1. classification of liabilities

8/20/2019 1. Classification of Liabilities

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International Financial Reporting Standards

The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation.

© IFRS Foundation !" #annon Street $ondon %#&' ()* +. www.ifrs.org

#lassification of

lia-ilitiesoint /orld Ban0 and IFRS Foundation

1train the trainers2 wor0shop hosted -y the

%##B, !" April to & 'ay 3"43





presenter,

not necessarily those of the IASB or IFRS Foundation

#oncepts5classification of lia-ilities




© 3"4" IFRS Foundation. !" #annon Street $ondon %#&' ()* +. www.ifrs.org

!Classification concepts

• 6-7ective of financial reporting

• Financial state8ents portray financial effects of

transactions and events -y9 : grouping into -road classes ;the ele8ents, eg lia-ility<

: su-=classify ele8ents

• IAS 4 : application of IFRSs with additional disclosures when

necessary results in a fair presentation ;faithful

representation of transactions, events and conditions< : don2t offset assets and lia-ilities or inco8e and

expenses





&

Classification concepts—assets

and claims

• Infor8ation a-out the nature and a8ounts of areporting entity2s econo8ic resources and

clai8s can help users to identify the reporting

entity2s financial strengths and wea0nesses.

• That infor8ation can help users to9 : assess the reporting entity2s li>uidity and

solvency

: its needs for additional financing and howsuccessful it is li0ely to -e in o-taining that

financing.

;#F.6B4!<





?Classification concepts—claims

• Infor8ation a-out priorities and pay8entre>uire8ents of existing clai8s helps users to

predict how future cash flows will -e distri-uted

a8ong those with a clai8 against the reporting

entity ;#F.6B4!<




A liability is defined as a:

• present o-ligation

• arising fro8 a past event

• the settle8ent of which is expected to lead toan outflow of future econo8ic -enefits fro8 the

entity

(Concept—liability definition




Concept—liability recognition

A liability is recognised when:• it is probable that any future econo8ic -enefit

associated with the ite8 will flow fro8 the

entity@ and• the ite8 has a value that can -e 8easured with

relia-ility.

For so8e ite8s that satisfy the definition of a lia-ility,significant 7udge8ent is re>uired to evaluate whether

such ite8s satisfy the recognition criteria. Individual

IFRSs provide principles and application guidance.






presenter,


ifferentiating e>uity fro8lia-ilities




Liabilities and equity

C ifferentiation -etween a financial lia-ility and

e>uity depends on whether there is an o-ligation

to deliver cash ;or so8e other financial asset<.C *owever, note the exception for certain putta-le

instru8ents.

C /hen a transaction will -e settled in the issuer2s

own shares, classification depends on whetherthe nu8-er of shares to -e issued is fixed or

varia-le.

D

IAS 32

Financial Instru8ents9 Eresentation




IAS 32


•

he following are equity: : Eutta-le instru8ent that entitles holder to pro

rata share of net assets on li>uidation

: Instru8ent that is auto8atically redee8ed if

an uncertain future event occurs or death orretire8ent of holder

: Su-ordinated instru8ent paya-le only on

li>uidation




IAS 32


•

he following are liabilities: : Instru8ent is paya-le on li>uidation, -ut the

a8ount is su-7ect to a 8axi8u8 ceiling

: %ntity is o-liged to 8a0e pay8ents -efore

li>uidation : such as 8andatory dividend

: 'andatorily redee8a-le preference shares




Compound financial instruments

C A co8pound financial instru8ent, such as a

converti-le note, is split into e>uity and lia-ility

co8ponents.C /hen the instru8ent is issued, the e>uity

co8ponent is 8easured as the difference

-etween the fair value of the co8pound

instru8ent and the fair value of the lia-ilityco8ponent.

43

IAS 32





!"ample—compound financial

instrument• Issuance of con#ertible debt $ !"ample

: 44)4 issue at par a &G converti-le -ond, parand 8aturity a8ount H ?",""", 8aturity in ?

years : If no conversion feature, would have paid (G : #alculate present value of cash flows at (G9

: E ?",""" due in ? years J (G H !,!(! : E annuity 3,"""year ? years J (G H K,&3?

: Total E H &?,KK%ebit cash &'('''

Credit financial liability )&(*++

Credit equity ,con#ersion right- )(2.2




reatment of interest( di#idends( gains andlosses

C #lassification of a financial instru8ent as a

financial lia-ility or e>uity deter8ines thetreat8ent of the interest, dividends, losses or

gains on the financial instru8ent as ite8s of

inco8e or expense, or as changes in e>uity.

C 1dividends2 on shares classified as lia-ilities arerecognised as expenses and affect profit or

loss.

4&

IAS 32





Comparison to the IFRS for SMEs

C Section 33 Liabilities and Equity of the IFRS for

SMEs and IAS !3 share si8ilar principles.

4?

IAS 32



S 32



/udgements and estimates

C So8e financial instru8ents 8ay have the legal

for8 of e>uity -ut their su-stance is one of a

lia-ility.C Separating the lia-ility and e>uity co8ponents

re>uires fair value esti8ates of the lia-ility

co8ponent -ased on the contractual strea8 of

future cash flows discounted at the 8ar0et ratethat would have -een applied without the

conversion option.

4(

IAS 32



I01S 2



I01S 2

Share=-ased Eay8ent

1ecognitionC The transaction is recognised when the entity

o-tains the goods or services.

C Loods or services received are recognised asassets or expenses as appropriate.

C The transaction is recognised as e>uity ;if e>uity=

settled< or as a lia-ility ;if cash=settled<.

C If a pay8ent is re>uired, the pay8ent a8ount is

-ased on the price of the entity2s shares ;eg

share appreciation rights<.

4






presenter,


#lassifying lia-ilities




4D4DLiability

Liabilities

Contingent

0inancial

ro#isions

etc

Leases

%efined

enefit

%eferred

a"

4 a r i o u

s

4 a r i o u

s5 i l

5 i l

0 L 6 r u

l e s

7 L 6 n

i l

3 e s t e s

t 8 t o s e t t l e

9 3 : S d a t e

0 a i r

# a l u

e

A m C

( 0 4 ;

< o t h

e r

a " r a t e s <

u n d i s c o u n

t e d

a " r a t e s

<

u n d i s c o u n

t e d

2 = C p l a n o b l i g a t i o n l e s s 0 4 p l a n a s s e t s a n d a r b i t r a r y r u l e s

2 = C p l a n o b l i g a t i o n

l e s s 0 4 p l a n a s s e t s

a n d a r b i t r a r y r u l e s

0 L 6 0 4

o r i f l e s s

2 4 ; L 2

7 L 6 r u

l e s

, n

i l -

3

e s t e s t 8 t o

S e t t l e 9

3 : S d a t e

Classification( recognition and

measurement




ro#isions

C A provision is a lia-ility of uncertain ti8ing or

a8ount ;ie recognition is uncertain<.

C A lia-ility 8ay -e a legal o-ligation or aconstructive o-ligation.

C A constructive o-ligation arises fro8 the entity2s

actions, through which it has indicated to others

that it will accept certain responsi-ilities, and asa result has created an expectation that it will

discharge those responsi-ilities.

3"

IAS 3*: Erovisions, #ontingent $ia-ilities

and #ontingent Assets




34



!"amples—pro#isions

• !" .: /aste fro8 A2s factory conta8inated the

groundwater. $awsuit9 local co88unity see0

co8pensation for da8ages to health fro8

conta8ination. A ac0nowledges wrongdoing.#ourt is deciding extent of the co8pensation.

$awyers expect ruling in M3 yrs N

co8pensation in the range of #+4,""",""" to

#+!",""",""".




33



• !" 2: /aste fro8 A2s factory conta8inated thegroundwater. Re>uired -y law to restore theenviron8ent. %sti8ates restoration cost-etween 4,""",""" N 4?,""",""". +nsure ofperiod to co8plete restoration.

• !" 3: A 8anufacturer gives warranties to thepurchasers of its goods. /arranty H 8a0egood, -y repair or replace8ent, 8anufacturingdefects that -eco8e apparent within ! years ofsale.




3!



!"amples—not pro#isions

• !" .: 1provision2 for self=insurance

• !" 2: S0i=resort operator operates in a verycyclical -usiness, with 1good years2 and 1-ad

years2 depending pri8arily on the weather. Toreduce earnings volatility, it recognises1provisions2 in 1good years2 to reverse in 1-adyears2.

• !" 3: 1provision2 for depreciation

• !" ): 1provision2 for dou-tful de-ts




3&



!"ample—constructi#e obligation• /aste fro8 A2s factory conta8inated the

groundwater. A is not re>uired -y law to

restore the conta8inated environ8ent N there

is no court case. *owever, in the reportingperiod the entity pu-licly announced that it

would restore the conta8inated environ8ent

within the next 43 8onths.




Contingent liabilities

C #ontingent lia-ilities are9

C possi-le o-ligations whose existence will -e confir8ed

-y uncertain future events that are not wholly within the

control of the entity.

C o-ligations that are not recognised -ecause theira8ount cannot -e 8easured relia-ly or settle8ent is

not pro-a-le ;eg litigation against the entity when the

occurrence of any wrongdoing -y the entity is uncertain

and it is 8ore li0ely than not that the entity will

successfully defend the case<.

C #ontingent lia-ilities are not recognised5definition and

recognition criteria are not 8et.

3?




S #



3(



!"ample—contingent liability

• A co88unity is see0ing co8pensation fro8 Afor da8ages to their health as a result ofconta8ination -elieved to -e caused -y A2splant.

It is dou-tful whether A is the source of theconta8ination -ecause

: 8any entities operate in the sa8e area

producing si8ilar waste N it is unclear whichentity is the source of the lea0

: A has ta0en precautions to avoid lea0s andis vigorously defending the case.




3



!"ample—contingent liability continued• *owever, it is not certain that it did not caused

the lea0 and the true offender will only -eco8e0nown after extensive testing has -een

perfor8ed. A2s legal counsel expects a court ruling inapproxi8ately 3 years. If A loses the case,co8pensation is li0ely to -e in the range of

#+4,""",""" to #+!",""",""".




3K



!"ample—contingent liability continued

It may be uncertain whether the entity has a

present obligation—this is the matter being

determined by the court8

: if ta0ing account of all of the availa-le

evidence, it is pro-a-le that the entity will

successfully defend the court case then the

entity has a possi-le o-ligation and hence acontingent lia-ility.




/udgements and estimatesC In so8e cases 7udge8ent is used to deter8ine

whether to recognise a provision ;lia-ility< or

8erely to disclose a contingent lia-ility.

C For exa8ple, when defending a court case in

which it is difficult to predict the outco8e.

C In other cases 7udge8ent is used to deter8ine

whether to disclose a contingent asset.C For exa8ple, a plaintiff in a court case in

which it is difficult to predict the outco8e.

3D




I01S ?



3"44 6cto-er Sao Eaulo IFRS #onference

All financial liabilitiesAmortised

cost

F6 for

8is8atch,

8anaged on

F -asis and

hy-rids!"cept:

>eld for trading

0air #alue

through

<L

7wn

credit in

7CI

C >ybrid financial liabilities are bifurcated

C 5o reclassification permitted

!"

Classification model: financial liabilities

I01S ?

Financial Instru8ents


I01S ?



/udgements and estimatesC #lassification of financial assets into IFRS D

categories drives the su-se>uent 8easure8entand re>uires careful consideration of all availa-le

evidence.C #lassification is 8ade pri8arily -ased on an

entity2s -usiness 8odel

C Fair value 8easure8ent re>uires 8axi8u8

possi-le use of o-serva-le 8ar0et data and the8ini8u8 use of entity=specific factors.

C In the a-sence of a >uoted active 8ar0et, it will -enecessary to use valuation techni>ues.

!4

I01S ?

Financial Instru8ents


IAS .*



Classification of leases

C A finance lease transfers to the lessee su-stantiallyall the ris0s and rewards incidental to ownership of

the leased asset.

C All other leases are operating leases.

C /hen a lease includes -oth land and -uildings

ele8ents, the classification of the land and -uilding

ele8ents are considered separately. : in deter8ining whether the land ele8ent is an

operating or finance lease, an i8portant consideration

is that land nor8ally has an indefinite econo8ic life.

!3

IAS .*

$eases


IAS .*



!!

IAS .*

$eases

• Situations that indi#idually or in

combination normally indicate a financelease: : lease transfers ownership of the asset to

lessee

: fro8 inception lessee reasona-ly certain toexercise -argain purchase option : lease ter8 is for the 8a7or part of asset2s

econo8ic life : at inception E of '$Es H su-stantially all

asset2s fair value : specialised asset ;only lessee can use

without 8a7or 8odifications<


IAS .*



!&

IAS .*

$eases• Situations that indi#idually or in

combination could indicate a finance lease : lessee can cancel the lease -ut

co8pensates the lessor2s for associatedlosses

: gains or losses fro8 the fluctuation in theresidual value of the leased asset accrue tothe lessee

: lessee can continue the lease for a

secondary period at a rent that issu-stantially lower than 8ar0et rent




!"amples—lease classification

• !" .: 6n 443")4 enter into ?=yr

non cancella-le lease over a 8achine.‑

'achine2s cash cost H 4"",""", econo8iclife H 4" yrs and residual value H ".

Annual lease pay8ents on !4439 & O3!,""" N 3!,?!D at end of yr ? whenownership transfers to the lessee.

The interest rate i8plicit in the lease is

?G p.a. which approxi8ates lessee2sincre8ental -orrowing rate.

!?





• !" 2: Sa8e as %x 4 except ownership of the8achine does not auto8atically transfer to thelessee at the end of the lease. Instead, thelessee has an option to ac>uire the 8achinefro8 the lessor on 443")( for #+4.

• !" 3: Sa8e as %x 4 except econo8ic life of

the 8achine is five years and ownership of the8achine does not transfer to the lessee at theend of the lease.

!(





• !" ): Sa8e as %x 4 except ownership does

not transfers to lessee at the end of the lease.

Instead lessee has an option to continue the

lease asset for a further ? years at a rent of#+4 per year.

• !" &: Sa8e as %x 4 except ownership

transfers to the lessee at the end of the lease

for a varia-le pay8ent e>ual to the asset2s

then fair value ;instead of 3!,?!D<.

!


IAS .*



7perating leasesC The leased asset re8ains in the state8ent of

financial position of the lessor.

C 6perating lease pay8ents are usuallyrecognised in profit or loss on a straight=line

-asis.

C Fro8 the perspective of the lessee, if pay8ents

are su-7ect to escalation, straight=line

recognition is profit or loss 8ay give rise to a

lia-ility on the state8ent of financial position

!K

IAS .*

$eases


IAS .*



0inance leasesC Finance leases are accounted for -y lessees as

an asset purchased ;other IFRSs then apply to

the asset< on credit ;a lia-ility<.

C Initially, the lia-ility is recognised at9

C the fair value of the leased property, or if lower

C The present value of the 8ini8u8 lease

pay8ents5the i8plicit interest rate is used as

the discount rate

!D

IAS .*

$eases


IAS .?



!mployee benefitsC %8ployee -enefits are all for8s of consideration

paid for services of e8ployees or for ter8ination

of e8ploy8ent.

C IAS 4D separates e8ployee -enefits into &

categories9

C short=ter8 -enefits

C post=e8ploy8ent -enefits

C other long=ter8 -enefits

C ter8ination -enefits

&"

IAS .?

%8ployee Benefits


IAS .?



Short$term employee benefitsC Short=ter8 e8ployee -enefits are e"pected to

-e settled wholly -efore 43 8onths after the

period in which the e8ployee rendered the

related service.

C recognise as an expense as the e8ployee

provides the related service

C 8easure o-ligations at undiscounted a8ounts;application of the cost constraint<

C no disclosures specified in IAS 4D.

&4

IAS .?

%8ployee Benefits


IAS .?



&3

IAS .?

%8ployee Benefits

• !"amples of Short$term employee benefits

include: : wages, salaries N social security

contri-utions@ : ST co8pensated a-sences ;paid annual

leave N paid sic0 leave< for a-sencesexpected to occur within 43 8onthli8itation@

: profit=sharing N -onuses paya-le within 43

8onth li8itation@ N : non=8onetary -enefits ;such as 8edicalcare, housing, cars and free or su-sidisedgoods or services< for current e8ployees.


IAS .?



ost$employment benefitsC Eost=e8ploy8ent -enefits are paya-le after the

co8pletion of e8ploy8ent.

C Two types9

C defined contribution plan( entity pays fixed

contri-utions to a separate entity ;a fund< and

has no legal or constructive o-ligation to pay

further contri-utions if the fund cannot pay the

e8ployee.

C all other post=e8ploy8ent plans are defined

benefit plans.

&!

IAS .?

%8ployee Benefits


IAS .?



ost$employment benefits—definedcontribution

C %8ployees ;not the e8ployer< are exposed to ris0s.

C%8ployer9

C recognises contri-utions paya-le as an expense as

the e8ployee provides services in exchange for the

contri-utions.

C 8easures o-ligations for unpaid contri-utions atundiscounted a8ounts ;application of the cost

constraint<.

C disclose a8ount recognised as an expense.

&&

IAS .?

%8ployee Benefits


IAS .?



ost$employment benefits—defined benefit

C Recognise the defined -enefit lia-ility as follows9

C use the pro7ected unit credit 8ethod -ased on

actuarial assu8ptions to 8easured the o-ligation at

its present value@ less

C the fair value of plan assets ;if any<.

C Recognise all changes in the defined -enefit lia-ility

;asset< when they occur9

C service costs and net interest in profit and lossC re8easure8ents in other co8prehensive inco8e.

C %xtensive disclosures specified.

&?

IAS .?

%8ployee Benefits


IAS .?



7ther long$term benefitsC 6ther long=ter8 -enefits are all e8ployee

-enefits other than short=ter8 e8ployee

-enefits, post=e8ploy8ent -enefits and

ter8ination -enefits ;eg long=service leave<

C Recognition and 8easure8ent is the sa8e as

that for post=e8ploy8ent -enefits9 defined

-enefit plans.C Po disclosures specified in IAS 4D.

&(

IAS .?

%8ployee Benefits


IAS .?



ermination benefits

C Ter8ination -enefits arise only on ter8ination, rather

than during e8ploy8ent.

C Erinciple5the event that gives rise to an o-ligation is the

ter8ination of e8ploy8ent rather than e8ployee service

C Recognise expense and a lia-ility at the earlier of9

C when the entity can no longer withdraw the offer of those

-enefits

C when the entity recognises the related restructuring

provision in accordance with IAS !.

C Po disclosures specified in IAS 4D.

&

IAS .?

%8ployee Benefits




&K

@uestions or comments

!"pressions of indi#idual#iews

by members of the IAS and

its staff are encouraged8 he

#iews e"pressed in this

presentation

are those of the presenter8

7fficial positions of the IAS

on accounting matters are

determined only after

e"tensi#e due process and

deliberation8




&D

The re>uire8ents are set out in International FinancialReporting Standards (IFRSs), as issued -y the IASB at4 anuary 3"43 with an effective date after 4 anuary3"43 -ut not the IFRSs they will replace.

The IFRS Foundation, the authors, the presenters andthe pu-lishers do not accept responsi-ility for losscaused to any person who acts or refrains fro8 actingin reliance on the 8aterial in this EowerEointpresentation, whether such loss is caused -y

negligence or otherwise.

&D

1. classification of liabilities

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