IA2: FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS, SHARE-BASED PAYMENT, NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

This unit is about International Financial Reporting Standard 1, 2 and 5: First-Time Adoption of International Financial Reporting Standards, Share-Based Payment and Non- Current Assets Held for Sale and Discontinued Operations respectively.

FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS, SHARE-BASED PAYMENT, NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

IFRS: 1 FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

Key terms

Date of Transition to IFRS is the beginning of the earliest period for which an entity presets full comparative information under IFRSs in its first IFRS financial statements.

Deemed cost- An amount used as surrogate for cost or depreciated cost at a given date.

First IFRS financial statements- The first financial statements in which an entity adopt international financial reporting standards (IFRSs), by an explicit and unreserved statement of compliance with IFRSs.

First IFRS reporting period is the latest reporting period covered by an entity’s first IFRS financial statement.

International Financial Reporting Standards (IFRSs). Standards and interpretations adopted by the

International Accounting Standards Board (IASB). They comprise:

(a) International Financial Reporting Standards;

(b) International Accounting Standards; and

(c) Interpretations developed by the Interactional Financial Reporting Interpretations  Committee (IFRIC) or the former Standing Interpretations Committee (SIC).

Opening IFRS Statement of Financial Position

An entity’s statement of financial position at the date of transition to IFRSs.

Previous GAAP- the bans of accounting that a first-time adopter used immediately before adopting

IFRSs.

Objective of IFRS 1

The objective of IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:

(a) Is transparent for users and comparable over all periods presented;

(b) Provides a suitable starting point for accounting in accordance with IFRSs and

(c) Can be generated at a cost that does not exceed the benefits.

An entity is, therefore, required to apply IFRS 1, in its first IFRS financial statements and each interim financial report for the part of the period covered by its first IFRS financial statements.

Definition of first-time adoption

Financial statements prepaid by an entity in accordance with IFRSs are the entity’s first IFRS financial statements. If the entity:

(a) Presented its most recent previous financial statements in accordance with national requirements that are partially consistent or totally inconsistent with IFRSs;

(b) Prepared financial statements in accordance with IFRSs for internal use only;

(c) Prepared a reporting package for consideration purposes only or;

(d) Did not present financial statements for previous periods.

First IFRS Reporting Period

An entity is required to use those accounting policies that comply with IFRSs, effective at the end of its first IFRS reporting period. If First and last bank decides to prepare its financial statements using

IFRSs, with effect from the reporting period ending on 31 December, 20X9, in:

(a) Preparing and presenting its opening IFRS statement of financial position at 1 January 20X8; and

(b) Preparing and presenting its statement of financial position for 31 December 20X9 (including comparative amounts for 20X8), statement of comprehensive income, statement of changes in equity and statement of cash flows for the year to 31 December 20X9 (including  comparative amounts for 20X8) and disclosures (including comparative information for 20X8).

The bank’s date of transition to IFRSs is 1 January 20X8.

Content of opening IFRS statement of financial position

In its opening IFRS statement of financial and entity should:

  1. Recognize all assets and liabilities whose recognition is required by IFRSs;
  2. Not recognize items as assets or liabilities if IFRSs do not permit such recognition;
  3. Reclassify items it recognized in accordance with previous GAAP where appropriate; and
  4. Apply IFRSs in measuring all recognized assets and liabilities.

IFRS 1 allows a first-time adopter some exemptions in accounting for certain transactions, such as, share-based payment transaction, insurance contracts, leases, compound financial instruments and borrowing cost (see appendix D of IFRS 1 for details.

Explanation of Transition to IFRSs

An entity is required to explain how the transition from previous GAAP to IFRSs affected its reported financial position, financial performance and cash flows. To comply with this; a first-time adopter is required to include the following in its first IFRS financial statements.

(a) Reconciliations of its equity reported in accordance with previous GAAP, to its equity in accordance with IFRSs, for both the date of transition and of the latest period, presented in  the entity’s most recent financial statements in accordance with previous GAAP.

(b) A reconciliation to its total comprehensive income, in accordance with IFRSs for the latest  period, in the entity’s most recent annual financial statements.

(c) If the entity recognized or reverse any impairment losses for the first time in preparing its opening IFRS statement of financial position, the disclosures that IAS 36 Impairment of Assets would have required if the entity had recognized those impairment losses or reversals in the period beginning with the date of transition to IFRSs.

SELF ASSESSMENT EXERCISE

What is a deemed cost?

IFRS 2: SHARE-BASED PAYMENT

KEY TERMS

Entity instrument: A contract that evidences a residual interest on the assets of an entity after deducting all its liabilities.

Share-based payment transaction: A transaction in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options), or acquires goods or services by incurring liabilities to the supplier of those goods or services for amount that are based on the price of the entity’s share or other equity instruments of the entity.

Grand date: This is the date at which the entity and another party (including an employee) agree to a share-based payment arrangement.

Intrinsic value: The difference between the fair value of the shares to which the counterparty has the right to subscribe or receive and the price the counterparty is required to pay for those shares.

Measurement date: The date at which the fair value of the equity instruments granted is measured for the purposes of IFRS 2.

Reload feature: A feature that provides for an automatic grant of additional share options whenever the option holder exercises previously granted options using the entity’s shares, rather than cash, to satisfy the exercise price.

Reload option: A new share option granted when a share is used to satisfy the exercise price of a previous share option.

Share option: A contract that gives the holder the right but not the obligation, to subscribe to the entity’s shares at a fixed or determinable price for a specified period of time.

Vest: To become an entitlement, under a share-based payment arrangement, a counterparty’s right to receive cash, other assets or equity instruments of the entity vests when the counterparty’s entitlement is no longer conditional on the satisfaction of any vesting condition.

Vesting conditions: The conditions that determine whether the entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity, under a share-based payment arrangement.

Vesting period: The period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.

Equity-settled share based payment transaction: A share based payment transaction in which the entity receives goods or services as consideration for equity instrument of the entity (including shares or share options).

Cash-settled share-based payment transaction: A share-based payment transaction in which the entity acquires goods or services by other assets to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s share or other equity instruments of the entity.

Overviews

Typically, shares, share options or other equity instruments are granted to employees as part of their remuneration package, in addition to a cash salary and other employment benefits. Usually, it is not possible to measure directly the services received for particular component of the employee benefit.

By granting shares and share options, in addition to other remuneration, the entity is paying additional benefits is likely to be difficult. In view of the difficulty of measuring directly the fair value of the services received, the entity measures the fair value by reference to the fair value of the equity instrument granted. (IFRS 2.15).

Recognition

(a) An entity should recognize the goods or services received or acquired in a share-based payment transaction as assets if they qualify for recognition as such, otherwise, they should be recognized as expenses.

(b) An entity should recognize the goods and services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received. The entity shall recognize a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction, or a liability if the goods or services were acquired in a cash-settled share-based payment transaction.

ILLUSTRATION

On 1 January 20X6, Mozunim Plc, granted 1000 share options to each of its 20 executives on the management team. Each grant is conditional upon each executive being on the management team till 31 December 20X8. In other words, the options vest at the end of a three year period. The fair value of each share option is N50 and the company expects that all the share options will be vest required:

(a) Calculate the amount to be recognized as expense for each of the three years and show the double entry at the end of the first year.

(b) Suppose the company estimated that 20% actually left at the end of the third year, calculate the amount to be recognized as expense for each of the three years.

SUGGESTED SOLUTION

(a) If all the options vest, the annual expense is calculated as follows: 1000 options x N50 x 1/3 = N333,333.

The double entries at the end of 20X6, would be as follows:

Dr profit or loss – N333,333

Cr Equity- N333,333

(b) If 20% is estimated to leave but 25% actually left in the third year, the annual expense would be calculated as follows:

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Measurement of equity settled transactions

(a) For equity-settled share-based transactions, the entity shall measure the goods and services received, and the corresponding increase in equity, directly, at the fair value of the goods and services received.

(b) If the entity cannot estimate reliably the fair value of the goods and services received, the entity shall measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.

Simply put, the fair value of equity-settled transactions is determined in two ways: (1) directly, at the fair value of the goods or services received; and (2) indirectly, by reference to the value to shares issued.

ILLUSTRATION

The management of Agudama Fishes Plc encountered some problems with its fish lake in Bayelsa State. To solve the problem, the company sought for and obtained the specialist advice of Professor T. Popoola, an environmental biologist, in one of the nation’s premier universities. To pay for his services, the company gave him 20,000 of its 50k shares with market value of N2.80 each.

You are required to show how this transaction would be accounted for in accordance with IFRS 2.

SUGGESTED SOLUTION

Under IFRS 2, an equity-settled transaction that cannot be measured directly at the fair value of the services received should be measured indirectly by reference to the fair value of the equity instruments granted.

The formal entries would be as follows:

Dr share capital                                                                                       N10,000

Cr share premium                                                                                   N46,000

Cash-settled share-based transactions

For cash-settled share-based payment transactions, the entity should measure the goods or services acquired and liability incurred at the fair value of the liability. Until the liability is settled, the entity should re-measure the fair value of the liability at the end of each reporting period and at the date of settlement, with any charges in fair value recognized in profit or loss.

Disclosures

An entity should disclose information that will enable users to understand:

(a) The effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position;

(b) How the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and

(c) The nature and extent of share-based payment arrangements that existed during the period.

SELF ASSESSMENT EXERCISE

What is a share-based payment transaction?

IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Classification as held for sale

A non-current asset or disposal group should be classified as, held for sale if its carrying amount will be recovered principally through a sale of transaction rather than through continuing use.

The standard requires the following conditions to be met for such a classification to take place:

(a) The asset must be available for immediate sale in its present condition;

(b) Management must be committed to a plan to sell the asset or disposal group;

(c) An active programme to locate a buyer and complete it at a reasonable price must have  been initiated;

(d) Sale is expected to be completed within one year; and

(e) It is unlikely that significant change to the plan will be made or that the plan will be  withdrawn.

When a non-current asset or disposal group is acquired exclusively with a view to its subsequent disposal within one year, it should be classified as held for sale. (IFRS 5.11).

Measurement of a non-current asset

(a) A non-current asset or disposal group held for sale should be measured at the lower of its carrying amount and fair values less cost to sell.

(b) A non-current asset or disposal group classified as held for distribution to owners should be measured at carrying amount and fair value less costs to distribute.

(c) The entity should recognize an impairment loss for any initial or subsequent write-down of the asset (or disposal group), to fair value less costs to sell. Any subsequent increase in fair value less cost to sell should be recognized as a gain.

(d) The impairment loss (or any subsequent gain) recognized for a disposal group, should be allocated to the carrying amount of the assets in accordance with IAS 36.

ILLUSTRATION

Weris Hotels Plc plans to dispose of a group of its assets in Katuna, as an asset sale. The assets constitute a disposal group and had the following values:

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The company estimates that fair value less cost to sell of the disposal group amounts to N30.4million.

You are required to show how the impairment loss will be allocated to non-current assets. (Adopted from IFRS 5 implementation guide).

SUGGESTED SOLUTION

The impairment loss is the difference between the carrying amount N39million and fair value less cost to sell, N30.4million.

According to IAS 36, the impairment loss will first reduce the goodwill. The residual loss will be allocated to the other non-current assets prorate, based on their carrying amounts.

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Discontinued operations

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale and;

(a) Represents a separate major line of business or geographical area of operations;

(b) Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operation; or

(c) Is a subsidiary acquired exclusively with a view to reselling.

Presentation and disclosure

IFRS 5 requires the following disclosures concerning discontinued operations:

(a) An entity shall disclose a single amount in the statement of comprehensive income comprising the total of:

(i) the post-tax profit or loss of discontinued operations and

(ii) the post-tax gain or 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.

(b) An analysis of the single amount in (a) into:

(i) the revenue, expenses and pre-tax profit or loss of discontinued operations;

(ii) the related tax;

(iii) the gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the discontinue operation; and

(iv) the related income tax expense.

The following presentation and disclosures are required in respect of assets classified as held for sale:

(a) An entity should present a non-current asset classified as held for sale and the assets of a disposal group classified as held for sale separately from other assets in the statement of financial position.

(b) The entity should disclose the following information in the notes to the financial statements  of the period:

(i) a description of the non-current assets;

(ii) a description of the facts and circumstances of the sale; and

(iii) if applicable, the reportable segment in which the non-current asset is presented.

ILLUSTRATION

As a result of frequent disruption of its operations in Zaramafa, Opuene Oil Services Ltd decided to sell off its business in that geographical area. The net assets of the company’s businesses in

Zaramafa at 31 December 20X8 amounted to N208million, but its fair value less cost to sell has been estimated at N198million. The company is confident that it could affect the disposal within one year as willing buyers have started indicating interest.

During the year ended 31 December, 20X8 the businesses in Zaramafa reported the following.

Revenue operating expenses N126million and estimated income tax, N15million.

The rest of the other businesses of Opuene Oil Services ltd had the following incomes and expenses.

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You are required to prepare a statement of comprehensive income for the year ended 31 December 20X8 in accordance with IFRS 5. Ignore comparative figures.

SUGGESTED SOLUTION

OPUENE OILD SERVICES LTD

Statement of Comprehensive Income for the year ended 31 December, 20X8

Continuing operations

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SELF ASSESSMENT EXERCISE

Solve the questions in the illustrations without looking at the solution and later compare your result to the solutions in the illustrations.

CONCLUSION

International Financial Reporting Standards (IFRS) are principles-based standards, interpretations and the framework (1989) adopted by the International Accounting Standards Board (IASB).

Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IASs were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC).

On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards IFRS.

 

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