SBR Notes

Conceptual Framework

• Financial Information should be readily understandable

• Information has the quality of relevance when it has the capacity to influence the economic
decisions of users by helping them evaluate past, present and future events or confirming, or
correcting, their past evaluations. Relevant financial information has predictive value,
confirmatory value or both.
• Comparability is the qualitative characteristic that enables users to identify and understand
similarities and differences amongst items

IAS 2 - Inventories

• Inventories to be valued at lower of cost or Net Realisable Value (NRV)

• NRV is defined as the estimated selling price in the ordinary course of business less costs of
completion and costs to sell

IAS s - Accounting policies, changes in accounting estimates and errors

• A change in accounting estimate is an adjustment of the carrying amount of an asset or liability,

or related expense, resulting from reassessing the expected future benefits and obligations
associated with that asset or liability.

IAS 16 - Property, Plant and Equipment

• Initial recognition at cost, subsequent measurement: Cost Model or Revaluation Model

• Costs of parts that need replacement must be recognized within the carrying value of the asset.
This will be depreciated separately over the life of the component and the cost of the
replacement must be capitalized if the recognition criteria are satisfied

IAS 21- Effects of changes in foreign currency

• Functional currency - The functional currency of an entity is the currency of its primary
economic environment. This is the currency in which it generates and expends cash. The
following primary factors must be considered when determining the functional currency:
o The currency that mainly influences sales prices for goods and services
o The currency of the country whose competitive forces and regulations mainly determine
the sales prices of goods and services
o The currency that mainly Influences labour, material and other costs of providing goods
and services
• If the primary factors are inconclusive, then the secondary factors should be considered: 1) The
currency in which the entity generates funds from financing activities, 2) The currency in which
the entity retains receipts from operating activities
• There are times when instead of applying the above rules, a foreign subsidiary should simply
adopt the same functional currency as its parent. In determining this, the following should be
considered:
 o Whether the foreign operation Is an extension of the parent, rather than having
significant autonomy
o The level of transactions between the foreign operation and the parent
o Whether the foreign operation generates sufficient cash flows to meet its cash needs
o Whether its cashflows directly affect those of the reporting entity

IAS 36 - Impairment of Assets

• At the end of each reporting period, an entity is required to assess whether there Is any
Indication that an asset may be impaired
• If there is an Indication that the asset may be Impaired, then the asset's recoverable amount
must be calculated.

IAS 38 - Intangible Assets

• An intangible asset is defined as an identifiable non-monetary asset w ithout physical substance.

• An entity is required to recognise an intangible asset if:

o The asset is identifiable
o The asset Is controlled by the entity
o The asset w ill generate future economic benefits for the entity
o The cost of the asset can be measured reliably.
• As per IAS 38, an intangible asset is identifiable if it:
o Is separable (can be separated and sold or transferred either individually or as part of a
package)
o Arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations
• At Initial recognition, intangible assets are measured at cost. For subsequent measurement, an
entity has a choice of either using the cost model or revaluation model for measuring each class
of Intangible asset
o Cost Model - The asset is measured at cost less accumulated amortisation and
impairments
o Revaluation model - The asset is measured at fair value less accumulated amortisation
and impairments. Revaluations should be sufficiently frequent such that the carrying
amount of the asset does not differ materially from the actual fair value at the reporting
date. The revaluation model can only be adopted if the fa ir value can be determined by
reference to an active market. An active market is one in which products are
homogenous, there are willing buyers and sellers to be found at all times and prices are
available to the public. Active markets are rare for Intangible assets. They are likely to
exist for milk quotas or stock exchange seats, but unlikely to exist for brands, newspaper
mastheads, patents, trademarks, music and film publishing rights. Revaluation gains and
losses are to be accounted for in the same way as revaluation gains and losses of
tangible assets in accordance with IAS 16.

• If the recognition criteria are not met, IAS 38 requ ires the expenditure to be expensed to profit
or loss when it is incurred.
 • An intangible asset should be derecognised only on disposal or when no future economic
benefits are expected from its use or disposal.

• IAS 38 prohibits presenting the proceeds from the disposal of an intangible asset as revenue.

• Intangible assets with finite lives are required to be amortised over their useful lives and
intangible assets with indefinite lives to be subject to an annual impairment review in
accordance w ith IAS 36.

• Research - Research is defined in IAS 38 as an original or planned investigation undertaken with

the prospect of gaining new scientific or technica l knowledge and understanding. Research
expenditure is expensed to profit or loss as incurred.

• Development - Development is defined in IAS 38 as the application of research find ings or other
knowledge to a plan or design for the production of new or substantially Improved materials,
devices, products, processes, systems or services before the start of commercial production or
use. Development expenditure must be recognised as an intangible asset if the entity can
demonstrate that:

o The project is technically feasible

o The entity intends to complete the intangible asset and then sell It or use it

o The intangible asset will generate future economic benefits

o The entity has adequate resources to complete the project

o It can reliably measure the expenditure on the project

Disclosures: IAS 38 requires entities to disclose:

• The amount of research and development expenditure expensed during the period

• The methods used for amortisation

• For intangible assets assessed as having indefinite lives,

IEBS 3 - Business combinations

• A business combination is defined as a transaction or other event in which an acquirer obtains
control of one or more businesses.
• A business is defined as an integrated set of activities and assets capable of providing a return.
• The accounting treatment of the acquisition of an interest in a joint operation that meets the
definition of a business should apply the same principles as are applied in a business
combination unless those principles contradict IFRS 11 Joint Arrangements
• Acquired Intangible assets must be recognised and measured at fair value If they are separable
or arise from other contractual rights.
IFRS 10 - Consolidated Financial Statements

• An investor controls an investee when it has power over the investee and is exposed, or has
rights to, va riable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee

IEBS 1s - Revenue from contracts with customers

• Revenue is defined as Income arising from a company's ordinary activities.

Financial Instruments

IAS 32- Financial Instruments: Presentation

A Financial Instrument is any contract t hat gives rise to a financial asset1 of one entity and a financial
liability2 of equity instrument3 of another entity

l. A financial asset is any asset that is:

• Cash
• An equity Instrument of another entity
• A contractual right to receive cash or another financial asset from another entity
• A cont ractual right to exchange financial instruments with another entity under conditions
wh ich are favourable to the entity
• A non-derivative contract for which the entity is or may be obliged to receive a variable
number of its own equity instruments
2. A financial liability is any liability that is:
• A cont ractual obligation to deliver cash or another financial asset to another entity
• A contractual obligation to exchange financial instruments with another entity under
condit ions which are potentially unfavourable
• A non-derivative contract for which the entity is or may be obliged to deliver a variable
number of its own equity instruments
3. An equity instrument is any contract that evidences a residual interest In an entity's assets after
deducting all of its liabilities

IAS 32 provides the rules for classification of financial instruments. The issuer of a financial Instrument
must recognize a financia l liability or an equity Instrument on initia l recognition based on the substance
of the instrument and the definitions as per IAS 32.

Dividends, Interest, losses and gains - The accounting treat ment of interest, dividends, losses and gains
relat ing to a financia l instrument follows the treatment of the Instrument itself. Dividends paid in respect
of preference shares classified as financial liabilities are recorded as finance costs in t he statement of
profit or loss. Dividends paid in respect of shares classified as equity instruments are recorded in the
statement of changes in equity.

Offsetting - lAS 32 states that a financia l asset and a financia l liability may only be offset in very limited
circumstances. A net amount may only be reported if the entity:

• Has a legally enforceable right to set off the amounts

 • Intends either to settle on a net basis or to realise the asset and settle the liability
simultaneously

Compound Instruments - A compound Instrument is a financial instrument that has characteristics of

both liabilities and equity. An example would be debt that can be redeemed for either cash or a fixed
number of equity shares. IAS 32 requires that a compound instrument should be split into two
components:

• A financial liability (the liability to repay the debt holder in cash)

• An equity instrument (the option to convert into shares)

These two components must be shown separately in the financial statements

Financial Assets- Investments in Equity Instruments: Investments in equity instruments (such as

investment in the ordinary shares of another entity) can be measured at either:

• Fair value through profit or loss, or

• Fair value through other comprehensive income

Fair value through profit or loss - The normal expectation Is that the equity Instrument has the
designation of fair value through profit or loss

Fair value through other comprehensive income - It is possible to designate an equity instrument as fair
value through other comprehensive income, provided that the following conditions are complied with:

• The equity instrument must not be held for trading, and

• There must have been an irrevocable choice of this designation upon initial recognition of the
asset

IFRS 9 - Financial Instruments

Financial Liabilities - Initial recognition: Financial Liabilities are initially recognized at fair value. If the
financial liability wi ll be held at fair value through profit or loss, transaction costs are expensed to the
statement of profit or loss. If the financial liability will not be held at fair va lue through profit or loss,
transaction costs should be deducted from its carrying amount

Subsequent measurement - Subsequent measurement of financial liabilities can be at either amortised

cost or fair value through profit or loss.

Most financial liabilities, such as borrowings are subsequently measured at amortised cost using the
effective interest rate method. The initial carrying amount of a financial liability measured at amortised
cost is its fair value less any transaction costs. Finance cost is charged at the effective interest rate. This
Increases the carrying amount of the financial liability. The carrying amount is reduced by any cash
payments made during the period.

Out of the money derivatives or liabilities held for trading are measured at fair value through profit or
loss. It is also possible to measure a liability at fair value when it would normally be measured at
amortised cost If it eliminated or reduces an accounting mismatch. In this case IFRS 9 says that any
movement in fair value is split into two components: 1) the fair value change due to own credit risk
which is presented in other comprehensive income, and 2) the remaining fair value change which is
presented in profit or loss

Compound Instruments -At initial recognition, a compound instrument must be split into an equity
component and a liability component:

• The liability component is calculated as the present value of repayments discounted at a market
rate of interest for similar instruments without the conversion rights
• The equity component is calculated as the difference between the cash proceeds from Issuing
the Instrument and the value of the liability component

Financial Assets - Investments in Equity Instruments

• Fair value through profit or loss: Investments in equity instruments classified as fair value
through profit or loss are initially recognised at fair va lue. Transaction costs are expensed to
profit or loss. At the reporting date the asset is reva lued to fair value with the gain or loss being
recorded in the statement of profit or loss.
• Fair value through other comprehensive income: Investments in equity instruments classified as
fair value through other comprehensive income are Initially recognised at fair value plus
transaction costs. At the reporting date, the asset is revalued to fair value with the gain or loss
being recorded In other comprehensive Income. This gain or loss may not be reclassified to profit
or loss in future periods.

Financial Assets - Investments in Debt Instruments

Financial Assets that are debt instruments can be measured in one of three ways:

• Amortised cost
• Fair value through other comprehensive income
• Fair value through profit or loss

Amortised cost - IFRS 9 says that an investment in a debt instrument is measured at amortised cost if:

• The entity's business model Is collect contractual cash flows.

o This means that the entity does not plan on selling the asset prior to maturity, but rather
intends to hold it until redemption
• The contractual terms of the financial asset give rise to cash flows that are solely payments of
principal and interest on the principal amount outstanding

Measurement- For investments in debt that are measured at amortised cost:

• The asset is initially recognised at fair value plus transaction costs

• Interest income is calculated using the effective rate of interest

Fair value through other comprehensive income - An investment in a debt instrument is measured at
fair value through other comprehensive Income If:

• The entity's business model Involves both collecting contractual cash flows and selling financial
assets.
 o This means that sales are more frequent than for debt instruments held at amortised
cost. For Instance, the entity may sell financial assets If the possibility of buying
Investments with a higher return arises.
• The contractual terms of the financial asset give rise to cash flows that are solely payments of
principal and Interest on the principal amount outstanding.

Measurement- For investments in debt that are measured at fair value through other comprehensive
income:

• The asset is initially recognised at fair value plus transaction costs

• Interest income is calculated using the effective rate of interest
• At the reporting date, the asset is reva lued to fair va lue with the gain or loss recognised in other
comprehensive income. This will be reclassified to profit or loss when the financial asset is
disposed of.

Fair value through profit or loss - Investments in debt instruments that are not measured at amortised
cost or fair value through other comprehensive Income are measured, according to IFRS 9 at fair value
through profit or loss

Meaurement- For Investments in debt that are measured at fair value through profit or loss:
• The asset is initially recognised at fair value, with any transaction costs being expensed to the
statement of profit or loss
• At the reporting date, the asset is reva lued to fair va lue, with the gain or loss recognised in the
statement of profit or loss

Reclassification - Financial assets are classified according to IFRS 9, when initially recognised. If an entity
changes its business model for managing financial assets, all affected financial assets are reclassified.
This applies only to investments in debt.

Credit Loss Allowances - For Investments in debt instruments measured at amortised cost or fair value
through other comprehensive income, the entity must also recognise a credit loss allowance.

Impairment of Financial Assets - IFRS 9 says that a loss allownance must be recognised for financial
assets that are debt Instruments and wh ich are measured at amortised cost or fair value through other
comprehensive income.

• If credit risk on the financial asset has not increased significantly, the loss allowance should be
equal to 12 month expected credit losses
• If credit risk on t he financial asset has increased significantly, the loss allowance should be equal
to lifetime expected credit losses

1. A credit loss Is the present value of the difference between contractual cash flows and the cash
flows that the entity expects to receive
2. Expected credit losses are the weighted average credit losses
3. Lifetime Expected Credit Losses are the expected credit losses that result from all possible
default events
 4. 12 month Expected Credit Losses are the portion of lifetime expected credit losses that might
occur with 12 months after the reporting date

Adjustments to the loss allowances are charged/credited to the statement of profit or loss

Unless credit-impaired, interest income is recognised on the gross carrying value of the asset

Significant increases in credit risk - To assess whether there has been a significant Increase in credit risk,
IFRS 9 says that an entity should compare the asset's risk of default at the reporting date with Its risk of
default on Initial recognition. Entities should not solely rely on past information when determining If
credit risk has increased significantly. An entity can assume that credit risk has not increased significantly
if the instrument has a low credit risk at the reporting date. Credit risk can be assumed to have increased
if contractual payments are more than 30 days overdue at the reporting date.

Measuring Expected Credit Losses -An entity's estimate of expected credit losses should be:

• Unbiased and probability weighted

• Reflective of the time value of money
• Based on Information about past events, current conditions and forecasts of future economic
conditions

If an asset is credit-impaired, IFRS 9 says that the loss allowance should be measured as the difference
between the gross carrying value of the asset and the present value of future estimated cash flows when
discounted using the original effective interest rate.

IFRS 9 says that the following may suggest that an asset is credit-impaired:

• Significant financial difficulties of the issuer or borrower

• A breach of contract, such as a default
• The borrower being granted concessions
• It becoming probable that the borrower w ill enter bankruptcy

If a financial asset is credit-impaired, interest income is calculated on the net carrying amount of the
asset

Purchased or originated credit-impaired financial assets -A purchased or originated credit-impaired

financial asset is one which is credit-impaired on initial recognition. Interest income is calculated using
the credit adjusted effective interest rate. The credit adjusted effective interest rate incorporates all the
contractual terms of the financial asset as well as the expected credit losses. In other words, the higher
the expected credit losses, the lower the credit adjusted effective interest rate. Since credit losses
anticipated at inception are recognised through the credit adjusted effective interest rate, the loss
allowance should be measured at only the change in lifetime expected credit losses since Initial
recogn ltion.

Debt Instruments at Fair Value through other comprehensive income - These assets are measured at
fair value at each reporting date and therefore the loss allowance should not reduce the carrying amount
of the asset in the statement of financial position. Instead, the loss allowance is recorded against other
comprehensive income.

Simplifications - IFRS 9 offers some simplifications:

 • It Is settled net In cash (or using another financial asset), and
• It is not entered Into for the purpose of receiving or delivering the item to meet the entity's
operating requirements

IFRS 9 says that a contract to buy a non-financial item is considered to be settled net in cash when:

• The terms of the contract permit either party to settle the contract net
• The entity has a practice of settling similar contracts net
• The entity, for similar contracts, has a practice of taking delivery of the Item and then quickly
selling It In order to benefit from fair value changes
• The non-financial Item Is readily converlble to cash

If the contract is not a derivative, then it is a simple executory contract. Such contracts are not normally
accounted for until the sale or purchase date.

Common Derivatives - Forwards, Futures, Swaps and Options are common derivatives.

Measurement - Derivatives are initially recognised at fair value. Any transaction costs are expensed to
profit or loss. At the reporting date, derivatives are remeasured to fair value, with any gains or losses
being recognised In the statement of profit or loss.

Embedded Derivatives - An embedded derivative is a component of a hybrid contract that also includes
a non-derivative host, with the effect that some of the cash flows of the combined Instruments vary in
way similar to a standalone derivative. With regards to the accounting treatment of embedded
derivatives, if the host contract is within the scope of IFRS 9, then the entire contract must be classified
and measured in accordance with that standard. If the host contract is outside the scope of IFRS 9, then
the embedded derivative can be separated out and measured at fair value through profit or loss if:

• The economic risks and characteristics of the embedded derivative are not closely related to
those of the host contract,
• A separate instrument with the same terms as the embedded derivative would meet the
definition of a derivative, and
• The entire instrument is not measured at fair value with changes in fair value recognised in profit
or loss

Because of the complexity involved in splitting out and measuring embedded derivatives, IFRS 9 permits
a hybrid contract where the host contract Is outside the scope of IFRS 9 to be measured at fair value
through profit or loss In Its entirety. For the vast majority of embedded derivatives, the entire contract
will simply be measured at fair value through profit or loss.