+ sections 20-22 ifrs on sme’s cera.cruz.macaraig.rodriguez.tan
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SECTIONS 20-22IFRS on SME’s
CERA.CRUZ.MACARAIG.RODRIGUEZ.TAN
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+COVERAGE
• LeasesSection 20
• Provisions and Contingencies
Section 21
• Liabilities and Equity
Section 22
+SECTION 20
LEASES
+SECTION 20: Leases
Applies to all leases other than: Leases to explore for or use minerals, oil, natural gas and similar
non-regenerative resources Licensing agreements for items such as motion picture films,
video recordings, plays, manuscripts, patents and copyrights Measurement of property held by lessees for investment
property and by lessors under operating leases Measurement of biological assets by lessees under finance
leases and by lessors under operating leases Leases that could lead to a loss as a result of contractual terms
unrelated to changes in the price of the leased asset, changes in foreign exchange rates, or default by one of the counterparties
Onerous operating leases
SCOPE
+SECTION 20: Leases
A. Definition:
A lease is an agreement that transfers the right to use assets in return for payment Finance Lease – transfers substantially all the risks and rewards incidental to
ownership. Substantially all risks and rewards are presumed transferred if:o the lease transfers ownership of the asset to the lessee by the end of the lease
termo the lessee has a 'bargain purchase option'o the lease term is for the major part of the economic life of the asset even if title is
not transferred at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
o the leased assets are of such a specialized nature that only the lessee can use them without major modifications
o the lessee bears the lessor losses if cancelledo a secondary rental period at below market rateso the residual value risk is borne by the lessee.
Operating Lease – does not transfer substantially all the risks and rewards incidental to ownership
BASIC PRINCIPLES
+SECTION 20: Leases
B. Operating Lease
Initial Measurement Lessee
expenses on a straight-line basis or another basis that represents the use of the asset, unless payments to the lessor increase with expected inflation in which case the payments are expensed when payable
Lessor presents assets subject to operating leases in the Statement of Financial
Position according to the nature of the asset income is recognized on a straight-line basis or another basis that
represents the use of the asset, unless payments received increase with expected inflation, in which case the payments are recognized as income when payable
depreciation is recognized on the same basis as for similar assets Initial Direct Costs incurred in arranging leases are added to the carrying
amount of the leased asset and expensed over the lease term on the same basis as the lease income
BASIC PRINCIPLES
+SECTION 20: Leases
B. Operating Lease
Sale and Leaseback Selling Price = Fair Value – profit or loss is
recognized immediately Selling Price < Fair Value – profit or loss is
recognized immediately, except if compensated for by future below-market price payments, which are deferred and amortized
Selling Price > Fair Value > Carrying Value
Deferred Outright
BASIC PRINCIPLES
+SECTION 20: Leases
B. Operating Lease
Lease bonus – amortized over lease term
Initial direct costs – deferred over lease term
BASIC PRINCIPLES
+SECTION 20: Leases
D. Finance Lease Initial measurement
Lessee – measured at the lower of Fair Value of the leased property or present value of Minimum Lease Payments
Lessor – presented as receivables at amounts equal to the net investment: Gross Investment discounted at the interest rate implicit in the lease
BASIC PRINCIPLES
+SECTION 20: Leases
D. Finance Lease Subsequent measurement
Lesseeo Minimum Lease Payments are apportioned between
finance charges and reduction of the liability using the effective interest method
o Asset is depreciated over the shorter of the lease term and useful life
Lessor o Finance income reflects a constant rate of return on
net investment. Payments are applied against the gross investment to reduce both the principal and unearned finance income
BASIC PRINCIPLES
+SECTION 20: Leases
D. Finance Lease Sale and Leaseback
Seller/lessee defers any gain and amortizes it over the lease term
BASIC PRINCIPLES
+SECTION 20: Leases
E. Derecognition Leases are classified at inception of the lease
and this is not changed during the term unless there is an agreement between the lessee and lessor, in which case the classification is reevaluated
BASIC PRINCIPLES
+Key Differences
+SECTION 21
PROVISIONS
AND
CONTINGENCIES
+ SECTION 21: Provisions & Contingencies
Applies to all provisions, contingent liabilities and contingent assets except those covered by other sections of the IFRS for SME (e.g. leases, construction contracts, employee benefits and income tax)
SCOPE
+
A. Provision An entity must recognize a provision if, and only
if A present obligation (legal or
constructive) has arisen as a result of a past event (the obligating event),
Payment is probable ('more likely than not'), and
The amount can be estimated reliably
BASIC PRINCIPLES
SECTION 21: Provisions & Contingencies
+
A. Provision Initial recognition
Initially recognized at the best possible estimate at the reporting date.
This value should take into any time value of money if this is considered material.
When all or part of a provision may be reimbursed by a third party, the reimbursement is to be recognized separately only when it is virtually certain payment will be received.
BASIC PRINCIPLES
SECTION 21: Provisions & Contingencies
+
A. Provision Subsequent measurement
Subsequently, provisions are to be reviewed at each reporting date and adjusted to meet the best current estimate
Any adjustments are recognized in profit and loss while any unwinding of discounts is to be treated as a finance cost
BASIC PRINCIPLES
SECTION 21: Provisions & Contingencies
+
A. Provision Restructuring
Must accrue provisions for:o Onerous contractso Warrantieso Restructuring if legal or constructive obligation to
restructureo Sales refunds
May NOT accrue provisions for:o Future operating losses, no matter how probableo Possible future restructuring (plan but not yet a legal or
constructive obligation)
BASIC PRINCIPLES
SECTION 21: Provisions & Contingencies
+
B. Contingencies Contingent liabilities
o These are not recognized as liabilitieso Unless remote, disclose an estimate of the financial
effect, indications of the uncertainties relating to timing or amount, and the possibility of reimbursement
Contingent assetso These are not recognized as assets.o Disclose a description of the nature and the financial
effect if probable
BASIC PRINCIPLES
SECTION 21: Provisions & Contingencies
+
Full IFRS (IAS 37) provides significantly more guidance on provisions relating to restructurings
Key Differences
+SECTION 22
LIABILITIES
AND
EQUITY
+SECTION 22: Liabilities and
Equity Classifies financial instruments as either
liabilities or equity
Applies to the accounting for equity instruments issued to owners of the entity
Does not include: Interest in joint ventures, subsidiaries and
associates Employers’ rights and obligations under
employee benefit plan Contracts for contingent consideration in a
business combination (acquirer only) Share-based payment transactions (Sec 26)
SCOPE
+SECTION 22: Liabilities and
EquityA. Classification between liabilities and
equity
Liabilities - obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits
Equity - residual interest of assets in an entity after paying all obligations
BASIC PRINCIPLES
+SECTION 22: Liabilities and
Equity Special Cases:
A. Financial instruments that meets the definition of a liability can be classified as equity
1. Puttable Instruments Pro rata share of the entity's net assets in the event of liquidation. The instrument is the most subordinate class.
o Has no priority over other claims to the assets of the entity on liquidation
o Does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments
All financial instruments in the most subordinate class have identical features.
Apart from the puttable features, there must be no other contractual obligation to deliver cash or other assets associated with the instrument.
The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit/loss or change in the net assets of the whole entity over the life of the instrument
BASIC PRINCIPLES
+SECTION 22: Liabilities and
EquitySpecial Cases:
A. Financial instruments that meets the definition of a liability can be classified as equity
2. Instruments subordinate to all other classes of instruments that impose an obligation on the entity to deliver a pro rata share of the net assets of the entity only on liquidation.
3. Members' shares in co-operative entities and similar instruments are equity if:
o the entity has an unconditional right to refuse redemption of the members' shares, or
o redemption is unconditionally prohibited by local law, regulation or the entity's governing charter.
BASIC PRINCIPLES
+SECTION 22: Liabilities and
EquitySpecial Cases:
B. Instruments classified as liability rather than equity1. If the distribution of net assets on liquidation is subject
to a maximum amount (a ceiling).
2. If it obliges the entity to make payments to the holder before liquidation, such as a mandatory dividend.
3. Mandatorily redeemable preference shares
4. A puttable instrument that entitles the holder to an amount measured on some other basis not under IFRS for SMEs (like local GAAP) is a financial liability.
5. A puttable instrument that is classified as equity in a subsidiary’s financial statements is classified as a liability in the consolidated group financial statements.
6. Cumulative, redeemable preference share
BASIC PRINCIPLES
+SECTION 22: Liabilities and
EquityBASIC PRINCIPLES
B. Original Issue of shares or other equity instruments
Recognition: Recognized as equity when another party is obliged
to provide cash or other resources in exchange for the instruments. Applies equally to the sale of options, rights, warrants and similar equity instruments.
Instrument is issued before cash is received = receivable, offset to equity
Subscribed shares = no increase in equity
+SECTION 22: Liabilities and
EquityBASIC PRINCIPLES
B. Original Issue of shares or other equity instruments
Measurement: At fair value, net of direct issuance costs. If payment is deferred, measure at present value. Transaction costs = deduction from equity, net of
income tax benefit
+SECTION 22: Liabilities and
EquityBASIC PRINCIPLES
C. Stock dividends and stock splits
Stock dividends and splits do not result in changes to total equity.
An entity shall reclassify amounts within equity in accordance with applicable laws.
+SECTION 22: Liabilities and
EquityBASIC PRINCIPLES
D. Convertible debt or similar compound financial instruments
Proceeds on the issue are allocated between the liability and equity component.
Liability component is measured at fair value of a similar liability that does not have a conversion feature. Uses effective interest method for the bond discount or premium.
Residual amount is allocated to the equity component. Transaction costs shall be allocated between the debt
and equity component based on their relative fair values
+SECTION 22: Liabilities and
EquityBASIC PRINCIPLES
E. Treasury SharesMeasured at the fair value of the consideration
paid
Deducted from equity
No gain or loss is recognized on the purchase, sale, issue or cancellation
+SECTION 22: Liabilities and
EquityBASIC PRINCIPLES
F. Distributions to OwnersEquity is reduced by the amount of distributions
to owners, net of any income tax benefits.
Liability to distribute non-cash assets to its owners is recognized at the fair value of the assets to be distributed
+SECTION 22: Liabilities and
EquityBASIC PRINCIPLES
G. Non-controlling interest and transactions in shares of a consolidated subsidiary
Changes in a parent’s controlling interest in a subsidiary that do not result in a loss of control are treated as equity transactions with the owners.
No gain or loss is recognized.An entity shall not recognize any change in the
carrying amounts of assets (including goodwill) or liabilities as a result of such transactions.
+Key Differences
+
Thank you!
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