permitted if it offers a more relevant and reliable statement.

The current assets & liabilities are represented:

- Realized/settled in the normal course of operating cycle;

- Held for trading purpose;

- Realized/settled within 12 months of the B/S date;- Cash or cash equivalent not restricted in use for at least 12 months.

The post-B/S events (refinancing, correction of defaults) do not affect the classification as

current. Moreover, disclosures are required on face or in notes e.g. relevant sub-classifications of

items on the face or information on share capital.

3. Statement of Comprehensive Income: Structure and content

The compulsory line items on face of Statements of Comprehensive Income are:

1) Revenue;

2) Finance costs;3) Share of the profit or loss of associates and joint ventures accounted for using the equity

method;4) Tax expense;5) A single amount comprising the total of:

- The post-tax profit/loss of discontinued operations and;- The post-tax gain/loss recognized on the measurement to fair value less costs to sell or on

the disposal of the assets or disposal group(s) constituting the discontinued operation;6) Profit or loss;



7) Each component of other comprehensive income classified by nature;8) Share of the other comprehensive income of associates and joint ventures accounted for

using the equity method;9) Total comprehensive income.

The expenses recorded in the Comprehensive Income Statement are analyzed on basis of theirnature of function (+ disclosure on the nature).

The components of other comprehensive income include:

Changes in revaluation surplus (IAS 16 - PP&E and IAS 38 ² Intangible Assets);

Gains or losses arising from translating the financial statements of a foreign operation

(IAS 21 ² The effects of Change in Foreign Exchange Rates);

Gains or losses on remeasuring available-for-sale financial assets (IAS 39 ² Financial

instruments: Recognition and Measurement);

The effective portion of gains and losses on hedging instruments in a cash flow hedge

(IAS39); Actuarial gains and losses on defined benefit plans recognized in accordance with

paragraph 93A of IAS 19 ² Employee Benefits.

4. Overall considerations

Fair presentation: achieved trough application of IFRS;

Going concern (the cie will operate under going concern/is the activity still worth?): no

intention to liquidate or to cease trading;

Accrual basis ² transaction and events: one specific operation should appear in the period

it occurred and also all the other transactions or things related to it;

Consistency: presentation & classification have to be retained over time;

Materiality & aggregation:

- Material are presented separately;

- Immaterial are aggregated over time;

Offsetting (compensating): an entity shall not offset assets and liabilities or income and

expenses, unless required or permitted by IFRS;

Comparative information: included narrative and descriptive information.



Tangible assets: IAS 16 ² Property, Plant and Equipment

1. Definitions

Property, plant and equipment (PP&E) are tangible assets that are held for use in the

production or supply of goods/services, for rental to others, or for administrative

purposes. They are expected to be used during more than one period.

Cost: the amount of cash or cash equivalents paid and the fair value of the other

consideration given to acquire an asset at the time of its acquisition or construction.

Depreciation: the systematic allocation of the depreciable amount of an asset over its

useful life.

Useful life: the period over which an asset is expected to be available for use by an entity

OR the number of production or similar units expected to be obtained from the asset by

an entity (reviewed at least at each closing. If revision change in accounting estimate).

Depreciable amount: the cost of an asset, or other amount substituted for cost, less its

residual value.

R esidual value of an asset: estimated amount that an entity would currently obtain

from the disposal of the asset, after deducting the estimated costs of disposal, if the asset

was already of the age and in the condition expected at the end of its useful life (reviewed

at least at each closing. If revision change in accounting estimate).

Fair value: the amount for which an asset could be exchanged between knowledgeable, willing parties in an arms· length (independent) transaction.

Impairment of loss (RVA): the amount by which the carrying amount of an asset

exceeds its recoverable amount.

Carrying amount: the amount at which an asset is recognized after deducting any

accumulated depreciation and accumulated impairment losses.

R ecoverable amount: the higher of an asset·s net selling price (net book value) and its

value in use.

2. Recognition

The cost of an item of PP&E shall be recognized as an asset if and only if it·s probable that

future economic benefits associated with the item will flow to the entity and that the cost of the

item can be measured reliably.

The same recognition principle accounts for:



- Costs incurred initially to acquire or construct an item of PP&E;

- Costs incurred subsequently to add to, replace part of, or service an item.

The ćomponent accountingµ means that we can allocate the amount initially recognized in

respect of an item of PP&E to its significant parts (but then, also separate depreciation,

recognition/de-recognition of the cost to replace a significant part, separate major inspections).

Example: a building = a lift + air -conditioning system + concrete parts of the building +

«

When repair and maintenance occur, we have to make the distinction between:

- The cost of day-to-day servicing: cost of labor, consumables and eventually small parts =

expensed as incurred;

- The cost of the ´major inspectionµ: is treated as a separate significant part whose cost

(services, small parts, labor, etc.) is deducted from the remainder of the item of PP&E (i.e.

part with the longest useful life). In other words, it is not recorded in addition to the costs of

the assets.

a) Measurement at recognition (initially)

A PP&E item is initially measured at cost. The elements of cost are:

1. Purchase price, import duties and purchase taxes, less trade discounts and rebates;

2. Directly attributable costs of bringing the asset to the location and condition necessary

for it to be capable of operating in the manner intended by management.

3. Initial estimate of the costs of dismantling and removing the item and restoring the site

on which it is located IFRIC 1 ² Ć hange s in Exi s ting Decommi ss ioning, Re s toration and

Similar Liabilitie s

µ applies to changes that result from changes in the estimated timing oramount of the outflow of resources required to settle the obligation, or a change in the

discount rate.

Directly attributable costs Costs excluded- Costs of employee benefits arising directly

from the construction or acquisition of theitem of PP&E;

- Costs of site preparation;- Initial delivery and handling costs;- Installation and assembly costs;

- Testing costs (after deducting the proceedsfrom the testing phase);

- Professional fees (lawyers, etc).

- Costs of opening a new facility;- Costs of introducing a new

product/service (advertising/promotionalactivities);

- Administration and other generaloverheads;

- Costs of relocating or reorganizing part orall of an entity·s operations.

The measurement of cost is equal to the cash price equivalent at the recognition date. If the

payment is deferred beyond normal credit terms, we must recognize as interests over the period

the difference between the cash price equivalent and the total payment.



b) Measurement after recognition

The ćost modelµ: cost less accumulated depreciation and impairment losses.

The ´revaluation modelµ: revalued amount being the fair value less accumulated depreciation and

impairment losses.

The revaluation model can be only used if the fair value can be measured reliably. The

revaluations should be made with sufficient regularity and for the entire class of PP&E.

R evaluation model

Increase DecreaseCredited directly to equity (revaluation surplus)but recognized in P&L to the extent that itreverses a revaluation decrease of the sameasset previously recognized in P&L.

Recognized in P&L but debited directly toequity to the extent of any credit balanceexisting in the revaluation surplus in respect of that asset.

The ´depreciationµ: each significant part is depreciated separately. The depreciation begins whenthe asset is available for use and does not cease when the asset becomes idle (non utilisé) or is

retired from active use and held for disposal. The depreciation is reviewed at least at each closing

and if revision is required, we have to change the accounting estimate.

The depreciation method reflects the pattern in which the asset·s future economic benefits are

expected to be consumed (straight-line method or sum-of-the units).

Significant parts having the same useful life and depreciation method may be grouped in

determining the depreciation charge.

The depreciation charge is an expense unless it is included in another asset. In this case, the

depreciation charge will be included in the total costs of the built asset.

If the residual value > carrying amount, the depreciation charge is zero (no reversal of previous

depreciation).

Depreciation: example

Cost: 100 (cost model used)

Useful life initially estimated: 5 years (linear)

R esidual value initially estimated: 20

Change in estimates as of year 3

- Total estimated useful life: 7 years- R esidual value: 10

Depreciation charge in year 1 and 3?

Year 1

Useful life: 5 years Cost: 100 R esidual value: 20

Year 3

R emaining useful life: 5 years Cost: 68 R esidual value: 10



= Depreciable amount: 80 = (100-20) depreciation= 80/5= 20

Carrying value after year 1= 100 ² 16 = 84 Carrying value after year 2= 84 ² 16= 68

= Depreciable amount: 58 = (68-10) depreciation= 58/ (7-2) = 11.6

Carrying value after year 3: 68 ² 11.6= 56.4

c) Impairment (see IAS 36 ² Impairment of assets)

The compensation for items of PP&E that were impaired, lost or given up is included in P&L

when the compensation becomes receivable.

d) Derecognition (when do I take my assets away from the balance sheet?)

The item of PP&E is eliminated from the B/S when the company disposes of it (sells it) or when

no future economic benefits are expected from the use or the disposal.

The gains or losses on disposal (recognized in the income statement) are equal to the proceeds

less the carrying amount.



IAS 38 ² Intangible assets

1. Definitions

R esearch: original and planned investigation undertaken with the prospect of gaining

new scientific or technical knowledge or understanding.

Development: application of all research findings or other knowledge to a plan or a

design for the production of new or substantially improved materials/devices/

products/processes/systems/services before the start of commercial production or

use.

An (intangible) asset is identifiable when it:

- Separable;

- Arises from contractual or other legal rights, regardless of whether those right are

transferable or separable from the entity or from other rights and obligations (ex: software

that can only be used with a specific machine asset but if we sell the machine, the software will be included in the cost = considered as PP&E).

An (intangible) asset meets the control criterion when it has the power to obtain the

future economic benefits flowing from the underlying resource and the power to

restrict the access of others to those benefits.

Research costs, internally skilled staff, training, customer lists, portfolio of customers, etc. are

never capitalized under IFRS because the company can·t controlled them.

Indefinite useful life (a brand): no amortization, but annual test of impairment

according to IAS 36 ² Í mpairment of a ss et s

Finite useful life: allocation of the depreciable amount (cost ² residual value/zero in

most of the cases) on a systematic basis over the useful life.

2. Recognition and measurement

An intangible asset should be recognized when it·s probable that future economic benefits

associated with this asset will flow to the enterprise and when the cost of this intangible asset can

be measured reliably.

a) ´Separate acquisitionµ

Recognition Probably criterion = always satisfied Reliable measurement = usually satisfied

Measurement At cost Cost components when purchase = purchase price, import duties and

purchases taxes, directly attributable expenditures of preparing theasset for its use less trade discounts and rebates.



b) Acquisition in a business combination

Recognition Probably criterion = always satisfied Reliable measurement = (refutable) presumption when finite useful

lifeMeasurement At fair value based on

- Quoted market prices (active market);- If no active market, use techniques to estimate fair value

(multiples/profitability, discounted future cash flows, etc.).

c) Internally generated assets

Goodwill Not recognized as an asset (expense to P&L)Brands, mastheads, publishing titles, customer lists and similaritems in substance

Expense to P&L

Research An intangible asset arising from research should not be

recognized. All expenditure on research should be expensed when incurred.Development See below

Development:

Development costs are capitalized if, and only if:

- The definition and recognition criteria are met;

- A list of other criteria is met (technical feasibility, intention to complete, availability of

resources, etc.).

Examples of development activities: design, construction and testing of pre-production or pre-

use prototypes and models; design of tools/jigs/moulds/dies involving new technology, etc.

Development expenditures are incurred from the date when the intangible asset first meets the

recognition criteria. The company can·t reinstate the expenditure previously recognized as an

expense.

The development costs comprise all directly attributable costs necessary to create, produce and

prepare the asset to be capable of operating in the manner intended by the management.

d) Recognition of an expense

The expense can·t be recognized as an intangible asset if the definition and recognition criteria

are not met (expense).

Specific examples are: start-up costs, training and advertising costs, relocation costs, etc.



3. Measurement after recognition

The ćost modelµ: cost less accumulated amortization and impairment losses.

The useful life is reviewed at the end of each financial year-end. Changes in accounting estimate

are accounted prospectively (= corrections if not correct but recorded the following year because

we can·t change the past!).

The residual value is assumed to be zero in most of the cases and should be reviewed at the end

of each financial year-end.

a) Amortization

The ámortization methodµ: the method shall reflect the pattern in which the asset·s economic

benefits are expected to be consumed. The straight-line method is used unless another pattern

can be determined reliably. The amortization should be reviewed at the end of each financial

year-end and begins when the asset is available for use. The amortization charge is recognized in

the P&L.

The amortization ceases when the asset is classified as held for sale in accordance with IFRS 5-

́N on current Ass et s Held for Sale and Di s continued Operation s µ or when the asset is derecognized.

b) Impairment: see IAS 36 ² Í mpairment of Ass et s µ

c) Retirements and disposals

The intangible asset can be eliminated from the B/S when the company disposes of it or when

no future economic benefits are expected from its use or disposal (i.e. no sale).

The gains or losses on disposal (recognized in the P&L) are equal to the proceeds less the

carrying amount.



IAS 36 ² Impairment of Assets

1. Assets in the scope of IAS 36

IAS36 applies to all assets other than:

- Inventories (IAS2);- Assets arising from construction contracts (IAS11);

- Deferred tax assets (IAS 12);

- Assets arising from employee benefits (IAS 19);

- Financial assets (IAS 32);

- Investment property (IAS 40).

2. Definitions

An asset is impaired when the carrying amount exceeds its recoverable amount.

Carrying amount: the amount at which an asset is recognized in the B/S after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon.

R ecoverable amount: the higher of an asset·s fair value less costs to sell and its value in

use RA = (FV ² C to C) + value in use

3. When do we have to perform an impairment test?

At each B/S date, a review should be performed to assess whether there is any indication that an

asset may be impaired (external & internal indicators).

External sources Internal sources

- Market value;- Changes in environment (technological,

legal, market, economical);- Market capitalization.

- Obsolescence or physical damage;- Changes in the use (restructuring, disposal,

etc.);- Lower economic performance than

expected (negative or lost budget).

If there is an indication that an asset may be impaired, than the company have to perform an

impairment test. Irrespective whether there is an indication of impairment, an entity shall also test

annually for impairment:

- Intangible assets with an indefinite useful life;

- Intangible assets not yet available for use;

- Goodwill (only consolidation goodwill = prices for the consolidation and the asset

bought).

An indication that an asset may be impaired may indicate that the asset·s useful life/depreciation

method/residual value may need to be reviewed and adjusted.



4. Fair value less cost to sell (FV ² C to S) = Net Selling Price ( NSP)

The fair value is the amount obtainable from the sale of an asset in an arm·s length transaction

between knowledgeable, willing parties less the costs of disposal.

If we are in the case of an active market: NSP = market price less costs of disposal;

If there is no active market: NSP = best estimate of the assets· selling price (based onrecent transactions in the sector) less costs of disposal.

NB: ćos t s of di s pos alµ = direct incremental costs only (e.g. legal costs, stamp duty taxes, costs of

removing the asset, etc.).

5. The value in use

The value in use is the present value of estimated future cash flows expected to arise from the

continuing use of an asset and from its disposal at the end of its useful life. The investments

made in order to increase the efficiency of the asset are not taken into account.

Steps to take:

a) Estimate the future cash flows from continuing use and ultimate disposal

The cash flow projections should be based on the best estimate of economic conditions over the

remaining useful life of the asset, reasonable and supportable assumptions and give greater

weight to external evidence. Moreover, they should be estimated for the asset in its current

condition.

The cash flow projections should be extrapolated using a steady or declining growth rate

(growing rate allowed if justified) and the forecasts should be made on a short-term basis (< 5

years).

Include in estimates of future CF Excluded from estimates of future CF

- Projections of cash inflows and outflowsfrom the continuing use of the asset;

- Net CF to be perceived (or to be paid) forthe disposal of the asset;

- Allocation of overheads attributable to theasset in the outflows projections;

- Effects of inflation.

- CF from financing activities;- Income tax receipts or payments;- Outflows related to obligations that have

already been recognized as liabilities;- Inflows generated by other assets, if those

inflows are largely independent from thosegenerated by the asset.

b) Apply appropriate discount rate

The discount rate is the return that investors would require if they were to choose an investment

that would generate cash flows of amounts/timing/risk profile equivalent to those expected from

the asset (= ´market di s count rate µ).

The discount rate should be pre-tax rate and should reflect current market assumptions.

If no discount rate is available from the market, the company should use as starting point the

WACC, the incremental bortowing rate or other market borrowing rate and adjust them.



c) Method to resolve the exercises:

1. FV ² C to S = NSP

- if NSP < carrying amount use the value in use

- if N

SP or value in use > carrying amount

Stop- if NSP cannot be determined Value in Use = recoverable amount

2. Assets to be disposed of : recoverable amount = NSP

d) Example

Carrying amount of PP&E: 105Sales price:110 (= fair value)Costs of disposal: 15 (=C to S)Estimated future cash flows:

- Year 1: 55

- Year 2: 60.5 (disposal)Discount rate: 10%

Carrying amount: 105

NSP = Fair value- C to S: 110 ² 15 =95

Value in use: 55/(1+0.10) +60.5/((1+0.10)2 )=100

Recoverable amount = 100- Carrying amount

= Impairment loss = 5

6. Recognition of an impairment loss

An impairment loss should be recognized whenever recoverable amount < carrying amount. If

the NSP or value in use > carrying amount, the company doesn·t need to determine the other

amounts.

An impairment loss is recognized as an expense.

7. Cash generating units (CGUs)

The recoverable amount should be determined for the individual asset. When it·s not possible to

determine the recoverable amount for the individual asset, the company should determine the

recoverable amount for the asset·s cash generating unit (CGU).

A CGU is the smallest identifiable group of assets that includes the asset, generates cash inflows

from continuing use. Those assets are largely independent of the cash inflows from other assets

or groups of assets.

If an active market exists for the output produced by an asset (group of assets), this asset (group

of assets) is a CGU. The CGUs should be identified consistently from period to period.

The carrying amount should be determined consistently with the way the CGUs recoverable

amount is determined.



An impairment loss for a CGU shall be allocated to reduce the carrying amount of the assets of

the client (group of units) in the following order:

- First to reduce the carrying amount of any G W to the CGU;

- Then the other assets of the unit pro rata the carrying amount of each asset = the unit

The carrying amount of an asset should not be reduced below the higher of its NSP/its value inuse/zero.

8. Allocating goodwill to CGU·s (in the case if a cie take another one over)

Goodwill shall from the acquisition date be allocated to CGU·s that are expected to benefit from

the synergies of the BC, irrespective of whether other assets or liabilities of the acquisition are

assigned to those units or groups of units. A CGU to which G W is allocated will be tested for

impairment annually.

Corporate assets are assets other than G W that contribute to the future cash positions of both

the CGU under review and other CGU·s headquarters, research centers, etc.).

9. Reversal of an impairment loss

The company will have to assess at each balance date whether there is an indication that an

impairment loss may have increased (same indicators as for identification of impaired assets). If

so, the company will have to calculate the recoverable amount.

An impairment loss should be reversed if, and only if, there has been change in the estimates

used to calculate the recoverable amount since the last impairment loss was recognized.

An increased carrying amount due to reversal should be less than depreciated historical cost.

R eversal of impairment loss Asset is revalued Revaluation increaseOtherwise Income in the income statement

An impairment loss recognized for Goodwill shall not be reversed in a subsequent period.



IAS 17 ² Leases (fixed assets)

1. Definitions

Lease: agreement whereby the lessor conveys to the lessee in return for a payment or

series of payments the right to use an asset for an agreed period of time.

Finance lease: lease that transfers substantially all the risks and rewards incidental to

ownership of an asset. Title may or may not eventually be transferred.

O perating lease: lease other than a finance lease. If the lease contract doesn·t show risks

and rewards, we·re in the case of an operating lease (´risks and rewards approachµ =

don·t look to the contract, look to the substance). An operating lease doesn·t appear on

the lessee·s B/S and therefore, isn·t depreciated.

2. Impact of the classification (situation of the lessee)

Impact on the Balance Sheet

O perating lease No item recognizedFinance lease Asset and corresponding liability recognized

Impact on the Income StatementO perating lease Entire rent recognized as an operating expenseFinance lease The rent is split between a finance expense and

the reduction of the lease liability. The asset isdepreciated over its useful life (in principle) operating expense.

3. Classification

The classification of leases is based on the extent to which risk and rewards incidental to

ownership of a leased lie with the lessor or the lessee. We·re in the case of a financial lease if

substantially all risks and rewards are transferred to the lessee.

R isks include the possibilities of losses from idle capacity or technological obsolescence

and of variations in return because of changing economic conditions.

R ewards may be represented by the expectation of profitable operation over the asset·s

economic life and of gain from appreciation in value or realization of a residual value (e.g.

CF of the assets, gains, rent of the asset).

The classification depends on the substance of the transaction rather than on the legal form of

the contract.

The classification is determined at the inception of the lease (i.e. date of the lease agreement) but

the recognition starts at the commencement of the lease (i.e. start of right to use).

If changes in the provisions of the lease result in a different classification, the modified

agreement is considered as a new lease.



Changes in estimates (e.g. of the economic life or residual value) or changes in circumstances (e.g.

default by the lessee) do not alter the classification.

Examples of situations that individually or in combination would normally lead to a lease being

classified as finance lease:

1) The lease transfers ownership of the assetat the end of the lease term

Automatic transfer at the end of thecontract

2) The lessee has the option to purchase theasset at the price that is expected to besufficiently lower than the fair value whenthe option becomes exercisable for it to bereasonably certain, at inception of thelease, that the option will be exercised

Ex: 5 year contract (lease rent) + optionµbargain purchase optionµ (´bonneaffaireµ) = the lessee will certainly pay theoption

3) Lease term is for the major part of theeconomic life of the asset even if title isn·ttransferred.

We·ve benefit of the asset for almost allits life.

If L T >= 75% of economic life

financial lease 4) At inception of the lease, the present value

of the minimum lease payments amountsto at least substantially all the fair value of the leased asset = Decisive factor

If NPV >= 90% of Fair value financiallease

5) If the lessee can cancel the lease, the lessor·slosses associated with the cancellation areborne by the lessee

If cancellation, the lessee pays the residual value.

6) Gains or losses from the fluctuation I thefair value of the residual value accrue to thelessee

If you pay the difference FV-RV, yousupport the risk

7) The lessee has the ability to continue the

lease for a secondary period at a rent that issubstantially lower than market rent.

Explanations: ́At inception of the lea s e, the pre s ent value of the minimum lea s e payment s amount s to at lea s t

s ub s tantially all the fair value of the lea s ed a ss et µ.

In this specific case, we need to know:

a) Minimum lease payments

The minimum lease payments are the payments over the lease term that the lessee is or can be

required to make.

It excludes:

- C ontingent rent : A US company leases a building for its activity at a very good price but the

owner asks an increase in the rent of xxx % if the company·s turnover amounts xxx $.

- C os t s for s ervice s and taxe s to be paid by and reimbur s ed to the le ss or



It includes:

- F or a le ss ee : any amounts guaranteed by the lessee or by a third party related to the lessee;

- F or the le ss or : any residual value guaranteed to the lessor;

- The exercise price of a ´bargain purcha s e option µ.

b) Discount rate

The interest rate implicit in the lease is the discount rate that, at inception of the lease, causes the

aggregate present value of:

- The minimum lease payments;

- The unguaranteed residual value;

to be equal to the sum of the fair value (market price) of the leased asset and any initial direct

costs of the lessor.

The lessee can use the íncremental borrowing rate µ when the interest rate implicit in the lease isn·t

practicable to determine.

c) Benchmark: 90% (but substance over form!)

d) Process

1. Determine the minimum lease payments and the unguaranteed residual value

(independent valuer);

2. Compute the interest rate implicit in the lease (lessor approach);

3. Determine the present value of the minimum lease payments (lessee approach);

4. Compare the present value of the minimum leases payments with the fair value of theleased asset;

5. Consider the other indicators/risks and rewards factors.

4. Initial recognition (by lessees)

Finance lease Recognize both an asset and a liability. The amount recognized is thelower of:

- The fair value of the leased asset;- The pre s ent value of the minimum lea s e payment s .

The asset should be depreciated using a policy consistent with that forowned assets ( I AS 16-PP&E ) over the shorter of the lease term and itsuseful life.

The lease payments are apportioned between:- F inancial charge = allocated to produce a constant periodic rate of

interest;- Reduction of the out s tanding liability .



Operating lease Lease payments are expensed in a straight line basis over the lease term(unless another systematic basis is more representative of the time patternof the user·s benefits). Example:

- Year 1 = 100;- Year 2 = 150;- Year 3 = 200

total = 450

´Straight line basisµ= 450/3 =150 per year

5. Sale and leaseback transactions: the sale of an asset by the vendor and leasing of the same

asset back to the vendor.

The classification criteria are the same as those for the ćlassicalµ leases. The recognition is:

Finance lease Amortize any excess of sales proceeds over thecarrying amount over the lease term

Operating lease - At or below fair value recognize gain or loss- Above fair value amortize excess over fair value over the period for which the asset isexpected to be used.

Example: we sell one of our buildings to the bank and lease it back to the bank (finance lease).

The purpose is to get the building ride of my B/S. the gain should not be recongised and thus,

shouldn·t appear in the B/S.



IAS 40 ² Investment property (fixed assets)

1. Definitions

An investment property is a property held to earn rentals or for capital appreciation or

both rather than for use or sale in the ordinary course of business.

An owner-occupied property is a property held for use in the production or supply of

goods or services or for administrative purpose.

2. Recognition

An investment property should be recognized as an asset when:

- Future economic benefit to flow from the asset are probable; and

- Cost can be measured reliably.

The same criteria are applicable to initial costs and subsequent costs relevant to investment

property.

a) Measurement at recognition

An investment property should be initially measured at its cost.

Cost components Costs not included- Purchase price;- Directly attributable expenditure (property

transfer taxes, professional fees, etc.)

- Start up costs;- Operating losses incurred before the

investment property achieves the plannedlevel of occupancy;

- Abnormal amounts of wasted material,labor or other resources incurred inconstructing or developing the property.



b) Measurement after recognition

An enterprise should choose between:

- The ´fair value modelµ;

- The ćost modelµ.

The fair value model should always be determined, either for measurement or disclosure.

Fair value model Investment properties are measured at their fair value at each closing. Themethod is applicable to all investment properties (no cherry picking).Changes in fair value are recorded in the income statement.

Determination of the fair value:- Price at which the property could be exchanged between

knowledgeable, willing parties in an arm·s length transaction;- Reflection of market conditions at the B/S date;- Without any deduction for transaction costs (sale or disposal) and without future capital expenditure that will improve or enhance theproperty.

Cost model Cost ² accumulated depreciation and impairment losses

= the same treatment as cost model in accordance with IAS 16.



IFRS 5 ² Assets Held for Sale &Discontinued Operations ( Non-current assets)

1. Definitions

An entity shall classify a non current asset (or disposal group) as held for sale if its

carrying amount will be recovered principally through a sale transaction rather than

through continuing use.

2. Classification as Held for Sale

If non current assets (not part of the consolidate assets) or disposal groups are acquired

exclusively with a view to disposal, they are classified as held for sale if:

- Sale is expected < 12 months;- It is highly probable that the full criteria will be met within a short period after acquisition

(usually 3 months).

Non current assets that are to be abandoned are not classified as held for sale (but may be

classified as discontinued operations when eventually abandoned).

3. Measurement of assets held for sale

An asset held for sale is measured at the lower of carrying amount and fair value less costs to sell.

Impairment losses for write downs: profit or loss

Subsequent increases in fair value are recognized if not in excess of the cumulative impairment

loss (under IFRS 5 or IAS 36).

Assets held for sale are not depreciated.



4. Presentation of assets held for sale

Non-current assets are shown separately from other assets.

Liabilities Presented separately from other liabilities Assets and liabilities Not offset

Prior periodsN

ot reclassifiedGains and losses on fair value adjustments (if not discontinued operations)

Recognized in profit or loss as a part of continuing operations

5. Discontinued operation - criteria

6. Presentation of discontinued operations

A single amount on the face of the incomestatement comprising:

- The sum of the post-tax profit/lossof the discontinued operation;

- The post-tax gain/loss recognized on

the measurement to fair value lesscosts to sell or on disposal

An analysis of that amount on the face or in thenotes

Amount split in different lines

Net CF attributable to operating, investing andfinancing activities presented separately on the faceof the CF statement or in the notes The disclosures are all represented for prior periods



IAS 37 ² Provisions

1. Definitions

Provisions: liability of uncertain timing or amount (but there exists an

obligation/liability)

Liability: present obligation as a result of past event. Settlement of which is expected to

result in an outflow of resources.

Constructive obligation: an obligation that derives from an entity·s actions where:

- by an established pattern of past practice, published policies or a sufficiently specific current

statement, the entity has indicated to other parties that it will accept certain responsibilities;

and

- as a result, the entity has created a valid expectation on the part of those other parties that it

will discharge those responsibilities (restructuring constructive obligation).

Example : in Belgium a constructive obligation appears i.e. when the company communicates a

plan to the working council there is no contract yet but the communication has been so far

that the constructive obligation has appeared.

Contingent liability: possible obligation depending on the occurrence/non -

occurrence of uncertain future events OR present obligation but no probable outflow

of economic benefits or amount can·t be reliably measured.

Contingent asset: possible asset that arises from past events and whose existence will

be confirmed only by the occurrence or non-occurrence of one or more uncertain

future events not wholly within the control of the entity.

Example : insurance policy litigation but not 100% sure that we will get compensation not

recorded on the asset side contingent asset which is never recorded on the B/S but disclosed

if necessary.

2. Provision or contingent liability? (slide 5)



3. Recognition of a provision

The company has to recognize a provision if, and only if:

- Present obligation (legal or constructive);

- As a result of past event ( obligating event );

- Probable (´more likely than notµ) transfer of economic benefits;- Reliable estimate can be made.

An obligating event is an event that creates a legal (by law or contract) or constructive obligation

and that results in an enterprise having no realistic alternative but to settle the obligation.

4. Contingent liability / contingent assets

Contingent liability Contingent assets

An enterprise should not recognize acontingent liability. Disclosure is requiredunless a cash outflow is remote.

Exception : when we acquire a company

obligation to recognize it.

A contingent asset is a possible assetdepending on the occurrence/non-occurrenceof uncertain future events. The company doesnot recognize contingent assets and disclosure

is required if a cash inflow is probable.

5. Measurement principles

a) Best estimate

The amount recognized as a provision shall be the best estimate of the expenditure required to

settle the present obligation at the balance sheet date = the amount an enterprise would rationally

pay to settle or transfer the obligation to a third party = fair value.

b) Discounted value

Where the effect of the time value of money is material, the amount of a provision shall be the

present value of the expenditures expected to be required to settle the obligation.

c) Future events

Future events that may affect the amount required to settle an obligation shall be reflected in the

amount of a provision where there is sufficient objective evidence that they will occur. The



company has to consider future cost reductions and changes in legislation. Furthermore,

provisions should not be recognized for future operating losses

d) Reduction of obligation

Gains from the expected disposal of assets should not be taken into account. Reimbursements

should be recognized when, and only when, it is virtually certain that reimbursement will bereceived if the enterprise settles the obligation ( cf : insurance cie).

e) Changes and use of provision

Provisions should be reviewed and adjusted at each balance sheet date. If outflow is no longer

probable, the company has to reverse the provision. A provision should be used only for

expenditures for which the provision was originally recognized.

f) Onerous contracts

An onerous contract is a contract in which the unavoidable cost of meeting the obligations under

the contract exceed the economic benefits expected to be received under it. The company has torecognize the present obligation under an onerous contract as a provision = unavoidable costs of

exiting the contract

Example: a building under lease contract but not occupied by the company

g) Restructuring provisions

A ´restructuringµ is a program that is planned and controlled by the management that materially

changes either:

- The scope of a business undertaken, or

- The manner in which that business is conducted.

Example s :

- Sale or termination of a line business;

- Closure of business locations;

- Changes in management structure;

- Fundamental reorganizations.

A constructive obligation to restructure arises only when there is a detailed formal plan and a

valid expectation of implementation of the plan (communication has been made).

Restructuring provisions should include only direct expenditures.

h) Provisions not recognized via P/L

Under IAS 16, the cost of an item of PP&E equipment includes the initial estimates of the costs

of dismantling and removing the item and restoring the site on which it is located. This part of

the cost of the asset is recognized via the set up of a provision of the same amount. This measure

is based on IAS 37.





4. Special reporting items

Interest and dividends each disclosed separately (no netting of received andpaid amounts);

consistent classification as financing or operating; interests paid to be reported as such even if capitalized

under IAS 23 Taxes (paid) and income separate disclosure

relate normally to operating activities, unless specifically identified with financing or investing activities

Acquisition (disposal) of

subsidiaries or otherbusiness

presented separately and classified as investing activities

= cash paid or received, net of cash equivalents insubsidiary or business unit at the date of acquisition(disposal)

Main disclosures:- total purchase (disposal) consideration and portion

discharged in cash/cash equivalents = classified in onesingle line;

- acquired (disposed) cash/cash equivalents;- other assets and liabilities acquired (disposed) by major

categories.



IAS 18 ² Revenue

Revenue should be measured at the fair value of consideration received:

- most cases: nominal value of cash received (net of rebates);

- for deferred consideration: discounting may be necessary;

- companies which sell businesses: recognition = issue of the invoice (90% of the companies).

Rule : when risk and rewards (=control) are transferred to the buyer (concept) = when the title of

ownership is passed to the buyer (substance).

When the company gets the cash over a period longer than a year, it will have to discount the

amount. The payment timing is different from the recognition time: those two elements are

independent even if we have to discount the recognized amount.

1. Identification of the transaction

Due to the economic substance, some transactions should be split into component parts or

combined into one transaction.

Example s :

- Split into components: service element in product sale price I sell a machine and I will be

responsible for the maintenance during 10 years = sale of an equipment + service (revenue

has to be split over the 10 years period).

- Combination into one transaction: sale and repurchase transaction.

2. Sale of goods

a) Recognition

The recognition happens when significant risks and rewards of ownership are transferred, that is

to say, when:

- the managerial involvement and control cease;

- revenue can be measured reliably;

- it is probable that economic benefits will flow to the enterprise;

- costs can be measured reliably.

b) Transfer of risks and rewards

In most of the cases, the transfer of risks and rewards of ownership coincides with the transfer of

the legal title or the passing of possession to the buyer.

If significant risks are retained: the revenue are recognized ( example : retail sale when a

refund is offered if the customer in not satisfied the liability for return is recognized

based on previous experience and other relevant factors).



In other cases: the transfer of risks and rewards of ownership occurs at a different time

(example: when the goods are shipped and subject to installation the installation is a

significant part of the contract which has not yet been completed by the enterprise OR

when the buyer has the right to rescind the purchase for a reason specified in the sales

contract and the enterprise is uncertain about the probability of return recognition when

the return period has expired).

3. Rendering of services

If the outcome can be estimate reliably (revenue can be measured reliably, probable economic

benefits, stage of completion and costs incurred/to complete can be measured reliably), the

revenue is recognized based on the stage of completion. Under this method, revenue is

recognized in the accounting periods in which the services are rendered.

T he s tage of completion of a transaction may be determined by a variety of methods:

- Surveys of work performed (seldom);

- Services performed to date as a percentage of total services to be performed (seldom);- The proportion that costs incurred to date bear to the estimated total cost of transaction =

prorata (most popular method).

Progress payments and advances received from customers often do not reflect the services

performed.

4. Interest, royalties and dividends

The same recognition criteria are used as for ´rendering s ervice s µ and ´s ale of good s µ.

Interest Effective yield method (interest revenueincludes the amount of amortization of any discount, premium or other differencesbetween the initial carrying amount of a debtsecurity and its amount at maturity

Royalties Appropriate accrual basisDividends When the right is established



IAS 2 ² Inventories

Inventories are assets held for sale in the ordinary course of business/in the process of

production/raw materials or supplies to be consumed in the production process or in the

rendering services.

1. Recognition

There need to be a matching between the revenue and the cost to recognize the inventories. The

recognition is made according IAS 18:

- Risks and rewards of ownership have been transferred;

- Effective control of goods;

- Cost can be measured reliably;

- Economic benefits flow to the enterprise.

2. Cost of inventories

Cost of purchase y Purchase price;

y Import duties;

y Non-recoverable taxes;

y Transport costs;

y Other costs directly attributable to the acquisitionCost of conversion y Costs directly related to units of production;

y Direct materials;

y Direct labor+ Systematic allocation of production overheads and variableproduction overheads.

3. Measurement of cost

a) Cost formulas

The cost of inventories of items that are not ordinarily interchangeable and goods/services that

are segregated for specific projects shall be assigned using specific identification of their

individual costs.

For the other items, the following formulas are used:

- FIFO (first-in, first-out);

- Weighted average.

An entity shall use the same cost formula for all inventories having a similar nature and use to the

entity. For inventories with a different nature or use, different cost formulas maybe justified.



b) Techniques of measurement: Standard cos t method Retail cos t method

Is the value I·ve bought my asset equivalent to the price I would get if I resold it?

The practice of writing inventories down below cost to net realizable value is consistent with the

view that assets should not be carried in excess amounts expected to be realized from their sale

or use.

Method: át lower cos t of net realizable value µ

c) Net realizable value

(lower) Estimated Selling Price- (lower) Estimated Costs of Completion- (lower) Estimated Costs of Selling

= (lower)Net realizable Value

The cost of inventories may not be recoverable if those inventories are damaged, if they have

become wholly or partially obsolete, or if their selling prices have declined.

Estimates of NRV are based on the most reliable evidence available at the time the estimates are

made, of the amount the inventories are expected to realize. Estimates of NRV also take into

account the purpose for which the inventory is held. F or example , the NRV of the quantity of

inventory held to satisfy firm sales or service contracts is based on contract price. If the sale

contracts are for less than the inventory quantities held, the NRV of the excess is based on

general selling prices.

Materials and other supplies held for use in the production of the inventories are not written

down below cost if the finished products in which they will be incorporated are expected to be

sold at or above cost.

When the circumstances that previously caused inventories to be written down below cost no

longer exist or when there is a clear evidence of an increase in NRV because of changed

economic circumstances, the amount of the write-down is reversed so that the new carrying

amount is the lower of the cost and the revised NRV.



Overview of Financial Instruments (IAS 32-39)

A financial a ss et is an asset that is:

- Cash;

- An equity instrument of another entity (i.e. shares);

- A contractual right (to receive cash/other financial asset OR exchange financialassets/liabilities under conditions that are potentially favorable to the entity);

- A contract that will or may be settled in the entity·s own equity instruments and is a non

derivative for which the entity is or may be obliged to receive a variable number of the

entity·s own equity instruments OR a derivative that will or may be settled other than by the

exchange of a fixed amount of cash or another financial asset for a fixed number of the

entity·s own equity instruments.

1. Classification of financial assets

Every financial asset that falls within the scope of IAS 39 must be classified into one of the

following 4 primary categories:

a) At fair value through profit or loss;

b) Available for sale;

c) Loans and receivables;

d) Held-to-maturity.

a) Financial assets at Fair Value through P/L

There exist 2 categories:

- Financial assets that should be classified as held for trading;- Financial assets that are designated on initial recognition as one to be measured at FV with

FV changes in profit or loss (= FV TPL).

The held for trading assets (HF T ) are financial assets that:

- Are acquired principally for the purpose of sale in the near term;

- It is a part of a portfolio of identified financial instruments that are managed together and for

which there is evidence of a recent actual pattern of short-term profit-taking;

- It is a derivative (except for a derivative that is a designated and effective hedging

instrument).

b) Held-to-maturity investments (H TM)

H TM investments are financial instruments with:

- Fixed or determinable payments and fixed maturity (equity instruments cannot be H TM! =

shares, stocks, etc.);

- That an entity has the positive intention and ability to hold to maturity;





2. Classification of financial liabilities

There are 2 categories of financial liabilities:

a) Financial liabilities at fair value through profit or loss:

- Financial liabilities classified as HF T;- Financial liabilities designated by the entity as at fair value through profit or loss.

b) Other financial liabilities

Once classified, reclassification in and out of those categories is prohibited.

3. Treasury shares

Where an entity reacquires its own shares, these shares (= treasury shares) are deducted from

equity. No gain or loss is recognized in the income statement on the purchase/ sale/ issue/

cancellation of an entity·s own equity instruments.

Where an entity holds its own shares on behalf of others, this represents an agency relationship

and as a result the shares are not included in the B/S of the entity.

4. Initial measurement of financial instruments

On initial measurement, financial assets and liabilities are measured at ´fair valueµ +

transaction costs for FA and FL not at FV TPL.

The fair value of a financial instrument acquired should normally be equal to the fair value of

the consideration given or received (´the tran s action price µ).

5. Subsequent measurements

Financial assets

1. At FV TPL and derivatives (excepthedging):

Measured at FV Changes in FV are recognized in profit

or loss

2. H TM investments and loans andreceivables

Amortized cost using the effective interestmethod

3. Available-for-sale financial assets Measured at FV Financial liabilities Measured at amortized cost using the

effective interest method with the following

exceptions:- At FV TPL (including derivatives);- Arising on the transfer of a financial asset;- Hedged items



6. Amortized cost

Amortized cost is the amount at which the financial asset/liability is measured at initial

recognition:

- Principal repayments

- /+ the cumulative amortization using the effective interest method of any differencebetween that initial amount and the maturity amount

- Any reduction (directly through the use of an allowance account) for impairment or

uncollectability

The effective interest rate is the rate that exactly discounts estimated future cash payments or

receipts through the expected life of the financial instruments or, where appropri ate, a shorter

period to the net carrying amount of the financial asset/liability.

7. Summary



Overview of Income Taxes ² IAS 12

1. Deferred taxation ² the principle

In most jurisdictions, rules for recognition and measurement of certain assets, liabilities,

income and expenses for tax purposes often differ from the equivalent rules under IFRS. This

results in different figures in the financial statements and in the tax return.

The transactions which are recognized in the accounts in a particular period may have their tax

effect deferred to a later period causing a dismatch: the relationship between the accounting

´profit before taxµ and the tax will be distorted.

The IASB approach to the problem is a balance sheet approach:

- Identify all the differences (known as temporary differences) in value between the financial

reporting B/S and the tax balance sheet.

- Calculate the deferred tax balance to be recognized in the B/S.

- Account for the movement on the deferred tax balance either in income statement or inequity.

Documents

Résume IFRS Meleke