A.F.Ferguson & Co. A member firm of pwc

1. A.F.Ferguson & Co. A member firm ofpwc Workshop on latest developments in IAS Improvements Project

2. By: Syed Fahim ul Hasan Partner A.F. Ferguson & Co., Karachi

3. Improvement to IAS • Revised standards applicable to financial periods beginning on or after January 1, 2005 (except for IAS 38 which is applicable for periods beginning on or after March 31, 2004) • Earlier application encouraged and the fact should be disclosed • When adopting requirement of a standard, the entire revised standard must be adopted

4. IAS 1 Presentation of Financial Statements • True and fair override in very rare circumstances • If not prohibited by the relevant regulatory framework • ‘true and fair’ presumes compliance with IFRS • Disclose: • Management concludes FS are fairly presented • Identify requirement not applied • Reason why treatment so misleading • For each period presented, the financial impact of the departure on each item in the FS

5. IAS 1 … contd. • New disclosures • Judgements made in applying accounting policies • Most significant effect of measurement of items • Key assumptions about future and other estimation uncertainties that risk future material adjustments • Separate income statement disclosure • Profit or loss for the period • Profit or loss attributable to minority interest • Profit or loss attributable to equity holders of the parent

6. IAS 1 … contd. • New disclosures…contd. • Statement of change in equity • Total income and expenses for the period attributable to ‘minority interest’ and ‘equity holders of the parent’

7. IAS 1 … contd. • Other changes • Classified balance sheet presentation required i.e. current and non-current • Liquidity basis or mixed basis is used only when reliable and more relevant. • Post balance sheet events (refinancing, correction of defaults) do not affect classification of debt • Presentation of extraordinary items prohibited

8. IAS 1 … contd. • Other changes • Capital disclosures (effective from January 1, 2007) IAS 1 has introduced requirements for all entities to disclose: • the entity's objectives, policies and processes for managing capital; • quantitative data about what the entity regards as capital; • whether the entity has complied with any capital requirements; and • if it has not complied, the consequences of such non-compliance.

9. IAS 2 Inventories • Scope changes • Clarifies the types of inventories exempted from measurement (but not disclosures) requirements • Commodity broker-traders measured at NRV through profit or loss • Producers of agricultural and forest products, agricultural produce after harvest and mineral products measured at fair value less costs to sell through profit or loss • All inventories covered – words ‘held under the historical cost system’ removed

10. IAS 2 …contd. • Other changes • LIFO method not permitted • Finance cost of inventories on deferred settlement terms • Difference between purchase price for normal credit terms and the amount paid is interest expense over financing period • Exchange differences as inventory cost no longer permitted • Consistency – same cost formula be used for similar inventories • Disclosure – Inventories carried at fair vale less cost to sell

11. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors • Main changes • All voluntary changes in accounting policies and corrections of errors must be made retrospectively • Allowed alternative method eliminated • Apply new accounting policy and correction to prior period errors to comparative information for prior periods as far back as practicable • If impracticable to determine cumulative effect, apply new accounting policy and correction of errors prospectively from earliest period practicable • Distinction between fundamental errors and other material errors eliminated • Change in accounting estimate and prior period errors defined

12. IAS 8 …contd. • Change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly are not corrections of errors

13. IAS 8 …contd. • Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: a) was available when financial statements for those periods were authorised for issue; and b) Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversight or misinterpretation of facts, and fraud

14. IAS 8 …contd. • New disclosures • Changes in accounting policy – initial application or voluntary changes • Identify change • Whether change is in accordance with transitional provisions and description of transitional provision • Reasons why new accounting policy reliable and more relevant • Amount of adjustment to each line item • Amount of adjustment to basic and diluted EPS • Amount of adjustment to prior periods • More disclosures required if application is impracticable

15. IAS 8 …contd. • New disclosures … contd. • When new standard or interpretation not applied but issued and is not yet effective • The fact and estimate of impact of application now required (was encouraged before) • Implication regarding the application of IFRS 1 to 7

16. IAS 8 …contd. • New disclosures … contd. • Prior period errors • Nature • Amount of correction for each line item • Amount of correction for basic and diluted EPS • Amount of correction at the beginning of earliest period • If retrospective restatement impracticable more disclosures are required

17. IAS 8 …contd. • Other changes • Materiality • Concept of materiality defined • IFRS not to be applied if effect of application is immaterial • FS do not comply with IFRS if they contain material errors

18. IAS 10 Events after the Balance Sheet Date • Clarifies • When dividends are declared after the balance sheet date, do not recognise dividends as liability • Disclosure such dividend in the notes in accordance with IAS 1

19. IAS 16 Property, Plant and Equipment • Main change • All exchange of non-monetary assets measured at fair value whether or not they have similar use and fair value • unless the transaction lacks commercial substance ; or • fair value of neither the asset received nor asset given up is reliably measurable • In which case asset will be recorded at cost

20. IAS 16 Property, Plant and Equipment • Main change…contd. • Definition of ‘residual value’ changed • Amount could receive at the balance sheet date if the asset were in the condition that it will be at expected disposal date • Does not include expected future inflation • Residual value, depreciation method and useful life must be reviewed at least annually

21. IAS 16 …contd. • Clarifies • Depreciation to continue on idle PPE • Requirements of components approach • An item of PPE often a combination of various items with separate useful lives • Use separate lives calculate depreciation, test for derecognition and replacement or renewal of a component of PPE • Cost of PPE – initial estimate of costs of dismantlement, removal or restoration of PPE • Costs recognised and measured under IAS 37

22. IAS 16 …contd. • Other changes • Capitalising subsequent costs • Use general recognition principle • No longer test against ‘originally assessed standard of performance’ • Requires derecognition of parts replaced • Clarifies and gives examples of items not to be included in acquisition costs • Start up costs • Cost of introducing new product or service • Administrative and general overhead costs • No depreciation charged if the residual value of asset exceeds the carrying value

23. IAS 16 …contd. • New disclosures • Depreciation • Whether recognised in the profit or loss or as part of cost of other assets • Accumulated depreciation at the end of FY • Change in estimates of • Residual value • Costs of dismantling, removing or restoring of PPE • Useful lives • Depreciation methods

24. IAS 16 …contd. • New disclosures • Revaluations • Methods and significant assumptions applied to estimate fair values • Reconciliation of carrying values at the beginning and end of the period

25. IAS 16 …contd. • Disclosures encouraged • Carrying amount of temporarily idle property, plant and equipment • Carrying amount of fully depreciated assets still in use • Carrying amount of assets retired from active use and not classified as held for sale as per IFRS 5 (IAS-35) • When the cost model is used, the fair value of assets when it is materially different from the carrying amount

26. IAS 17 Leases • Main changes • Lease of land and building to be split into two elements • A lease of land and a lease of building(s) • Based on the fair value of the components • A lessee can classify an operating lease as investment property, if it accounts for it as a finance lease

27. IAS 17 Leases • Main changes • Eliminates the choice in accounting for initial direct costs (lessors) • Include in the leased asset and recognise as an expense over the lease term • Manufacturer or dealer to recognise as expense at the time of recognition of selling profit • Special transition provisions • Inception and commencement of lease

28. IAS 21 The Effects of Changes in Foreign Exchange Rates • Incorporates SIC-19 and SIC-30 • Replaces ‘measurement currency’ with ‘functional currency’ – two have same meaning and the definition of ‘presentation currency’ added Approach • First step: Translate all the branches and subsidiaries FC balances into functional currency of the group, exchange differences to go to P&L • Second step: Translate financial statements to presentation currency, exchange differences to go to equity

29. IAS 21 The Effects of Changes in Foreign Exchange Rates • Incorporates SIC-19 and SIC-30 • No change in accounting practices for many entities except • Additional guidance on determining the functional currency • Emphasis on the currency that determines the pricing of transactions and in which transactions are denominated • Entities should reassess their functional currency to be consistent with new guidance

30. IAS 21 …contd. • Other changes • Eliminated distinction between foreign operations and foreign entities • But foreign operations and reporting entity likely to have same functional currency, so no real change • Goodwill and fair value adjustments to assets/liabilities arising on the acquisition of foreign operations shall be treated as the assets/liabilities of that foreign operations and be re-translated at each balance sheet date • Using closing rate

31. IAS 21 …contd. • Other changes • Special transition provisions for this change • Only prospective application required • Retrospective application encouraged • All other changes resulting from the application of IAS 21 be treated under IAS 8 • Eliminated the allowed alternative of capitalising unexpected severe devaluations

32. IAS 21 …contd. • Primary Rules • All exchange differences to go to P&L with exception: • When functional currency is different and translation into presentation currency is done, the exchange differences will go to equity • In case of monetary items forming part of net investment in a foreign operation presented in the consolidated financial statements of reporting entity, the exchange differences will go to equity

33. All FC monetary items at closing balance sheet rate • FC Non-monetary items measured in terms of historical cost at the rate of transaction date • FC Non-monetary items measured in terms of fair value at the rate when the fair value was measured • All exchange differences will go to P&L IAS 21 …contd. • Primary Rules 2. Foreign currency transactions presented in functional currency

34. Assets and liabilities at closing balance sheet rate • P&L items at the rate of transaction date • All exchange differences will go to equity IAS 21 …contd. • Primary Rules • Foreign currency transactions presented in other than functional currency • If gain or loss on a non-monetary item is recognised directly in equity, any exchange component of that gain or loss shall also be recognised directly in equity

35. IAS 21 …contd. • New disclosures • When presentation currency is different from functional currency • Disclose the fact, functional currency and reason for different presentation currency • Reason for change of functional currency, if applicable • Convenience translation also allowed • only can be shown as supplementary information • disclose functional currency and the method of translation

36. IAS 24 Related Party Disclosures • Definition of related party expanded to include • Parties with joint control over the entity • Joint ventures in which the entity is a venturer • Post employment benefit plans for the benefit of employees of an entity or entity or entity’s related party • Expanded scope includes close family members of • Individuals with direct, joint or indirect control or significant influence • Key management personnel of the entity or its parent

37. IAS 24 … contd. • No exemption • Parent companies, investors or ventures in separate financial statements • Profit oriented state-controlled enterprises • Requires new disclosures including • Terms and conditions of related party balances • Whether outstanding balances are secured • The nature of the consideration to be provided in settlement • Details of guarantees given or received

38. IAS 24 … contd. • Requires new disclosures including …contd. • The expense recognised during the period in respect of bad and doubtful debts due from related parties • Classification of amounts payable to, and receivable from, related parties into different categories of related parties • The name of the entity’s parent and, if different the ultimate controlling party. If neither of these two parties produce financial statements available for public use, the name of the next most senior parent that does so, is required

39. IAS 24 … contd. • Disclosure required separately for each of the following categories • The parent • Entities with joint control or significant influence • Subsidiaries • Associates • JVs • Key management personnel • Other RPs

40. IAS 24 … contd. • Disclosure not required (Significant Change) • Pricing of transactions – Discussions on the pricing of transactions and related disclosures between RP have been removed because the Standard does not apply to the measurement of RP transactions. Further, the Standard clarifies that an entity discloses that the terms of related party transactions are equivalent to those that prevail in arm’s length transactions only if such terms can be substantiated

41. IAS 27 Consolidated and Separate Financial Statements • Conditions changed for exemption not to prepare Consolidated Financial Statements (All to be met) • The parent is a wholly owned subsidiary, or a partially owned subsidiary and all owners (including those not otherwise entitled to vote) do not object • No debt or equity instruments traded in a public market • Not in process of filing its FS with a regulatory authority (eg SECP) to issue any class of instruments to public and • The ultimate or any intermediate parent of the parent produces consolidated FS that comply with IFRS and are available for public use

42. IAS 27 … contd. • Main changes • Clarifies – no exemption from consolidation • Venture capital organisations • Mutual funds • Unit trusts and similar entities • Uniform accounting policies to be used in the group • Impracticability exemption removed

43. IAS 27 … contd. • Main changes • Prohibits equity method of accounting by a parent in separate Financial Statements • New presentation of minority interests • Within equity but separately from the parent shareholders’ equity • Separately in income statement

44. IAS 27 … contd. • Other changes…contd. • Limited exemption – a newly acquired subsidiary excluded from consolidation only when • To be disposed of within 12 months from acquisition • Management actively seeking a buyer • Eliminates explicit exemption for a subsidiary operating under severe long-term restrictions (control must be lost) • Incorporates SIC-33 – potential voting rights

45. IAS 27 … contd. • Other changes • More disclosures required • Summarised information of subsidiaries not consolidated • Nature of relationship when parent does not own more than half of the voting power • Reasons why no control when the company owns more than half (potential) voting power • Reporting date of the FS of a subsidiary if different dates from parent

46. IAS 28 Investments in Associates • Main changes • Scope exclusion • For some types of investors • Venture capital organisations • Mutual funds • Unit trusts and similar entities • Investment limited insurance funds • Must be held for trading under IAS 39 • Similar exemptions in IAS 31

47. IAS 28 Investments in Associates • Main changes Equity Method for associates with significant control must be used whether the investor also has investments in subsidiaries and prepares Consolidated Financial Statements or not. However, the investor should not apply Equity method when preparing separate Financial Statements under IAS 27 The Standard does not permit not to use Equity method when associate with significant influence operates under severe long-term restrictions (Significant influence must be lost)

48. IAS 28 ...contd. • Conditions changed for exemption for application of Equity method similar to those provided to parents not to prepare Consolidated Financial Statements in IAS 27 • The investor is a wholly owned subsidiary, or a partially owned subsidiary and all owners (including those not otherwise entitled to vote) do not object to the investor not to apply Equity method • No debt or equity instruments traded in a public market • Not in process of filing its FS with a regulatory authority (eg SECP) to issue any class of instruments to public and • The ultimate or any intermediate parent of the investor produces consolidated FS that comply with IFRS and are available for public use

49. IAS 28 … contd. • Modifies guidance in SIC-20 Equity Accounting Method – Recognition of Losses • Investor’s net investment now includes other long-term interest except trade receivables, trade payables or any long-term receivables with adequate collateral (secured loans)

50. IAS 28 … contd. • Other changes • Similar exemption as in IAS 27 that an investee treated as financial asset if • To be disposed within twelve months from acquisition • Management is actively seeking a buyer • Uniform accounting policies to be use • Impractically exemption eliminated • Extensive disclosure requirements similar to IAS 27