Preface to International Financial Reporting Standards1
This Preface is issued to set out the objectives and due process of the International
Accounting Standards Board and to explain the scope authority and timing of
application of International Financial Reporting Standards The Preface was approved by
the IASB in April 2002 and superseded the Preface published in January 1975 (amended
November 1982) In 2007 the Preface was amended in January and October to reflect
changes in the IASC Foundation’s2 Constitution and in September as a consequence of
the changes made by IAS 1 Presentation of Financial Statements (as revised in 2007) In
January 2008 paragraph 9 was amended to update the reference to the body now known
as the IPSASB In 2010 the Preface was amended to reflect the Constitution as revised in
January 2009 and January 2010 and the publication of the Conceptual Framework in
September 2010
1 The International Accounting Standards Board (IASB) was established in 2001 as
part of the International Accounting Standards Committee (IASC) Foundation
In 2010 the IASC Foundation was renamed the IFRS Foundation The governance
of the IFRS Foundation rests with twentytwo Trustees The Trustees’
responsibilities include appointing the members of the IASB and associated
councils and committees as well as securing financing for the organisation The
IASB comprises fifteen fulltime members (the IFRS Foundation’s Constitution
provides for membership to rise to sixteen by 1 July 2012) Approval of
International Financial Reporting Standards (IFRSs) and related documents such
as the Conceptual Framework for Financial Reporting exposure drafts and other
discussion documents is the responsibility of the IASB
2 The IFRS Interpretations Committee3 comprises fourteen voting members and a
nonvoting Chairman all appointed by the Trustees The role of the Committee
is to prepare interpretations of IFRSs for approval by the IASB and in the context
of the Conceptual Framework to provide timely guidance on financial reporting
issues The Committee (then called the International Financial Reporting
Interpretations Committee) replaced the former Standing Interpretations
Committee (SIC) in 2002
3 The IFRS Advisory Council4 is appointed by the Trustees It provides a formal
vehicle for participation by organisations and individuals with an interest in
international financial reporting The participants have diverse geographical
and functional backgrounds The Council’s objective is to give advice to the IASB
on priorities agenda decisions and on major standardsetting projects
4 The IASB was preceded by the Board of IASC which came into existence on
29 June 1973 as a result of an agreement by professional accountancy bodies in
Australia Canada France Germany Japan Mexico the Netherlands the United
1 including IFRIC and SIC Interpretations
2 In July 2010 the IASC Foundation was renamed the IFRS Foundation
3 Before March 2010 the Interpretations Committee was called the International Financial Reporting
Interpretations Committee (IFRIC)
4 Before March 2010 the IFRS Advisory Council was called the Standards Advisory Council (SAC)
Preface to IFRSs
IFRS Foundation A13Kingdom and Ireland and the United States of America A revised Agreement
and Constitution were signed in November 1982 The Constitution was further
revised in October 1992 and May 2000 by the IASC Board Under the May 2000
Constitution the professional accountancy bodies adopted a mechanism
enabling the appointed Trustees to put the May 2000 Constitution into force
The Trustees activated the new Constitution in January 2001 and revised it in
March 20025
5 At its meeting on 20 April 2001 the IASB passed the following resolution
All Standards and Interpretations issued under previous Constitutions continue to
be applicable unless and until they are amended or withdrawn The International
Accounting Standards Board may amend or withdraw International Accounting
Standards and SIC Interpretations issued under previous Constitutions of IASC as
well as issue new Standards and Interpretations
When the term IFRSs is used in this Preface it includes standards and
Interpretations approved by the IASB and International Accounting Standards
(IASs) and SIC Interpretations issued under previous Constitutions
Objectives of the IASB
6 The objectives of the IASB are
(a) to develop in the public interest a single set of high quality
understandable enforceable and globally accepted financial reporting
standards based on clearly articulated principles These standards
should require high quality transparent and comparable information in
financial statements and other financial reporting to help investors
other participants in the various capital markets of the world and other
users of financial information make economic decisions
(b) to promote the use and rigorous application of those standards
(c) in fulfilling the objectives associated with (a) and (b) to take account of
as appropriate the needs of a range of sizes and types of entities in
diverse economic settings
(d) to promote and facilitate the adoption of IFRSs being the standards and
interpretations issued by the IASB through the convergence of national
accounting standards and IFRSs
Scope and authority of International Financial Reporting
Standards
7 The IASB achieves its objectives primarily by developing and publishing IFRSs
and promoting the use of those standards in general purpose financial
statements and other financial reporting Other financial reporting comprises
information provided outside financial statements that assists in the
interpretation of a complete set of financial statements or improves users’
ability to make efficient economic decisions In developing IFRSs the IASB
5 The Constitution was further revised in July 2002 June 2005 October 2007 January 2009 January
2010 and January 2013
Preface to IFRSs
IFRS FoundationA14works with national standardsetters to promote and facilitate adoption of IFRSs
through convergence of national accounting standards and IFRSs
8 IFRSs set out recognition measurement presentation and disclosure
requirements dealing with transactions and events that are important in
general purpose financial statements They may also set out such requirements
for transactions and events that arise mainly in specific industries IFRSs are
based on the Conceptual Framework which addresses the concepts underlying the
information presented in general purpose financial statements Although the
Conceptual Framework was not issued until September 2010 it was developed from
the previous Framework for the Preparation and Presentation of Financial Statements
which the IASB adopted in 2001 The objective of the Conceptual Framework is to
facilitate the consistent and logical formulation of IFRSs The Conceptual
Framework also provides a basis for the use of judgement in resolving accounting
issues
9 IFRSs are designed to apply to the general purpose financial statements and
other financial reporting of profitoriented entities Profitoriented entities
include those engaged in commercial industrial financial and similar activities
whether organised in corporate or in other forms They include organisations
such as mutual insurance companies and other mutual cooperative entities that
provide dividends or other economic benefits directly and proportionately to
their owners members or participants Although IFRSs are not designed to
apply to notforprofit activities in the private sector public sector or
government entities with such activities may find them appropriate The
International Public Sector Accounting Standards Board (IPSASB) prepares
accounting standards for governments and other public sector entities other
than government business entities based on IFRSs
10 IFRSs apply to all general purpose financial statements Such financial
statements are directed towards the common information needs of a wide range
of users for example shareholders creditors employees and the public at large
The objective of financial statements is to provide information about the
financial position performance and cash flows of an entity that is useful to
those users in making economic decisions
11 A complete set of financial statements includes a statement of financial position
a statement of comprehensive income a statement of changes in equity a
statement of cash flows and accounting policies and explanatory notes When a
separate income statement is presented in accordance with IAS 1 Presentation of
Financial Statements (as revised in 2007) it is part of that complete set In the
interest of timeliness and cost considerations and to avoid repeating
information previously reported an entity may provide less information in its
interim financial statements than in its annual financial statements IAS 34
Interim Financial Reporting prescribes the minimum content of complete or
condensed financial statements for an interim period The term financial
statements’ includes a complete set of financial statements prepared for an
interim or annual period and condensed financial statements for an interim
period
12 Some IFRSs permit different treatments for given transactions and events The
IASB’s objective is to require like transactions and events to be accounted for and
Preface to IFRSs
IFRS Foundation A15reported in a like way and unlike transactions and events to be accounted for
and reported differently both within an entity over time and among entities
Consequently the IASB intends not to permit choices in accounting treatment
Also the IASB has reconsidered and will continue to reconsider those
transactions and events for which IFRSs permit a choice of accounting
treatment with the objective of reducing the number of those choices
13 Standards approved by the IASB include paragraphs in bold type and plain type
which have equal authority Paragraphs in bold type indicate the main
principles An individual standard should be read in the context of the objective
stated in that standard and this Preface
14 Interpretations of IFRSs are prepared by the Interpretations Committee to give
authoritative guidance on issues that are likely to receive divergent or
unacceptable treatment in the absence of such guidance
15 IAS 1 (as revised in 2007) includes the following requirement
An entity whose financial statements comply with IFRSs shall make an explicit and
unreserved statement of such compliance in the notes An entity shall not
describe financial statements as complying with IFRSs unless they comply with all
the requirements of IFRSs
16 Any limitation of the scope of an IFRS is made clear in the standard
Due process
17 IFRSs are developed through an international due process that involves
accountants financial analysts and other users of financial statements the
business community stock exchanges regulatory and legal authorities
academics and other interested individuals and organisations from around the
world The IASB consults in public meetings the Advisory Council on major
projects agenda decisions and work priorities and discusses technical matters
in meetings that are open to public observation Due process for projects
normally but not necessarily involves the following steps (the steps that are
required under the terms of the IFRS Foundation’s Constitution are indicated by
an asterisk*)
(a) the staff are asked to identify and review all the issues associated with
the topic and to consider the application of the Conceptual Framework to
the issues
(b) study of national accounting requirements and practice and an
exchange of views about the issues with national standardsetters
(c) consulting the Trustees and the Advisory Council about the advisability
of adding the topic to the IASB’s agenda*6
(d) formation of an advisory group to give advice to the IASB on the project
(e) publishing for public comment a discussion document
(f) publishing for public comment an exposure draft (including any
dissenting opinions held by IASB members) approved by at least nine
6 Beginning no later than 30 June 2011 the IASB is required to carry out a public consultation on its
agenda every three years
Preface to IFRSs
IFRS FoundationA16votes of the IASB if there are fewer than sixteen members or by ten of its
members if there are sixteen members*
(g) normally publishing with an exposure draft a basis for conclusions and
the alternative views of any IASB member who opposes publication*
(h) consideration of all comments received within the comment period on
discussion documents and exposure drafts*
(i) consideration of the desirability of holding a public hearing and of the
desirability of conducting field tests and if considered desirable holding
such hearings and conducting such tests
(j) approval of a standard by at least nine votes of the IASB if there are fewer
than sixteen members or by ten of its members if there are sixteen
members* and
(k) publishing with a standard (i) a basis for conclusions explaining among
other things the steps in the IASB’s due process and how the IASB dealt
with public comments on the exposure draft and (ii) the dissenting
opinion of any IASB member*
18 Interpretations of IFRSs are developed through an international due process that
involves accountants financial analysts and other users of financial statements
the business community stock exchanges regulatory and legal authorities
academics and other interested individuals and organisations from around the
world The Interpretations Committee discusses technical matters in meetings
that are open to public observation The due process for each project normally
but not necessarily involves the following steps (the steps that are required
under the terms of the IFRS Foundation’s Constitution are indicated by an
asterisk*)
(a) the staff are asked to identify and review all the issues associated with
the topic and to consider the application of the Conceptual Framework to
the issues
(b) consideration of the implications for the issues of the hierarchy of IAS 8
Accounting Policies Changes in Accounting Estimates and Errors
(c) publication of a draft Interpretation for public comment if no more than
four Committee members have voted against the proposal*
(d) consideration of all comments received within the comment period on a
draft Interpretation*
(e) approval by the Interpretations Committee of an Interpretation if no
more than four Committee members have voted against the
Interpretation after considering public comments on the draft
Interpretation* and
(f) approval of the Interpretation by at least nine votes of the IASB if there
are fewer than sixteen members or by ten of its members if there are
sixteen members*
Preface to IFRSs
IFRS Foundation A17Timing of application of International Financial Reporting
Standards
19 IFRSs apply from a date specified in the document New or revised IFRSs set out
transitional provisions to be applied on their initial application
20 The IASB has no general policy of exempting transactions occurring before a
specific date from the requirements of new IFRSs When financial statements
are used to monitor compliance with contracts and agreements a new IFRS may
have consequences that were not foreseen when the contract or agreement was
finalised For example covenants contained in banking and loan agreements
may impose limits on measures shown in a borrower’s financial statements The
IASB believes the fact that financial reporting requirements evolve and change
over time is well understood and would be known to the parties when they
entered into the agreement It is up to the parties to determine whether the
agreement should be insulated from the effects of a future IFRS or if not the
manner in which it might be renegotiated to reflect changes in reporting rather
than changes in the underlying financial condition
21 Exposure drafts are issued for comment and their proposals are subject to
revision Until the effective date of an IFRS the requirements of any IFRS that
would be affected by proposals in an exposure draft remain in force
Language
22 The approved text of any discussion document exposure draft or IFRS is that
approved by the IASB in the English language The IASB may approve
translations in other languages provided that the translation is prepared in
accordance with a process that provides assurance of the quality of the
translation and the IASB may license other translations
Preface to IFRSs
IFRS FoundationA18The Conceptual Framework for Financial
Reporting
The Conceptual Framework was issued by the International Accounting Standards Board in
September 2010 It superseded the Framework for the Preparation and Presentation of Financial
Statements
IFRS Foundation A15CONTENTS
from paragraph
FOREWORD
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
INTRODUCTION
Purpose and status
Scope
CHAPTERS
1 The objective of general purpose financial reporting OB1
2 The reporting entity to be added
3 Qualitative characteristics of useful financial information QC1
4 The Framework (1989) the remaining text 41
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF THE CONCEPTUAL FRAMEWORK 2010
BASIS FOR CONCLUSIONS ON CHAPTERS 1 AND 3
TABLE OF CONCORDANCE
Conceptual Framework
IFRS FoundationA16Foreword
The International Accounting Standards Board is currently in the process of updating its
conceptual framework This conceptual framework project is conducted in phases
As a chapter is finalised the relevant paragraphs in the Framework for the Preparation and
Presentation of Financial Statements that was published in 1989 will be replaced When the
conceptual framework project is completed the Board will have a complete comprehensive
and single document called the Conceptual Framework for Financial Reporting
This version of the Conceptual Framework includes the first two chapters the Board published
as a result of its first phase of the conceptual framework project—Chapter 1 The objective of
general purpose financial reporting and Chapter 3 Qualitative characteristics of useful financial
information Chapter 2 will deal with the reporting entity concept The Board published an
exposure draft on this topic in March 2010 with a comment period that ended on 16 July
2010 Chapter 4 contains the remaining text of the Framework (1989) The table of
concordance at the end of this publication shows how the contents of the Framework (1989)
and the Conceptual Framework (2010) correspond
Conceptual Framework
IFRS Foundation A17The Introduction has been carried forward from the Framework (1989) This will be
updated when the IASB considers the purpose of the Conceptual Framework Until then the
purpose and the status of the Conceptual Framework are the same as before
Introduction
Financial statements are prepared and presented for external users by many entities around
the world Although such financial statements may appear similar from country to
country there are differences which have probably been caused by a variety of social
economic and legal circumstances and by different countries having in mind the needs of
different users of financial statements when setting national requirements
These different circumstances have led to the use of a variety of definitions of the elements
of financial statements for example assets liabilities equity income and expenses They
have also resulted in the use of different criteria for the recognition of items in the financial
statements and in a preference for different bases of measurement The scope of the
financial statements and the disclosures made in them have also been affected
The International Accounting Standards Board is committed to narrowing these differences
by seeking to harmonise regulations accounting standards and procedures relating to the
preparation and presentation of financial statements It believes that further
harmonisation can best be pursued by focusing on financial statements that are prepared
for the purpose of providing information that is useful in making economic decisions
The Board believes that financial statements prepared for this purpose meet the common
needs of most users This is because nearly all users are making economic decisions for
example
(a) to decide when to buy hold or sell an equity investment
(b) to assess the stewardship or accountability of management
(c) to assess the ability of the entity to pay and provide other benefits to its employees
(d) to assess the security for amounts lent to the entity
(e) to determine taxation policies
(f) to determine distributable profits and dividends
(g) to prepare and use national income statistics
(h) to regulate the activities of entities
The Board recognises however that governments in particular may specify different or
additional requirements for their own purposes These requirements should not however
affect financial statements published for the benefit of other users unless they also meet the
needs of those other users
Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financial capital maintenance
concept Other models and concepts may be more appropriate in order to meet the
objective of providing information that is useful for making economic decisions although
there is at present no consensus for change This Conceptual Framework has been developed
so that it is applicable to a range of accounting models and concepts of capital and capital
maintenance
Conceptual Framework
IFRS FoundationA18Purpose and status
This Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users The purpose of the Conceptual
Framework is
(a) to assist the Board in the development of future IFRSs and in its review of existing
IFRSs
(b) to assist the Board in promoting harmonisation of regulations accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRSs
(c) to assist national standardsetting bodies in developing national standards
(d) to assist preparers of financial statements in applying IFRSs and in dealing with
topics that have yet to form the subject of an IFRS
(e) to assist auditors in forming an opinion on whether financial statements comply
with IFRSs
(f) to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs and
(g) to provide those who are interested in the work of the IASB with information about
its approach to the formulation of IFRSs
This Conceptual Framework is not an IFRS and hence does not define standards for any
particular measurement or disclosure issue Nothing in this Conceptual Framework overrides
any specific IFRS
The Board recognises that in a limited number of cases there may be a conflict between the
Conceptual Framework and an IFRS In those cases where there is a conflict the requirements
of the IFRS prevail over those of the Conceptual Framework As however the Board will be
guided by the Conceptual Framework in the development of future IFRSs and in its review of
existing IFRSs the number of cases of conflict between the Conceptual Framework and IFRSs
will diminish through time
The Conceptual Framework will be revised from time to time on the basis of the Board’s
experience of working with it
Scope
The Conceptual Framework deals with
(a) the objective of financial reporting
(b) the qualitative characteristics of useful financial information
(c) the definition recognition and measurement of the elements from which financial
statements are constructed and
(d) concepts of capital and capital maintenance
Conceptual Framework
IFRS Foundation A19CONTENTS
from paragraph
CHAPTER 1 THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
INTRODUCTION OB1
OBJECTIVE USEFULNESS AND LIMITATIONS OF GENERAL PURPOSE
FINANCIAL REPORTING OB2
INFORMATION ABOUT A REPORTING ENTITY’S ECONOMIC RESOURCES
CLAIMS AGAINST THE ENTITY AND CHANGES IN RESOURCES AND CLAIMS OB12
Economic resources and claims OB13
Changes in economic resources and claims OB15
Financial performance reflected by accrual accounting OB17
Financial performance reflected by past cash flows OB20
Changes in economic resources and claims not resulting from financial
performance OB21
Conceptual Framework
IFRS FoundationA20Chapter 1 The objective of general purpose financial reporting
Introduction
OB1 The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework Other aspects of the Conceptual Framework—a reporting
entity concept the qualitative characteristics of and the constraint on useful
financial information elements of financial statements recognition
measurement presentation and disclosure—flow logically from the objective
Objective usefulness and limitations of general purpose
financial reporting
OB2 The objective of general purpose financial reporting1 is to provide financial
information about the reporting entity that is useful to existing and potential
investors lenders and other creditors in making decisions about providing
resources to the entity Those decisions involve buying selling or holding equity
and debt instruments and providing or settling loans and other forms of credit
OB3 Decisions by existing and potential investors about buying selling or holding
equity and debt instruments depend on the returns that they expect from an
investment in those instruments for example dividends principal and interest
payments or market price increases Similarly decisions by existing and
potential lenders and other creditors about providing or settling loans and other
forms of credit depend on the principal and interest payments or other returns
that they expect Investors’ lenders’ and other creditors’ expectations about
returns depend on their assessment of the amount timing and uncertainty of
(the prospects for) future net cash inflows to the entity Consequently existing
and potential investors lenders and other creditors need information to help
them assess the prospects for future net cash inflows to an entity
OB4 To assess an entity’s prospects for future net cash inflows existing and potential
investors lenders and other creditors need information about the resources of
the entity claims against the entity and how efficiently and effectively the
entity’s management and governing board2 have discharged their
responsibilities to use the entity’s resources Examples of such responsibilities
include protecting the entity’s resources from unfavourable effects of economic
factors such as price and technological changes and ensuring that the entity
complies with applicable laws regulations and contractual provisions
Information about management’s discharge of its responsibilities is also useful
for decisions by existing investors lenders and other creditors who have the
right to vote on or otherwise influence management’s actions
OB5 Many existing and potential investors lenders and other creditors cannot
require reporting entities to provide information directly to them and must rely
1 Throughout this Conceptual Framework the terms financial reports and financial reporting refer to general
purpose financial reports and general purpose financial reporting unless specifically indicated otherwise
2 Throughout this Conceptual Framework the term management refers to management and the governing
board of an entity unless specifically indicated otherwise
Conceptual Framework
IFRS Foundation A21on general purpose financial reports for much of the financial information they
need Consequently they are the primary users to whom general purpose
financial reports are directed
OB6 However general purpose financial reports do not and cannot provide all of the
information that existing and potential investors lenders and other creditors
need Those users need to consider pertinent information from other sources
for example general economic conditions and expectations political events and
political climate and industry and company outlooks
OB7 General purpose financial reports are not designed to show the value of a
reporting entity but they provide information to help existing and potential
investors lenders and other creditors to estimate the value of the reporting
entity
OB8 Individual primary users have different and possibly conflicting information
needs and desires The Board in developing financial reporting standards will
seek to provide the information set that will meet the needs of the maximum
number of primary users However focusing on common information needs
does not prevent the reporting entity from including additional information
that is most useful to a particular subset of primary users
OB9 The management of a reporting entity is also interested in financial information
about the entity However management need not rely on general purpose
financial reports because it is able to obtain the financial information it needs
internally
OB10 Other parties such as regulators and members of the public other than
investors lenders and other creditors may also find general purpose financial
reports useful However those reports are not primarily directed to these other
groups
OB11 To a large extent financial reports are based on estimates judgements and
models rather than exact depictions The Conceptual Framework establishes the
concepts that underlie those estimates judgements and models The concepts
are the goal towards which the Board and preparers of financial reports strive
As with most goals the Conceptual Framework’s vision of ideal financial reporting
is unlikely to be achieved in full at least not in the short term because it takes
time to understand accept and implement new ways of analysing transactions
and other events Nevertheless establishing a goal towards which to strive is
essential if financial reporting is to evolve so as to improve its usefulness
Information about a reporting entity’s economic
resources claims against the entity and changes in
resources and claims
OB12 General purpose financial reports provide information about the financial
position of a reporting entity which is information about the entity’s economic
resources and the claims against the reporting entity Financial reports also
provide information about the effects of transactions and other events that
Conceptual Framework
IFRS FoundationA22change a reporting entity’s economic resources and claims Both types of
information provide useful input for decisions about providing resources to an
entity
Economic resources and claims
OB13 Information about the nature and amounts of a reporting entity’s economic
resources and claims can help users to identify the reporting entity’s financial
strengths and weaknesses That information can help users to assess the
reporting entity’s liquidity and solvency its needs for additional financing and
how successful it is likely to be in obtaining that financing Information about
priorities and payment requirements of existing claims helps users to predict
how future cash flows will be distributed among those with a claim against the
reporting entity
OB14 Different types of economic resources affect a user’s assessment of the reporting
entity’s prospects for future cash flows differently Some future cash flows
result directly from existing economic resources such as accounts receivable
Other cash flows result from using several resources in combination to produce
and market goods or services to customers Although those cash flows cannot be
identified with individual economic resources (or claims) users of financial
reports need to know the nature and amount of the resources available for use
in a reporting entity’s operations
Changes in economic resources and claims
OB15 Changes in a reporting entity’s economic resources and claims result from that
entity’s financial performance (see paragraphs OB17–OB20) and from other
events or transactions such as issuing debt or equity instruments (see
paragraph OB21) To properly assess the prospects for future cash flows from the
reporting entity users need to be able to distinguish between both of these
changes
OB16 Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic resources
Information about the return the entity has produced provides an indication of
how well management has discharged its responsibilities to make efficient and
effective use of the reporting entity’s resources Information about the
variability and components of that return is also important especially in
assessing the uncertainty of future cash flows Information about a reporting
entity’s past financial performance and how its management discharged its
responsibilities is usually helpful in predicting the entity’s future returns on its
economic resources
Financial performance reflected by accrual accounting
OB17 Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the
periods in which those effects occur even if the resulting cash receipts and
payments occur in a different period This is important because information
about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for
Conceptual Framework
IFRS Foundation A23assessing the entity’s past and future performance than information solely
about cash receipts and payments during that period
OB18 Information about a reporting entity’s financial performance during a period
reflected by changes in its economic resources and claims other than by
obtaining additional resources directly from investors and creditors (see
paragraph OB21) is useful in assessing the entity’s past and future ability to
generate net cash inflows That information indicates the extent to which the
reporting entity has increased its available economic resources and thus its
capacity for generating net cash inflows through its operations rather than by
obtaining additional resources directly from investors and creditors
OB19 Information about a reporting entity’s financial performance during a period
may also indicate the extent to which events such as changes in market prices or
interest rates have increased or decreased the entity’s economic resources and
claims thereby affecting the entity’s ability to generate net cash inflows
Financial performance reflected by past cash flows
OB20 Information about a reporting entity’s cash flows during a period also helps
users to assess the entity’s ability to generate future net cash inflows It
indicates how the reporting entity obtains and spends cash including
information about its borrowing and repayment of debt cash dividends or other
cash distributions to investors and other factors that may affect the entity’s
liquidity or solvency Information about cash flows helps users understand a
reporting entity’s operations evaluate its financing and investing activities
assess its liquidity or solvency and interpret other information about financial
performance
Changes in economic resources and claims not resulting from
financial performance
OB21 A reporting entity’s economic resources and claims may also change for reasons
other than financial performance such as issuing additional ownership shares
Information about this type of change is necessary to give users a complete
understanding of why the reporting entity’s economic resources and claims
changed and the implications of those changes for its future financial
performance
Conceptual Framework
IFRS FoundationA24CHAPTER 2 THE REPORTING ENTITY
[to be added]
Conceptual Framework
IFRS Foundation A25CONTENTS
from paragraph
CHAPTER 3 QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
INTRODUCTION QC1
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION QC4
Fundamental qualitative characteristics QC5
Relevance QC6
Faithful representation QC12
Applying the fundamental qualitative characteristics QC17
Enhancing qualitative characteristics QC19
Comparability QC20
Verifiability QC26
Timeliness QC29
Understandability QC30
Applying the enhancing characteristics QC33
THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING QC35
Conceptual Framework
IFRS FoundationA26Chapter 3 Qualitative characteristics of useful financial
information
Introduction
QC1 The qualitative characteristics of useful financial information discussed in this
chapter identify the types of information that are likely to be most useful to the
existing and potential investors lenders and other creditors for making
decisions about the reporting entity on the basis of information in its financial
report (financial information)
QC2 Financial reports provide information about the reporting entity’s economic
resources claims against the reporting entity and the effects of transactions and
other events and conditions that change those resources and claims (This
information is referred to in the Conceptual Framework as information about the
economic phenomena) Some financial reports also include explanatory
material about management’s expectations and strategies for the reporting
entity and other types of forwardlooking information
QC3 The qualitative characteristics of useful financial information3 apply to financial
information provided in financial statements as well as to financial information
provided in other ways Cost which is a pervasive constraint on the reporting
entity’s ability to provide useful financial information applies similarly
However the considerations in applying the qualitative characteristics and the
cost constraint may be different for different types of information For example
applying them to forwardlooking information may be different from applying
them to information about existing economic resources and claims and to
changes in those resources and claims
Qualitative characteristics of useful financial information
QC4 If financial information is to be useful it must be relevant and faithfully
represent what it purports to represent The usefulness of financial information
is enhanced if it is comparable verifiable timely and understandable
Fundamental qualitative characteristics
QC5 The fundamental qualitative characteristics are relevance and faithful
representation
Relevance
QC6 Relevant financial information is capable of making a difference in the decisions
made by users Information may be capable of making a difference in a decision
even if some users choose not to take advantage of it or are already aware of it
from other sources
QC7 Financial information is capable of making a difference in decisions if it has
predictive value confirmatory value or both
3 Throughout this Conceptual Framework the terms qualitative characteristics and constraint refer to the
qualitative characteristics of and the constraint on useful financial information
Conceptual Framework
IFRS Foundation A27QC8 Financial information has predictive value if it can be used as an input to
processes employed by users to predict future outcomes Financial information
need not be a prediction or forecast to have predictive value Financial
information with predictive value is employed by users in making their own
predictions
QC9 Financial information has confirmatory value if it provides feedback about
(confirms or changes) previous evaluations
QC10 The predictive value and confirmatory value of financial information are
interrelated Information that has predictive value often also has confirmatory
value For example revenue information for the current year which can be
used as the basis for predicting revenues in future years can also be compared
with revenue predictions for the current year that were made in past years The
results of those comparisons can help a user to correct and improve the
processes that were used to make those previous predictions
Materiality
QC11 Information is material if omitting it or misstating it could influence decisions
that users make on the basis of financial information about a specific reporting
entity In other words materiality is an entityspecific aspect of relevance based
on the nature or magnitude or both of the items to which the information
relates in the context of an individual entity’s financial report Consequently
the Board cannot specify a uniform quantitative threshold for materiality or
predetermine what could be material in a particular situation
Faithful representation
QC12 Financial reports represent economic phenomena in words and numbers To be
useful financial information must not only represent relevant phenomena but
it must also faithfully represent the phenomena that it purports to represent
To be a perfectly faithful representation a depiction would have three
characteristics It would be complete neutral and free from error Of course
perfection is seldom if ever achievable The Board’s objective is to maximise
those qualities to the extent possible
QC13 A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted including all necessary
descriptions and explanations For example a complete depiction of a group of
assets would include at a minimum a description of the nature of the assets in
the group a numerical depiction of all of the assets in the group and a
description of what the numerical depiction represents (for example original
cost adjusted cost or fair value) For some items a complete depiction may also
entail explanations of significant facts about the quality and nature of the items
factors and circumstances that might affect their quality and nature and the
process used to determine the numerical depiction
QC14 A neutral depiction is without bias in the selection or presentation of financial
information A neutral depiction is not slanted weighted emphasised
deemphasised or otherwise manipulated to increase the probability that
financial information will be received favourably or unfavourably by users
Neutral information does not mean information with no purpose or no
Conceptual Framework
IFRS FoundationA28influence on behaviour On the contrary relevant financial information is by
definition capable of making a difference in users’ decisions
QC15 Faithful representation does not mean accurate in all respects Free from error
means there are no errors or omissions in the description of the phenomenon
and the process used to produce the reported information has been selected and
applied with no errors in the process In this context free from error does not
mean perfectly accurate in all respects For example an estimate of an
unobservable price or value cannot be determined to be accurate or inaccurate
However a representation of that estimate can be faithful if the amount is
described clearly and accurately as being an estimate the nature and limitations
of the estimating process are explained and no errors have been made in
selecting and applying an appropriate process for developing the estimate
QC16 A faithful representation by itself does not necessarily result in useful
information For example a reporting entity may receive property plant and
equipment through a government grant Obviously reporting that an entity
acquired an asset at no cost would faithfully represent its cost but that
information would probably not be very useful A slightly more subtle example
is an estimate of the amount by which an asset’s carrying amount should be
adjusted to reflect an impairment in the asset’s value That estimate can be a
faithful representation if the reporting entity has properly applied an
appropriate process properly described the estimate and explained any
uncertainties that significantly affect the estimate However if the level of
uncertainty in such an estimate is sufficiently large that estimate will not be
particularly useful In other words the relevance of the asset being faithfully
represented is questionable If there is no alternative representation that is
more faithful that estimate may provide the best available information
Applying the fundamental qualitative characteristics
QC17 Information must be both relevant and faithfully represented if it is to be useful
Neither a faithful representation of an irrelevant phenomenon nor an unfaithful
representation of a relevant phenomenon helps users make good decisions
QC18 The most efficient and effective process for applying the fundamental
qualitative characteristics would usually be as follows (subject to the effects of
enhancing characteristics and the cost constraint which are not considered in
this example) First identify an economic phenomenon that has the potential to
be useful to users of the reporting entity’s financial information Second
identify the type of information about that phenomenon that would be most
relevant if it is available and can be faithfully represented Third determine
whether that information is available and can be faithfully represented If so
the process of satisfying the fundamental qualitative characteristics ends at that
point If not the process is repeated with the next most relevant type of
information
Enhancing qualitative characteristics
QC19 Comparability verifiability timeliness and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and
faithfully represented The enhancing qualitative characteristics may also help
Conceptual Framework
IFRS Foundation A29determine which of two ways should be used to depict a phenomenon if both are
considered equally relevant and faithfully represented
Comparability
QC20 Users’ decisions involve choosing between alternatives for example selling or
holding an investment or investing in one reporting entity or another
Consequently information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar
information about the same entity for another period or another date
QC21 Comparability is the qualitative characteristic that enables users to identify and
understand similarities in and differences among items Unlike the other
qualitative characteristics comparability does not relate to a single item A
comparison requires at least two items
QC22 Consistency although related to comparability is not the same Consistency
refers to the use of the same methods for the same items either from period to
period within a reporting entity or in a single period across entities
Comparability is the goal consistency helps to achieve that goal
QC23 Comparability is not uniformity For information to be comparable like things
must look alike and different things must look different Comparability of
financial information is not enhanced by making unlike things look alike any
more than it is enhanced by making like things look different
QC24 Some degree of comparability is likely to be attained by satisfying the
fundamental qualitative characteristics A faithful representation of a relevant
economic phenomenon should naturally possess some degree of comparability
with a faithful representation of a similar relevant economic phenomenon by
another reporting entity
QC25 Although a single economic phenomenon can be faithfully represented in
multiple ways permitting alternative accounting methods for the same
economic phenomenon diminishes comparability
Verifiability
QC26 Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent Verifiability means that
different knowledgeable and independent observers could reach consensus
although not necessarily complete agreement that a particular depiction is a
faithful representation Quantified information need not be a single point
estimate to be verifiable A range of possible amounts and the related
probabilities can also be verified
QC27 Verification can be direct or indirect Direct verification means verifying an
amount or other representation through direct observation for example by
counting cash Indirect verification means checking the inputs to a model
formula or other technique and recalculating the outputs using the same
methodology An example is verifying the carrying amount of inventory by
checking the inputs (quantities and costs) and recalculating the ending
inventory using the same cost flow assumption (for example using the firstin
firstout method)
Conceptual Framework
IFRS FoundationA30QC28 It may not be possible to verify some explanations and forwardlooking financial
information until a future period if at all To help users decide whether they
want to use that information it would normally be necessary to disclose the
underlying assumptions the methods of compiling the information and other
factors and circumstances that support the information
Timeliness
QC29 Timeliness means having information available to decisionmakers in time to be
capable of influencing their decisions Generally the older the information is
the less useful it is However some information may continue to be timely long
after the end of a reporting period because for example some users may need to
identify and assess trends
Understandability
QC30 Classifying characterising and presenting information clearly and concisely
makes it understandable
QC31 Some phenomena are inherently complex and cannot be made easy to
understand Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to
understand However those reports would be incomplete and therefore
potentially misleading
QC32 Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyse the information
diligently At times even wellinformed and diligent users may need to seek the
aid of an adviser to understand information about complex economic
phenomena
Applying the enhancing qualitative characteristics
QC33 Enhancing qualitative characteristics should be maximised to the extent
possible However the enhancing qualitative characteristics either individually
or as a group cannot make information useful if that information is irrelevant
or not faithfully represented
QC34 Applying the enhancing qualitative characteristics is an iterative process that
does not follow a prescribed order Sometimes one enhancing qualitative
characteristic may have to be diminished to maximise another qualitative
characteristic For example a temporary reduction in comparability as a result
of prospectively applying a new financial reporting standard may be worthwhile
to improve relevance or faithful representation in the longer term Appropriate
disclosures may partially compensate for noncomparability
The cost constraint on useful financial reporting
QC35 Cost is a pervasive constraint on the information that can be provided by
financial reporting Reporting financial information imposes costs and it is
important that those costs are justified by the benefits of reporting that
information There are several types of costs and benefits to consider
Conceptual Framework
IFRS Foundation A31QC36 Providers of financial information expend most of the effort involved in
collecting processing verifying and disseminating financial information but
users ultimately bear those costs in the form of reduced returns Users of
financial information also incur costs of analysing and interpreting the
information provided If needed information is not provided users incur
additional costs to obtain that information elsewhere or to estimate it
QC37 Reporting financial information that is relevant and faithfully represents what
it purports to represent helps users to make decisions with more confidence
This results in more efficient functioning of capital markets and a lower cost of
capital for the economy as a whole An individual investor lender or other
creditor also receives benefits by making more informed decisions However it
is not possible for general purpose financial reports to provide all the
information that every user finds relevant
QC38 In applying the cost constraint the Board assesses whether the benefits of
reporting particular information are likely to justify the costs incurred to
provide and use that information When applying the cost constraint in
developing a proposed financial reporting standard the Board seeks
information from providers of financial information users auditors academics
and others about the expected nature and quantity of the benefits and costs of
that standard In most situations assessments are based on a combination of
quantitative and qualitative information
QC39 Because of the inherent subjectivity different individuals’ assessments of the
costs and benefits of reporting particular items of financial information will
vary Therefore the Board seeks to consider costs and benefits in relation to
financial reporting generally and not just in relation to individual reporting
entities That does not mean that assessments of costs and benefits always
justify the same reporting requirements for all entities Differences may be
appropriate because of different sizes of entities different ways of raising capital
(publicly or privately) different users’ needs or other factors
Conceptual Framework
IFRS FoundationA32CONTENTS
from paragraph
CHAPTER 4 THE FRAMEWORK (1989) THE REMAINING
TEXT
UNDERLYING ASSUMPTION 41
Going concern 41
THE ELEMENTS OF FINANCIAL STATEMENTS 42
Financial position 44
Assets 48
Liabilities 415
Equity 420
Performance 424
Income 429
Expenses 433
Capital maintenance adjustments 436
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS 437
The probability of future economic benefit 440
Reliability of measurement 441
Recognition of assets 444
Recognition of liabilities 446
Recognition of income 447
Recognition of expenses 449
MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS 454
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE 457
Concepts of capital 457
Concepts of capital maintenance and the determination of profit 459
Conceptual Framework
IFRS Foundation A33Chapter 4 The Framework (1989) the remaining text
The remaining text of the Framework for the Preparation and Presentation of Financial
Statements (1989) has not been amended to reflect changes made by IAS 1 Presentation of
Financial Statements (as revised in 2007)
The remaining text will also be updated when the Board has considered the elements of financial
statements and their measurement bases
Underlying assumption
Going concern
41 The financial statements are normally prepared on the assumption that an
entity is a going concern and will continue in operation for the foreseeable
future Hence it is assumed that the entity has neither the intention nor the
need to liquidate or curtail materially the scale of its operations if such an
intention or need exists the financial statements may have to be prepared on a
different basis and if so the basis used is disclosed
The elements of financial statements
42 Financial statements portray the financial effects of transactions and other
events by grouping them into broad classes according to their economic
characteristics These broad classes are termed the elements of financial
statements The elements directly related to the measurement of financial
position in the balance sheet are assets liabilities and equity The elements
directly related to the measurement of performance in the income statement are
income and expenses The statement of changes in financial position usually
reflects income statement elements and changes in balance sheet elements
accordingly this Conceptual Framework identifies no elements that are unique to
this statement
43 The presentation of these elements in the balance sheet and the income
statement involves a process of subclassification For example assets and
liabilities may be classified by their nature or function in the business of the
entity in order to display information in the manner most useful to users for
purposes of making economic decisions
Financial position
44 The elements directly related to the measurement of financial position are
assets liabilities and equity These are defined as follows
(a) An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity
(b) A liability is a present obligation of the entity arising from past events
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits
Conceptual Framework
IFRS FoundationA34(c) Equity is the residual interest in the assets of the entity after deducting
all its liabilities
45 The definitions of an asset and a liability identify their essential features but do
not attempt to specify the criteria that need to be met before they are recognised
in the balance sheet Thus the definitions embrace items that are not
recognised as assets or liabilities in the balance sheet because they do not satisfy
the criteria for recognition discussed in paragraphs 437–453 In particular the
expectation that future economic benefits will flow to or from an entity must be
sufficiently certain to meet the probability criterion in paragraph 438 before an
asset or liability is recognised
46 In assessing whether an item meets the definition of an asset liability or equity
attention needs to be given to its underlying substance and economic reality and
not merely its legal form Thus for example in the case of finance leases the
substance and economic reality are that the lessee acquires the economic
benefits of the use of the leased asset for the major part of its useful life in
return for entering into an obligation to pay for that right an amount
approximating to the fair value of the asset and the related finance charge
Hence the finance lease gives rise to items that satisfy the definition of an asset
and a liability and are recognised as such in the lessee’s balance sheet
47 Balance sheets drawn up in accordance with current IFRSs may include items
that do not satisfy the definitions of an asset or liability and are not shown as
part of equity The definitions set out in paragraph 44 will however underlie
future reviews of existing IFRSs and the formulation of further IFRSs
Assets
48 The future economic benefit embodied in an asset is the potential to contribute
directly or indirectly to the flow of cash and cash equivalents to the entity The
potential may be a productive one that is part of the operating activities of the
entity It may also take the form of convertibility into cash or cash equivalents
or a capability to reduce cash outflows such as when an alternative
manufacturing process lowers the costs of production
49 An entity usually employs its assets to produce goods or services capable of
satisfying the wants or needs of customers because these goods or services can
satisfy these wants or needs customers are prepared to pay for them and hence
contribute to the cash flow of the entity Cash itself renders a service to the
entity because of its command over other resources
410 The future economic benefits embodied in an asset may flow to the entity in a
number of ways For example an asset may be
(a) used singly or in combination with other assets in the production of
goods or services to be sold by the entity
(b) exchanged for other assets
(c) used to settle a liability or
(d) distributed to the owners of the entity
Conceptual Framework
IFRS Foundation A35411 Many assets for example property plant and equipment have a physical form
However physical form is not essential to the existence of an asset hence
patents and copyrights for example are assets if future economic benefits are
expected to flow from them to the entity and if they are controlled by the entity
412 Many assets for example receivables and property are associated with legal
rights including the right of ownership In determining the existence of an
asset the right of ownership is not essential thus for example property held on
a lease is an asset if the entity controls the benefits which are expected to flow
from the property Although the capacity of an entity to control benefits is
usually the result of legal rights an item may nonetheless satisfy the definition
of an asset even when there is no legal control For example knowhow
obtained from a development activity may meet the definition of an asset when
by keeping that knowhow secret an entity controls the benefits that are
expected to flow from it
413 The assets of an entity result from past transactions or other past events
Entities normally obtain assets by purchasing or producing them but other
transactions or events may generate assets examples include property received
by an entity from government as part of a programme to encourage economic
growth in an area and the discovery of mineral deposits Transactions or events
expected to occur in the future do not in themselves give rise to assets hence
for example an intention to purchase inventory does not of itself meet the
definition of an asset
414 There is a close association between incurring expenditure and generating assets
but the two do not necessarily coincide Hence when an entity incurs
expenditure this may provide evidence that future economic benefits were
sought but is not conclusive proof that an item satisfying the definition of an
asset has been obtained Similarly the absence of a related expenditure does not
preclude an item from satisfying the definition of an asset and thus becoming a
candidate for recognition in the balance sheet for example items that have
been donated to the entity may satisfy the definition of an asset
Liabilities
415 An essential characteristic of a liability is that the entity has a present
obligation An obligation is a duty or responsibility to act or perform in a
certain way Obligations may be legally enforceable as a consequence of a
binding contract or statutory requirement This is normally the case for
example with amounts payable for goods and services received Obligations
also arise however from normal business practice custom and a desire to
maintain good business relations or act in an equitable manner If for example
an entity decides as a matter of policy to rectify faults in its products even when
these become apparent after the warranty period has expired the amounts that
are expected to be expended in respect of goods already sold are liabilities
416 A distinction needs to be drawn between a present obligation and a future
commitment A decision by the management of an entity to acquire assets in
the future does not of itself give rise to a present obligation An obligation
normally arises only when the asset is delivered or the entity enters into an
irrevocable agreement to acquire the asset In the latter case the irrevocable
Conceptual Framework
IFRS FoundationA36nature of the agreement means that the economic consequences of failing to
honour the obligation for example because of the existence of a substantial
penalty leave the entity with little if any discretion to avoid the outflow of
resources to another party
417 The settlement of a present obligation usually involves the entity giving up
resources embodying economic benefits in order to satisfy the claim of the other
party Settlement of a present obligation may occur in a number of ways for
example by
(a) payment of cash
(b) transfer of other assets
(c) provision of services
(d) replacement of that obligation with another obligation or
(e) conversion of the obligation to equity
An obligation may also be extinguished by other means such as a creditor
waiving or forfeiting its rights
418 Liabilities result from past transactions or other past events Thus for example
the acquisition of goods and the use of services give rise to trade payables (unless
paid for in advance or on delivery) and the receipt of a bank loan results in an
obligation to repay the loan An entity may also recognise future rebates based
on annual purchases by customers as liabilities in this case the sale of the goods
in the past is the transaction that gives rise to the liability
419 Some liabilities can be measured only by using a substantial degree of
estimation Some entities describe these liabilities as provisions In some
countries such provisions are not regarded as liabilities because the concept of a
liability is defined narrowly so as to include only amounts that can be
established without the need to make estimates The definition of a liability in
paragraph 44 follows a broader approach Thus when a provision involves a
present obligation and satisfies the rest of the definition it is a liability even if
the amount has to be estimated Examples include provisions for payments to
be made under existing warranties and provisions to cover pension obligations
Equity
420 Although equity is defined in paragraph 44 as a residual it may be subclassified
in the balance sheet For example in a corporate entity funds contributed by
shareholders retained earnings reserves representing appropriations of
retained earnings and reserves representing capital maintenance adjustments
may be shown separately Such classifications can be relevant to the
decisionmaking needs of the users of financial statements when they indicate
legal or other restrictions on the ability of the entity to distribute or otherwise
apply its equity They may also reflect the fact that parties with ownership
interests in an entity have differing rights in relation to the receipt of dividends
or the repayment of contributed equity
421 The creation of reserves is sometimes required by statute or other law in order to
give the entity and its creditors an added measure of protection from the effects
of losses Other reserves may be established if national tax law grants
Conceptual Framework
IFRS Foundation A37exemptions from or reductions in taxation liabilities when transfers to such
reserves are made The existence and size of these legal statutory and tax
reserves is information that can be relevant to the decisionmaking needs of
users Transfers to such reserves are appropriations of retained earnings rather
than expenses
422 The amount at which equity is shown in the balance sheet is dependent on the
measurement of assets and liabilities Normally the aggregate amount of equity
only by coincidence corresponds with the aggregate market value of the shares
of the entity or the sum that could be raised by disposing of either the net assets
on a piecemeal basis or the entity as a whole on a going concern basis
423 Commercial industrial and business activities are often undertaken by means of
entities such as sole proprietorships partnerships and trusts and various types
of government business undertakings The legal and regulatory framework for
such entities is often different from that applying to corporate entities For
example there may be few if any restrictions on the distribution to owners or
other beneficiaries of amounts included in equity Nevertheless the definition
of equity and the other aspects of this Conceptual Framework that deal with equity
are appropriate for such entities
Performance
424 Profit is frequently used as a measure of performance or as the basis for other
measures such as return on investment or earnings per share The elements
directly related to the measurement of profit are income and expenses The
recognition and measurement of income and expenses and hence profit
depends in part on the concepts of capital and capital maintenance used by the
entity in preparing its financial statements These concepts are discussed in
paragraphs 457–465
425 The elements of income and expenses are defined as follows
(a) Income is increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity other than those relating to
contributions from equity participants
(b) Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity other than those relating to
distributions to equity participants
426 The definitions of income and expenses identify their essential features but do
not attempt to specify the criteria that would need to be met before they are
recognised in the income statement Criteria for the recognition of income and
expenses are discussed in paragraphs 437–453
427 Income and expenses may be presented in the income statement in different
ways so as to provide information that is relevant for economic decisionmaking
For example it is common practice to distinguish between those items of
income and expenses that arise in the course of the ordinary activities of the
entity and those that do not This distinction is made on the basis that the
source of an item is relevant in evaluating the ability of the entity to generate
Conceptual Framework
IFRS FoundationA38cash and cash equivalents in the future for example incidental activities such
as the disposal of a longterm investment are unlikely to recur on a regular basis
When distinguishing between items in this way consideration needs to be given
to the nature of the entity and its operations Items that arise from the ordinary
activities of one entity may be unusual in respect of another
428 Distinguishing between items of income and expense and combining them in
different ways also permits several measures of entity performance to be
displayed These have differing degrees of inclusiveness For example the
income statement could display gross margin profit or loss from ordinary
activities before taxation profit or loss from ordinary activities after taxation
and profit or loss
Income
429 The definition of income encompasses both revenue and gains Revenue arises
in the course of the ordinary activities of an entity and is referred to by a variety
of different names including sales fees interest dividends royalties and rent
430 Gains represent other items that meet the definition of income and may or may
not arise in the course of the ordinary activities of an entity Gains represent
increases in economic benefits and as such are no different in nature from
revenue Hence they are not regarded as constituting a separate element in this
Conceptual Framework
431 Gains include for example those arising on the disposal of noncurrent assets
The definition of income also includes unrealised gains for example those
arising on the revaluation of marketable securities and those resulting from
increases in the carrying amount of longterm assets When gains are recognised
in the income statement they are usually displayed separately because
knowledge of them is useful for the purpose of making economic decisions
Gains are often reported net of related expenses
432 Various kinds of assets may be received or enhanced by income examples
include cash receivables and goods and services received in exchange for goods
and services supplied Income may also result from the settlement of liabilities
For example an entity may provide goods and services to a lender in settlement
of an obligation to repay an outstanding loan
Expenses
433 The definition of expenses encompasses losses as well as those expenses that
arise in the course of the ordinary activities of the entity Expenses that arise in
the course of the ordinary activities of the entity include for example cost of
sales wages and depreciation They usually take the form of an outflow or
depletion of assets such as cash and cash equivalents inventory property plant
and equipment
434 Losses represent other items that meet the definition of expenses and may or
may not arise in the course of the ordinary activities of the entity Losses
represent decreases in economic benefits and as such they are no different in
nature from other expenses Hence they are not regarded as a separate element
in this Conceptual Framework
Conceptual Framework
IFRS Foundation A39435 Losses include for example those resulting from disasters such as fire and flood
as well as those arising on the disposal of noncurrent assets The definition of
expenses also includes unrealised losses for example those arising from the
effects of increases in the rate of exchange for a foreign currency in respect of
the borrowings of an entity in that currency When losses are recognised in the
income statement they are usually displayed separately because knowledge of
them is useful for the purpose of making economic decisions Losses are often
reported net of related income
Capital maintenance adjustments
436 The revaluation or restatement of assets and liabilities gives rise to increases or
decreases in equity While these increases or decreases meet the definition of
income and expenses they are not included in the income statement under
certain concepts of capital maintenance Instead these items are included in
equity as capital maintenance adjustments or revaluation reserves These
concepts of capital maintenance are discussed in paragraphs 457–465 of this
Conceptual Framework
Recognition of the elements of financial statements
437 Recognition is the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element and satisfies the
criteria for recognition set out in paragraph 438 It involves the depiction of the
item in words and by a monetary amount and the inclusion of that amount in
the balance sheet or income statement totals Items that satisfy the recognition
criteria should be recognised in the balance sheet or income statement The
failure to recognise such items is not rectified by disclosure of the accounting
policies used nor by notes or explanatory material
438 An item that meets the definition of an element should be recognised if
(a) it is probable that any future economic benefit associated with the item
will flow to or from the entity and
(b) the item has a cost or value that can be measured with reliability4
439 In assessing whether an item meets these criteria and therefore qualifies for
recognition in the financial statements regard needs to be given to the
materiality considerations discussed in Chapter 3 Qualitative characteristics of useful
financial information The interrelationship between the elements means that an
item that meets the definition and recognition criteria for a particular element
for example an asset automatically requires the recognition of another
element for example income or a liability
The probability of future economic benefit
440 The concept of probability is used in the recognition criteria to refer to the
degree of uncertainty that the future economic benefits associated with the item
will flow to or from the entity The concept is in keeping with the uncertainty
that characterises the environment in which an entity operates Assessments of
4 Information is reliable when it is complete neutral and free from error
Conceptual Framework
IFRS FoundationA40the degree of uncertainty attaching to the flow of future economic benefits are
made on the basis of the evidence available when the financial statements are
prepared For example when it is probable that a receivable owed to an entity
will be paid it is then justifiable in the absence of any evidence to the contrary
to recognise the receivable as an asset For a large population of receivables
however some degree of nonpayment is normally considered probable hence
an expense representing the expected reduction in economic benefits is
recognised
Reliability of measurement
441 The second criterion for the recognition of an item is that it possesses a cost or
value that can be measured with reliability In many cases cost or value must be
estimated the use of reasonable estimates is an essential part of the preparation
of financial statements and does not undermine their reliability When
however a reasonable estimate cannot be made the item is not recognised in the
balance sheet or income statement For example the expected proceeds from a
lawsuit may meet the definitions of both an asset and income as well as the
probability criterion for recognition however if it is not possible for the claim
to be measured reliably it should not be recognised as an asset or as income the
existence of the claim however would be disclosed in the notes explanatory
material or supplementary schedules
442 An item that at a particular point in time fails to meet the recognition criteria
in paragraph 438 may qualify for recognition at a later date as a result of
subsequent circumstances or events
443 An item that possesses the essential characteristics of an element but fails to
meet the criteria for recognition may nonetheless warrant disclosure in the
notes explanatory material or in supplementary schedules This is appropriate
when knowledge of the item is considered to be relevant to the evaluation of the
financial position performance and changes in financial position of an entity by
the users of financial statements
Recognition of assets
444 An asset is recognised in the balance sheet when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value that
can be measured reliably
445 An asset is not recognised in the balance sheet when expenditure has been
incurred for which it is considered improbable that economic benefits will flow
to the entity beyond the current accounting period Instead such a transaction
results in the recognition of an expense in the income statement This
treatment does not imply either that the intention of management in incurring
expenditure was other than to generate future economic benefits for the entity
or that management was misguided The only implication is that the degree of
certainty that economic benefits will flow to the entity beyond the current
accounting period is insufficient to warrant the recognition of an asset
Conceptual Framework
IFRS Foundation A41Recognition of liabilities
446 A liability is recognised in the balance sheet when it is probable that an outflow
of resources embodying economic benefits will result from the settlement of a
present obligation and the amount at which the settlement will take place can
be measured reliably In practice obligations under contracts that are equally
proportionately unperformed (for example liabilities for inventory ordered but
not yet received) are generally not recognised as liabilities in the financial
statements However such obligations may meet the definition of liabilities
and provided the recognition criteria are met in the particular circumstances
may qualify for recognition In such circumstances recognition of liabilities
entails recognition of related assets or expenses
Recognition of income
447 Income is recognised in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability
has arisen that can be measured reliably This means in effect that recognition
of income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example the net increase in assets arising on a sale of
goods or services or the decrease in liabilities arising from the waiver of a debt
payable)
448 The procedures normally adopted in practice for recognising income for
example the requirement that revenue should be earned are applications of the
recognition criteria in this Conceptual Framework Such procedures are generally
directed at restricting the recognition as income to those items that can be
measured reliably and have a sufficient degree of certainty
Recognition of expenses
449 Expenses are recognised in the income statement when a decrease in future
economic benefits related to a decrease in an asset or an increase of a liability
has arisen that can be measured reliably This means in effect that recognition
of expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets (for example the accrual of employee
entitlements or the depreciation of equipment)
450 Expenses are recognised in the income statement on the basis of a direct
association between the costs incurred and the earning of specific items of
income This process commonly referred to as the matching of costs with
revenues involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other
events for example the various components of expense making up the cost of
goods sold are recognised at the same time as the income derived from the sale
of the goods However the application of the matching concept under this
Conceptual Framework does not allow the recognition of items in the balance sheet
which do not meet the definition of assets or liabilities
451 When economic benefits are expected to arise over several accounting periods
and the association with income can only be broadly or indirectly determined
expenses are recognised in the income statement on the basis of systematic and
rational allocation procedures This is often necessary in recognising the
Conceptual Framework
IFRS FoundationA42expenses associated with the using up of assets such as property plant
equipment goodwill patents and trademarks in such cases the expense is
referred to as depreciation or amortisation These allocation procedures are
intended to recognise expenses in the accounting periods in which the
economic benefits associated with these items are consumed or expire
452 An expense is recognised immediately in the income statement when an
expenditure produces no future economic benefits or when and to the extent
that future economic benefits do not qualify or cease to qualify for recognition
in the balance sheet as an asset
453 An expense is also recognised in the income statement in those cases when a
liability is incurred without the recognition of an asset as when a liability under
a product warranty arises
Measurement of the elements of financial statements
454 Measurement is the process of determining the monetary amounts at which the
elements of the financial statements are to be recognised and carried in the
balance sheet and income statement This involves the selection of the
particular basis of measurement
455 A number of different measurement bases are employed to different degrees and
in varying combinations in financial statements They include the following
(a) Historical cost Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration given to acquire
them at the time of their acquisition Liabilities are recorded at the
amount of proceeds received in exchange for the obligation or in some
circumstances (for example income taxes) at the amounts of cash or
cash equivalents expected to be paid to satisfy the liability in the normal
course of business
(b) Current cost Assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent asset was
acquired currently Liabilities are carried at the undiscounted amount of
cash or cash equivalents that would be required to settle the obligation
currently
(c) Realisable (settlement) value Assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the asset in
an orderly disposal Liabilities are carried at their settlement values that
is the undiscounted amounts of cash or cash equivalents expected to be
paid to satisfy the liabilities in the normal course of business
(d) Present value Assets are carried at the present discounted value of the
future net cash inflows that the item is expected to generate in the
normal course of business Liabilities are carried at the present
discounted value of the future net cash outflows that are expected to be
required to settle the liabilities in the normal course of business
456 The measurement basis most commonly adopted by entities in preparing their
financial statements is historical cost This is usually combined with other
measurement bases For example inventories are usually carried at the lower of
Conceptual Framework
IFRS Foundation A43cost and net realisable value marketable securities may be carried at market
value and pension liabilities are carried at their present value Furthermore
some entities use the current cost basis as a response to the inability of the
historical cost accounting model to deal with the effects of changing prices of
nonmonetary assets
Concepts of capital and capital maintenance
Concepts of capital
457 A financial concept of capital is adopted by most entities in preparing their
financial statements Under a financial concept of capital such as invested
money or invested purchasing power capital is synonymous with the net assets
or equity of the entity Under a physical concept of capital such as operating
capability capital is regarded as the productive capacity of the entity based on
for example units of output per day
458 The selection of the appropriate concept of capital by an entity should be based
on the needs of the users of its financial statements Thus a financial concept of
capital should be adopted if the users of financial statements are primarily
concerned with the maintenance of nominal invested capital or the purchasing
power of invested capital If however the main concern of users is with the
operating capability of the entity a physical concept of capital should be used
The concept chosen indicates the goal to be attained in determining profit even
though there may be some measurement difficulties in making the concept
operational
Concepts of capital maintenance and the determination
of profit
459 The concepts of capital in paragraph 457 give rise to the following concepts of
capital maintenance
(a) Financial capital maintenance Under this concept a profit is earned only if
the financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of net assets at the beginning of
the period after excluding any distributions to and contributions from
owners during the period Financial capital maintenance can be
measured in either nominal monetary units or units of constant
purchasing power
(b) Physical capital maintenance Under this concept a profit is earned only if
the physical productive capacity (or operating capability) of the entity (or
the resources or funds needed to achieve that capacity) at the end of the
period exceeds the physical productive capacity at the beginning of the
period after excluding any distributions to and contributions from
owners during the period
460 The concept of capital maintenance is concerned with how an entity defines the
capital that it seeks to maintain It provides the linkage between the concepts of
capital and the concepts of profit because it provides the point of reference by
which profit is measured it is a prerequisite for distinguishing between an
entity’s return on capital and its return of capital only inflows of assets in
Conceptual Framework
IFRS FoundationA44excess of amounts needed to maintain capital may be regarded as profit and
therefore as a return on capital Hence profit is the residual amount that
remains after expenses (including capital maintenance adjustments where
appropriate) have been deducted from income If expenses exceed income the
residual amount is a loss
461 The physical capital maintenance concept requires the adoption of the current
cost basis of measurement The financial capital maintenance concept however
does not require the use of a particular basis of measurement Selection of the
basis under this concept is dependent on the type of financial capital that the
entity is seeking to maintain
462 The principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the
entity In general terms an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the period Any
amount over and above that required to maintain the capital at the beginning of
the period is profit
463 Under the concept of financial capital maintenance where capital is defined in
terms of nominal monetary units profit represents the increase in nominal
money capital over the period Thus increases in the prices of assets held over
the period conventionally referred to as holding gains are conceptually
profits They may not be recognised as such however until the assets are
disposed of in an exchange transaction When the concept of financial capital
maintenance is defined in terms of constant purchasing power units profit
represents the increase in invested purchasing power over the period Thus
only that part of the increase in the prices of assets that exceeds the increase in
the general level of prices is regarded as profit The rest of the increase is treated
as a capital maintenance adjustment and hence as part of equity
464 Under the concept of physical capital maintenance when capital is defined in
terms of the physical productive capacity profit represents the increase in that
capital over the period All price changes affecting the assets and liabilities of
the entity are viewed as changes in the measurement of the physical productive
capacity of the entity hence they are treated as capital maintenance
adjustments that are part of equity and not as profit
465 The selection of the measurement bases and concept of capital maintenance will
determine the accounting model used in the preparation of the financial
statements Different accounting models exhibit different degrees of relevance
and reliability and as in other areas management must seek a balance between
relevance and reliability This Conceptual Framework is applicable to a range of
accounting models and provides guidance on preparing and presenting the
financial statements constructed under the chosen model At the present time
it is not the intention of the Board to prescribe a particular model other than in
exceptional circumstances such as for those entities reporting in the currency
of a hyperinflationary economy This intention will however be reviewed in
the light of world developments
Conceptual Framework
IFRS Foundation A45IFRS Standard 1
Firsttime Adoption of International
Financial Reporting Standards
In April 2001 the International Accounting Standards Board (the Board) adopted SIC8
Firsttime Application of IASs as the Primary Basis of Accounting which had been issued by the
Standing Interpretations Committee of the International Accounting Standards Committee
in July 1998
In June 2003 the Board issued IFRS 1 Firsttime Adoption of International Financial Reporting
Standards to replace SIC8 IAS 1 Presentation of Financial Statements (as revised in 2007)
amended the terminology used throughout IFRS including IFRS 1
The Board restructured IFRS 1 in November 2008 In December 2010 the Board amended
IFRS 1 to reflect that a firsttime adopter would restate past transactions from the date of
transition to IFRS instead of at 1 January 2004
Since it was issued in 2003 IFRS 1 was amended to accommodate firsttime adoption
requirements resulting from new or amended Standards IFRS 1 was amended by
Government Loans (issued March 2012) which added an exception to the retrospective
application of IFRS to require that first time adopters apply the requirements in IFRS 9
Financial Instruments and IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance prospectively to government loans existing at the date of transition to IFRS
Other Standards have made minor consequential amendments to IFRS 1 They include
Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime Adopters (Amendments to
IFRS 1) (issued January 2010) Improvements to IFRSs (issued May 2010) Disclosures—Transfers of
Financial Assets (Amendments to IFRS 7) (issued October 2010) Severe Hyperinflation and Removal
of Fixed Dates for Firsttime Adopters (Amendments to IFRS 1) (issued December 2010) IFRS 10
Consolidated Financial Statements (issued May 2011) IFRS 11 Joint Arrangements (issued
May 2011) IFRS 13 Fair Value Measurement (issued May 2011) IAS 19 Employee Benefits (issued
June 2011) Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (issued
June 2011) IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (issued October
2011) Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012) Consolidated Financial
Statements Joint Arrangements and Disclosure of Interests in Other Entities Transition Guidance
(Amendments to IFRS 10 IFRS 11 and IFRS 12) (issued June 2012) Investment Entities
(Amendments to IFRS 10 IFRS 12 and IAS 27) (issued October 2012) IFRS 9 Financial
Instruments (Hedge Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued
November 2013) IFRS 14 Regulatory Deferral Accounts (issued January 2014) Accounting for
Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) (issued May 2014) IFRS 15
Revenue from Contracts with Customers (issued May 2014) IFRS 9 Financial Instruments (issued July
2014) Method in Separate Financial Statements (Amendments to IAS 27) (issued August 2014)
Annual Improvements to IFRSs 2012–2014 Cycle (issued September 2014) and IFRS 16 Leases (issued
January 2016)
IFRS 1
IFRS Foundation A47CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 1
FIRSTTIME ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS
OBJECTIVE 1
SCOPE 2
RECOGNITION AND MEASUREMENT 6
Opening IFRS statement of financial position 6
Accounting policies 7
Exceptions to the retrospective application of other IFRSs 13
Exemptions from other IFRSs 18
PRESENTATION AND DISCLOSURE 20
Comparative information 21
Explanation of transition to IFRSs 23
EFFECTIVE DATE 34
WITHDRAWAL OF IFRS 1 (ISSUED 2003) 40
APPENDICES
A Defined terms
B Exceptions to the retrospective application of other IFRSs
C Exemptions for business combinations
D Exemptions from other IFRSs
E Shortterm exemptions from IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 1 ISSUED IN NOVEMBER 2008
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 1
Additional Exemptions For Firsttime Adopters issued in July 2009
Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime
Adopters issued in January 2010
Severe Hyperinflation and Removal of Fixed Dates for Firsttime Adopters
issued in December 2010
Government Loans issued in March 2012
BASIS FOR CONCLUSIONS
APPENDIX
Amendments to Basis for Conclusions on other IFRSs IMPLEMENTATION
GUIDANCE
TABLE OF CONCORDANCE
IFRS 1
IFRS FoundationA48International Financial Reporting Standard 1 Firsttime Adoption of International Financial
Reporting Standards (IFRS 1) is set out in paragraphs 1–40 and Appendices A–E All the
paragraphs have equal authority Paragraphs in bold type state the main principles
Terms defined in Appendix A are in italics the first time they appear in the IFRS
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards IFRS 1 should be read in the context of its objective and the Basis for
Conclusions the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance
IFRS 1
IFRS Foundation A49Introduction
Reasons for issuing the IFRS
IN1 The International Accounting Standards Board issued IFRS 1 in June 2003
IFRS 1 replaced SIC8 Firsttime Application of IASs as the Primary Basis of Accounting
The Board developed the IFRS to address concerns about the full retrospective
application of IFRSs required by SIC8
IN2 Subsequently IFRS 1 was amended many times to accommodate firsttime
adoption requirements resulting from new or amended IFRSs As a result the
IFRS became more complex and less clear In 2007 therefore the Board
proposed as part of its annual improvements project to change IFRS 1 to make
it easier for the reader to understand and to design it to better accommodate
future changes The version of IFRS 1 issued in 2008 retains the substance of the
previous version but within a changed structure It replaces the previous
version and is effective for entities applying IFRSs for the first time for annual
periods beginning on or after 1 July 2009 Earlier application is permitted
Main features of the IFRS
IN3 The IFRS applies when an entity adopts IFRSs for the first time by an explicit and
unreserved statement of compliance with IFRSs
IN4 In general the IFRS requires an entity to comply with each IFRS effective at the
end of its first IFRS reporting period In particular the IFRS requires an entity to
do the following in the opening IFRS statement of financial position that it
prepares as a starting point for its accounting under IFRSs
(a) recognise all assets and liabilities whose recognition is required by IFRSs
(b) not recognise items as assets or liabilities if IFRSs do not permit such
recognition
(c) reclassify items that it recognised under previous GAAP as one type of
asset liability or component of equity but are a different type of asset
liability or component of equity under IFRSs and
(d) apply IFRSs in measuring all recognised assets and liabilities
IN5 The IFRS grants limited exemptions from these requirements in specified areas
where the cost of complying with them would be likely to exceed the benefits to
users of financial statements The IFRS also prohibits retrospective application
of IFRSs in some areas particularly where retrospective application would
require judgements by management about past conditions after the outcome of
a particular transaction is already known
IN6 The IFRS requires disclosures that explain how the transition from previous
GAAP to IFRSs affected the entity’s reported financial position financial
performance and cash flows
IN7 An entity is required to apply the IFRS if its first IFRS financial statements are for
a period beginning on or after 1 July 2009 Earlier application is encouraged
IFRS 1
IFRS FoundationA50IN8 Paragraphs B10 and B11 (introduced by Government Loans in March 2012) refer to
IFRS 9 If an entity applies this IFRS but does not yet apply IFRS 9 the references
in paragraphs B10 and B11 to IFRS 9 shall be read as references to IAS 39 Financial
Instruments Recognition and Measurement
IFRS 1
IFRS Foundation A51International Financial Reporting Standard 1
Firsttime Adoption of International Financial Reporting
Standards
Objective
1 The objective of this 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
International Financial Reporting Standards (IFRSs) and
(c) can be generated at a cost that does not exceed the benefits
Scope
2 An entity shall apply this IFRS in
(a) its first IFRS financial statements and
(b) each interim financial report if any that it presents in accordance with
IAS 34 Interim Financial Reporting for part of the period covered by its first
IFRS financial statements
3 An entity’s first IFRS financial statements are the first annual financial
statements in which the entity adopts IFRSs by an explicit and unreserved
statement in those financial statements of compliance with IFRSs Financial
statements in accordance with IFRSs are an entity’s first IFRS financial
statements if for example the entity
(a) presented its most recent previous financial statements
(i) in accordance with national requirements that are not consistent
with IFRSs in all respects
(ii) in conformity with IFRSs in all respects except that the financial
statements did not contain an explicit and unreserved statement
that they complied with IFRSs
(iii) containing an explicit statement of compliance with some but
not all IFRSs
(iv) in accordance with national requirements inconsistent with
IFRSs using some individual IFRSs to account for items for which
national requirements did not exist or
(v) in accordance with national requirements with a reconciliation
of some amounts to the amounts determined in accordance with
IFRSs
IFRS 1
IFRS FoundationA52(b) prepared financial statements in accordance with IFRSs for internal use
only without making them available to the entity’s owners or any other
external users
(c) prepared a reporting package in accordance with IFRSs for consolidation
purposes without preparing a complete set of financial statements as
defined in IAS 1 Presentation of Financial Statements (as revised in 2007) or
(d) did not present financial statements for previous periods
4 This IFRS applies when an entity first adopts IFRSs It does not apply when for
example an entity
(a) stops presenting financial statements in accordance with national
requirements having previously presented them as well as another set of
financial statements that contained an explicit and unreserved
statement of compliance with IFRSs
(b) presented financial statements in the previous year in accordance with
national requirements and those financial statements contained an
explicit and unreserved statement of compliance with IFRSs or
(c) presented financial statements in the previous year that contained an
explicit and unreserved statement of compliance with IFRSs even if the
auditors qualified their audit report on those financial statements
4A Notwithstanding the requirements in paragraphs 2 and 3 an entity that has
applied IFRSs in a previous reporting period but whose most recent previous
annual financial statements did not contain an explicit and unreserved
statement of compliance with IFRSs must either apply this IFRS or else apply
IFRSs retrospectively in accordance with IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors as if the entity had never stopped applying IFRSs
4B When an entity does not elect to apply this IFRS in accordance with
paragraph 4A the entity shall nevertheless apply the disclosure requirements in
paragraphs 23A–23B of IFRS 1 in addition to the disclosure requirements in
IAS 8
5 This IFRS does not apply to changes in accounting policies made by an entity
that already applies IFRSs Such changes are the subject of
(a) requirements on changes in accounting policies in IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors and
(b) specific transitional requirements in other IFRSs
Recognition and measurement
Opening IFRS statement of financial position
6 An entity shall prepare and present an opening IFRS statement of financial position at
the date of transition to IFRSs This is the starting point for its accounting in
accordance with IFRSs
IFRS 1
IFRS Foundation A53Accounting policies
7 An entity shall use the same accounting policies in its opening IFRS
statement of financial position and throughout all periods presented in
its first IFRS financial statements Those accounting policies shall
comply with each IFRS effective at the end of its first IFRS reporting
period except as specified in paragraphs 13–19 and Appendices B–E
8 An entity shall not apply different versions of IFRSs that were effective at earlier
dates An entity may apply a new IFRS that is not yet mandatory if that IFRS
permits early application
Example Consistent application of latest version of IFRSs
Background
The end of entity A’s first IFRS reporting period is 31 December 20X5
Entity A decides to present comparative information in those financial
statements for one year only (see paragraph 21) Therefore its date of
transition to IFRSs is the beginning of business on 1 January 20X4 (or
equivalently close of business on 31 December 20X3) Entity A presented
financial statements in accordance with its previous GAAP annually to
31 December each year up to and including 31 December 20X4
Application of requirements
Entity A is required to apply the IFRSs effective for periods ending on
31 December 20X5 in
(a) preparing and presenting its opening IFRS statement of financial
position at 1 January 20X4 and
(b) preparing and presenting its statement of financial position for
31 December 20X5 (including comparative amounts for 20X4)
statement of comprehensive income statement of changes in equity
and statement of cash flows for the year to 31 December 20X5
(including comparative amounts for 20X4) and disclosures (including
comparative information for 20X4)
If a new IFRS is not yet mandatory but permits early application entity A is
permitted but not required to apply that IFRS in its first IFRS financial
statements
9 The transitional provisions in other IFRSs apply to changes in accounting
policies made by an entity that already uses IFRSs they do not apply to a firsttime
adopter’s transition to IFRSs except as specified in Appendices B–E
10 Except as described in paragraphs 13–19 and Appendices B–E an entity shall in
its opening IFRS statement of financial position
(a) recognise all assets and liabilities whose recognition is required by IFRSs
(b) not recognise items as assets or liabilities if IFRSs do not permit such
recognition
IFRS 1
IFRS FoundationA54(c) reclassify items that it recognised in accordance with previous GAAP as
one type of asset liability or component of equity but are a different
type of asset liability or component of equity in accordance with IFRSs
and
(d) apply IFRSs in measuring all recognised assets and liabilities
11 The accounting policies that an entity uses in its opening IFRS statement of
financial position may differ from those that it used for the same date using its
previous GAAP The resulting adjustments arise from events and transactions
before the date of transition to IFRSs Therefore an entity shall recognise those
adjustments directly in retained earnings (or if appropriate another category of
equity) at the date of transition to IFRSs
12 This IFRS establishes two categories of exceptions to the principle that an
entity’s opening IFRS statement of financial position shall comply with each
IFRS
(a) paragraphs 14–17 and Appendix B prohibit retrospective application of
some aspects of other IFRSs
(b) Appendices C–E grant exemptions from some requirements of other
IFRSs
Exceptions to the retrospective application of other
IFRSs
13 This IFRS prohibits retrospective application of some aspects of other IFRSs
These exceptions are set out in paragraphs 14–17 and Appendix B
Estimates
14 An entity’s estimates in accordance with IFRSs at the date of transition to
IFRSs shall be consistent with estimates made for the same date in
accordance with previous GAAP (after adjustments to reflect any
difference in accounting policies) unless there is objective evidence that
those estimates were in error
15 An entity may receive information after the date of transition to IFRSs about
estimates that it had made under previous GAAP In accordance with
paragraph 14 an entity shall treat the receipt of that information in the same
way as nonadjusting events after the reporting period in accordance with IAS 10
Events after the Reporting Period For example assume that an entity’s date of
transition to IFRSs is 1 January 20X4 and new information on 15 July 20X4
requires the revision of an estimate made in accordance with previous GAAP at
31 December 20X3 The entity shall not reflect that new information in its
opening IFRS statement of financial position (unless the estimates need
adjustment for any differences in accounting policies or there is objective
evidence that the estimates were in error) Instead the entity shall reflect that
new information in profit or loss (or if appropriate other comprehensive
income) for the year ended 31 December 20X4
16 An entity may need to make estimates in accordance with IFRSs at the date of
transition to IFRSs that were not required at that date under previous GAAP To
achieve consistency with IAS 10 those estimates in accordance with IFRSs shall
IFRS 1
IFRS Foundation A55reflect conditions that existed at the date of transition to IFRSs In particular
estimates at the date of transition to IFRSs of market prices interest rates or
foreign exchange rates shall reflect market conditions at that date
17 Paragraphs 14–16 apply to the opening IFRS statement of financial position
They also apply to a comparative period presented in an entity’s first IFRS
financial statements in which case the references to the date of transition to
IFRSs are replaced by references to the end of that comparative period
Exemptions from other IFRSs
18 An entity may elect to use one or more of the exemptions contained in
Appendices C–E An entity shall not apply these exemptions by analogy to other
items
19 [Deleted]
Presentation and disclosure
20 This IFRS does not provide exemptions from the presentation and disclosure
requirements in other IFRSs
Comparative information
21 An entity’s first IFRS financial statements shall include at least three statements
of financial position two statements of profit or loss and other comprehensive
income two separate statements of profit or loss (if presented) two statements
of cash flows and two statements of changes in equity and related notes
including comparative information for all statements presented
NonIFRS comparative information and historical summaries
22 Some entities present historical summaries of selected data for periods before
the first period for which they present full comparative information in
accordance with IFRSs This IFRS does not require such summaries to comply
with the recognition and measurement requirements of IFRSs Furthermore
some entities present comparative information in accordance with previous
GAAP as well as the comparative information required by IAS 1 In any financial
statements containing historical summaries or comparative information in
accordance with previous GAAP an entity shall
(a) label the previous GAAP information prominently as not being prepared
in accordance with IFRSs and
(b) disclose the nature of the main adjustments that would make it comply
with IFRSs An entity need not quantify those adjustments
Explanation of transition to IFRSs
23 An entity shall explain how the transition from previous GAAP to IFRSs
affected its reported financial position financial performance and cash
flows
23A An entity that has applied IFRSs in a previous period as described in
paragraph 4A shall disclose
IFRS 1
IFRS FoundationA56(a) the reason it stopped applying IFRSs and
(b) the reason it is resuming the application of IFRSs
23B When an entity in accordance with paragraph 4A does not elect to apply IFRS 1
the entity shall explain the reasons for electing to apply IFRSs as if it had never
stopped applying IFRSs
Reconciliations
24 To comply with paragraph 23 an entity’s first IFRS financial statements shall
include
(a) reconciliations of its equity reported in accordance with previous GAAP
to its equity in accordance with IFRSs for both of the following dates
(i) the date of transition to IFRSs and
(ii) the end of the latest period presented in the entity’s most recent
annual 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 The starting point for that reconciliation shall be total
comprehensive income in accordance with previous GAAP for the same
period or if an entity did not report such a total profit or loss under
previous GAAP
(c) if the entity recognised or reversed 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 recognised those impairment losses or reversals in the period
beginning with the date of transition to IFRSs
25 The reconciliations required by paragraph 24(a) and (b) shall give sufficient
detail to enable users to understand the material adjustments to the statement
of financial position and statement of comprehensive income If an entity
presented a statement of cash flows under its previous GAAP it shall also
explain the material adjustments to the statement of cash flows
26 If an entity becomes aware of errors made under previous GAAP the
reconciliations required by paragraph 24(a) and (b) shall distinguish the
correction of those errors from changes in accounting policies
27 IAS 8 does not apply to the changes in accounting policies an entity makes when
it adopts IFRSs or to changes in those policies until after it presents its first IFRS
financial statements Therefore IAS 8’s requirements about changes in
accounting policies do not apply in an entity’s first IFRS financial statements
27A If during the period covered by its first IFRS financial statements an entity
changes its accounting policies or its use of the exemptions contained in this
IFRS it shall explain the changes between its first IFRS interim financial report
and its first IFRS financial statements in accordance with paragraph 23 and it
shall update the reconciliations required by paragraph 24(a) and (b)
28 If an entity did not present financial statements for previous periods its first
IFRS financial statements shall disclose that fact
IFRS 1
IFRS Foundation A57Designation of financial assets or financial liabilities
29 An entity is permitted to designate a previously recognised financial asset as a
financial asset measured at fair value through profit or loss in accordance with
paragraph D19A The entity shall disclose the fair value of financial assets so
designated at the date of designation and their classification and carrying
amount in the previous financial statements
29A An entity is permitted to designate a previously recognised financial liability as a
financial liability at fair value through profit or loss in accordance with
paragraph D19 The entity shall disclose the fair value of financial liabilities so
designated at the date of designation and their classification and carrying
amount in the previous financial statements
Use of fair value as deemed cost
30 If an entity uses fair value in its opening IFRS statement of financial position as
deemed cost for an item of property plant and equipment an investment
property an intangible asset or a rightofuse asset (see paragraphs D5 and D7)
the entity’s first IFRS financial statements shall disclose for each line item in the
opening IFRS statement of financial position
(a) the aggregate of those fair values and
(b) the aggregate adjustment to the carrying amounts reported under
previous GAAP
Use of deemed cost for investments in subsidiaries joint ventures
and associates
31 Similarly if an entity uses a deemed cost in its opening IFRS statement of
financial position for an investment in a subsidiary joint venture or associate in
its separate financial statements (see paragraph D15) the entity’s first IFRS
separate financial statements shall disclose
(a) the aggregate deemed cost of those investments for which deemed cost is
their previous GAAP carrying amount
(b) the aggregate deemed cost of those investments for which deemed cost is
fair value and
(c) the aggregate adjustment to the carrying amounts reported under
previous GAAP
Use of deemed cost for oil and gas assets
31A If an entity uses the exemption in paragraph D8A(b) for oil and gas assets it shall
disclose that fact and the basis on which carrying amounts determined under
previous GAAP were allocated
Use of deemed cost for operations subject to rate regulation
31B If an entity uses the exemption in paragraph D8B for operations subject to rate
regulation it shall disclose that fact and the basis on which carrying amounts
were determined under previous GAAP
IFRS 1
IFRS FoundationA58Use of deemed cost after severe hyperinflation
31C If an entity elects to measure assets and liabilities at fair value and to use that
fair value as the deemed cost in its opening IFRS statement of financial position
because of severe hyperinflation (see paragraphs D26–D30) the entity’s first IFRS
financial statements shall disclose an explanation of how and why the entity
had and then ceased to have a functional currency that has both of the
following characteristics
(a) a reliable general price index is not available to all entities with
transactions and balances in the currency
(b) exchangeability between the currency and a relatively stable foreign
currency does not exist
Interim financial reports
32 To comply with paragraph 23 if an entity presents an interim financial report in
accordance with IAS 34 for part of the period covered by its first IFRS financial
statements the entity shall satisfy the following requirements in addition to the
requirements of IAS 34
(a) Each such interim financial report shall if the entity presented an
interim financial report for the comparable interim period of the
immediately preceding financial year include
(i) a reconciliation of its equity in accordance with previous GAAP at
the end of that comparable interim period to its equity under
IFRSs at that date and
(ii) a reconciliation to its total comprehensive income in accordance
with IFRSs for that comparable interim period (current and year
to date) The starting point for that reconciliation shall be total
comprehensive income in accordance with previous GAAP for
that period or if an entity did not report such a total profit or
loss in accordance with previous GAAP
(b) In addition to the reconciliations required by (a) an entity’s first interim
financial report in accordance with IAS 34 for part of the period covered
by its first IFRS financial statements shall include the reconciliations
described in paragraph 24(a) and (b) (supplemented by the details
required by paragraphs 25 and 26) or a crossreference to another
published document that includes these reconciliations
(c) If an entity changes its accounting policies or its use of the exemptions
contained in this IFRS it shall explain the changes in each such interim
financial report in accordance with paragraph 23 and update the
reconciliations required by (a) and (b)
33 IAS 34 requires minimum disclosures which are based on the assumption that
users of the interim financial report also have access to the most recent annual
financial statements However IAS 34 also requires an entity to disclose any
events or transactions that are material to an understanding of the current
interim period’ Therefore if a firsttime adopter did not in its most recent
annual financial statements in accordance with previous GAAP disclose
IFRS 1
IFRS Foundation A59information material to an understanding of the current interim period its
interim financial report shall disclose that information or include a
crossreference to another published document that includes it
Effective date
34 An entity shall apply this IFRS if its first IFRS financial statements are for a
period beginning on or after 1 July 2009 Earlier application is permitted
35 An entity shall apply the amendments in paragraphs D1(n) and D23 for annual
periods beginning on or after 1 July 2009 If an entity applies IAS 23 Borrowing
Costs (as revised in 2007) for an earlier period those amendments shall be
applied for that earlier period
36 IFRS 3 Business Combinations (as revised in 2008) amended paragraphs 19 C1 and
C4(f) and (g) If an entity applies IFRS 3 (revised 2008) for an earlier period the
amendments shall also be applied for that earlier period
37 IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) amended
paragraphs B1 and B7 If an entity applies IAS 27 (amended 2008) for an earlier
period the amendments shall be applied for that earlier period
38 Cost of an Investment in a Subsidiary Jointly Controlled Entity or Associate (Amendments
to IFRS 1 and IAS 27) issued in May 2008 added paragraphs 31 D1(g) D14 and
D15 An entity shall apply those paragraphs for annual periods beginning on or
after 1 July 2009 Earlier application is permitted If an entity applies the
paragraphs for an earlier period it shall disclose that fact
39 Paragraph B7 was amended by Improvements to IFRSs issued in May 2008 An
entity shall apply those amendments for annual periods beginning on or after
1 July 2009 If an entity applies IAS 27 (amended 2008) for an earlier period the
amendments shall be applied for that earlier period
39A Additional Exemptions for Firsttime Adopters (Amendments to IFRS 1) issued in July
2009 added paragraphs 31A D8A D9A and D21A and amended paragraph D1(c)
(d) and (l) An entity shall apply those amendments for annual periods
beginning on or after 1 January 2010 Earlier application is permitted If an
entity applies the amendments for an earlier period it shall disclose that fact
39B [Deleted]
39C IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments added
paragraph D25 An entity shall apply that amendment when it applies IFRIC 19
39D Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime Adopters
(Amendment to IFRS 1) issued in January 2010 added paragraph E3 An entity
shall apply that amendment for annual periods beginning on or after 1 July
2010 Earlier application is permitted If an entity applies the amendment for
an earlier period it shall disclose that fact
39E Improvements to IFRSs issued in May 2010 added paragraphs 27A 31B and D8B and
amended paragraphs 27 32 D1(c) and D8 An entity shall apply those
amendments for annual periods beginning on or after 1 January 2011 Earlier
application is permitted If an entity applies the amendments for an earlier
IFRS 1
IFRS FoundationA60period it shall disclose that fact Entities that adopted IFRSs in periods before
the effective date of IFRS 1 or applied IFRS 1 in a previous period are permitted
to apply the amendment to paragraph D8 retrospectively in the first annual
period after the amendment is effective An entity applying paragraph D8
retrospectively shall disclose that fact
39F Disclosures—Transfers of Financial Assets (Amendments to IFRS 7) issued in October
2010 added paragraph E4 An entity shall apply that amendment for annual
periods beginning on or after 1 July 2011 Earlier application is permitted If an
entity applies the amendment for an earlier period it shall disclose that fact
39G [Deleted]
39H Severe Hyperinflation and Removal of Fixed Dates for Firsttime Adopters (Amendments to
IFRS 1) issued in December 2010 amended paragraphs B2 D1 and D20 and
added paragraphs 31C and D26–D30 An entity shall apply those amendments
for annual periods beginning on or after 1 July 2011 Earlier application is
permitted
39I IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements issued in
May 2011 amended paragraphs 31 B7 C1 D1 D14 and D15 and added
paragraph D31 An entity shall apply those amendments when it applies IFRS 10
and IFRS 11
39J IFRS 13 Fair Value Measurement issued in May 2011 deleted paragraph 19
amended the definition of fair value in Appendix A and amended
paragraphs D15 and D20 An entity shall apply those amendments when it
applies IFRS 13
39K Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) issued in
June 2011 amended paragraph 21 An entity shall apply that amendment when
it applies IAS 1 as amended in June 2011
39L IAS 19 Employee Benefits (as amended in June 2011) amended paragraph D1
deleted paragraphs D10 and D11 and added paragraph E5 An entity shall apply
those amendments when it applies IAS 19 (as amended in June 2011)
39M IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine added
paragraph D32 and amended paragraph D1 An entity shall apply that
amendment when it applies IFRIC 20
39N Government Loans (Amendments to IFRS 1) issued in March 2012 added
paragraphs B1(f) and B10–B12 An entity shall apply those paragraphs for
annual periods beginning on or after 1 January 2013 Earlier application is
permitted
39O Paragraphs B10 and B11 refer to IFRS 9 If an entity applies this IFRS but does
not yet apply IFRS 9 the references in paragraphs B10 and B11 to IFRS 9 shall be
read as references to IAS 39 Financial Instruments Recognition and Measurement
39P Annual Improvements 2009–2011 Cycle issued in May 2012 added paragraphs 4A–4B
and 23A–23B An entity shall apply that amendment retrospectively in
accordance with IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
IFRS 1
IFRS Foundation A61for annual periods beginning on or after 1 January 2013 Earlier application is
permitted If an entity applies that amendment for an earlier period it shall
disclose that fact
39Q Annual Improvements 2009–2011 Cycle issued in May 2012 amended
paragraph D23 An entity shall apply that amendment retrospectively in
accordance with IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
for annual periods beginning on or after 1 January 2013 Earlier application is
permitted If an entity applies that amendment for an earlier period it shall
disclose that fact
39R Annual Improvements 2009–2011 Cycle issued in May 2012 amended paragraph 21
An entity shall apply that amendment retrospectively in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors for annual periods
beginning on or after 1 January 2013 Earlier application is permitted If an
entity applies that amendment for an earlier period it shall disclose that fact
39S Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 amended paragraph D31 An entity shall apply that amendment
when it applies IFRS 11 (as amended in June 2012)
39T Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraphs D16 D17 and Appendix C and added a heading and
paragraphs E6–E7 An entity shall apply those amendments for annual periods
beginning on or after 1 January 2014 Earlier application of Investment Entities is
permitted If an entity applies those amendments earlier it shall also apply all
amendments included in Investment Entities at the same time
39U [Deleted]
39V IFRS 14 Regulatory Deferral Accounts issued in January 2014 amended
paragraph D8B An entity shall apply that amendment for annual periods
beginning on or after 1 January 2016 Earlier application is permitted If an
entity applies IFRS 14 for an earlier period the amendment shall be applied for
that earlier period
39W Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
issued in May 2014 amended paragraph C5 An entity shall apply that
amendment in annual periods beginning on or after 1 January 2016 If an entity
applies related amendments to IFRS 11 from Accounting for Acquisitions of Interests
in Joint Operations (Amendments to IFRS 11) in an earlier period the amendment
to paragraph C5 shall be applied in that earlier period
39X IFRS 15 Revenue from Contracts with Customers issued in May 2014 deleted
paragraph D24 and its related heading and added paragraphs D34–D35 and
their related heading An entity shall apply those amendments when it applies
IFRS 15
39Y IFRS 9 Financial Instruments as issued in July 2014 amended paragraphs 29
B1–B6 D1 D14 D15 D19 and D20 deleted paragraphs 39B 39G and 39U and
added paragraphs 29A B8–B8G B9 D19A–D19C D33 E1 and E2 An entity shall
apply those amendments when it applies IFRS 9
IFRS 1
IFRS FoundationA6239Z Equity Method in Separate Financial Statements (Amendments to IAS 27) issued in
August 2014 amended paragraph D14 and added paragraph D15A An entity
shall apply those amendments for annual periods beginning on or after
1 January 2016 Earlier application is permitted If an entity applies those
amendments for an earlier period it shall disclose that fact
39AA Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014 added
paragraph E4A An entity shall apply that amendment for annual periods
beginning on or after 1 January 2016 Earlier application is permitted If an
entity applies that amendment for an earlier period it shall disclose that fact
39AB IFRS 16 Leases issued in January 2016 amended paragraphs 30 C4 D1 D7 D8B
and D9 deleted paragraph D9A and added paragraphs D9B–D9E An entity shall
apply those amendments when it applies IFRS 16
Withdrawal of IFRS 1 (issued 2003)
40 This IFRS supersedes IFRS 1 (issued in 2003 and amended at May 2008)
IFRS 1
IFRS Foundation A63Appendix A
Defined terms
This appendix is an integral part of the IFRS
date of
transition to
IFRSs
The beginning of the earliest period for which an entity presents full
comparative information under IFRSs in its first IFRS financial
statements
deemed cost An amount used as a surrogate for cost or depreciated cost at a given
date Subsequent depreciation or amortisation assumes that the entity
had initially recognised the asset or liability at the given date and that
its cost was equal to the deemed cost
fair value Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date (See IFRS 13)
first IFRS
financial
statements
The first annual financial statements in which an entity adopts
International Financial Reporting Standards (IFRSs) by an explicit
and unreserved statement of compliance with IFRSs
first IFRS
reporting
period
The latest reporting period covered by an entity’s first IFRS financial
statements
firsttime
adopter
An entity that presents its first IFRS financial statements
International
Financial
Reporting
Standards
(IFRSs)
Standards and Interpretations issued by the International Accounting
Standards Board (IASB) They comprise
(a) International Financial Reporting Standards
(b) International Accounting Standards
(c) IFRIC Interpretations and
(d) SIC Interpretations(a)
opening IFRS
statement of
financial
position
An entity’s statement of financial position at the date of transition to
IFRSs
previous GAAP The basis of accounting that a firsttime adopter used immediately
before adopting IFRSs
(a) Definition of IFRSs amended after the name changes introduced by the revised Constitution of the
IFRS Foundation in 2010
IFRS 1
IFRS FoundationA64Appendix B
Exceptions to the retrospective application of other IFRSs
This appendix is an integral part of the IFRS
B1 An entity shall apply the following exceptions
(a) derecognition of financial assets and financial liabilities (paragraphs B2
and B3)
(b) hedge accounting (paragraphs B4–B6)
(c) noncontrolling interests (paragraph B7)
(d) classification and measurement of financial assets (paragraph B8–B8C)
(e) impairment of financial assets (paragraphs B8D–B8G)
(f) embedded derivatives (paragraph B9) and
(g) government loans (paragraphs B10–B12)
Derecognition of financial assets and financial liabilities
B2 Except as permitted by paragraph B3 a firsttime adopter shall apply the
derecognition requirements in IFRS 9 prospectively for transactions occurring
on or after the date of transition to IFRSs For example if a firsttime adopter
derecognised nonderivative financial assets or nonderivative financial
liabilities in accordance with its previous GAAP as a result of a transaction that
occurred before the date of transition to IFRSs it shall not recognise those assets
and liabilities in accordance with IFRSs (unless they qualify for recognition as a
result of a later transaction or event)
B3 Despite paragraph B2 an entity may apply the derecognition requirements in
IFRS 9 retrospectively from a date of the entity’s choosing provided that the
information needed to apply IFRS 9 to financial assets and financial liabilities
derecognised as a result of past transactions was obtained at the time of initially
accounting for those transactions
Hedge accounting
B4 As required by IFRS 9 at the date of transition to IFRSs an entity shall
(a) measure all derivatives at fair value and
(b) eliminate all deferred losses and gains arising on derivatives that were
reported in accordance with previous GAAP as if they were assets or
liabilities
B5 An entity shall not reflect in its opening IFRS statement of financial position a
hedging relationship of a type that does not qualify for hedge accounting in
accordance with IFRS 9 (for example many hedging relationships where the
hedging instrument is a standalone written option or a net written option or
where the hedged item is a net position in a cash flow hedge for another risk
than foreign currency risk) However if an entity designated a net position as a
hedged item in accordance with previous GAAP it may designate as a hedged
item in accordance with IFRSs an individual item within that net position or a
IFRS 1
IFRS Foundation A65net position if that meets the requirements in paragraph 661 of IFRS 9
provided that it does so no later than the date of transition to IFRSs
B6 If before the date of transition to IFRSs an entity had designated a transaction
as a hedge but the hedge does not meet the conditions for hedge accounting in
IFRS 9 the entity shall apply paragraphs 656 and 657 of IFRS 9 to discontinue
hedge accounting Transactions entered into before the date of transition to
IFRSs shall not be retrospectively designated as hedges
Noncontrolling interests
B7 A firsttime adopter shall apply the following requirements of IFRS 10
prospectively from the date of transition to IFRSs
(a) the requirement in paragraph B94 that total comprehensive income is
attributed to the owners of the parent and to the noncontrolling
interests even if this results in the noncontrolling interests having a
deficit balance
(b) the requirements in paragraphs 23 and B96 for accounting for changes
in the parent’s ownership interest in a subsidiary that do not result in a
loss of control and
(c) the requirements in paragraphs B97–B99 for accounting for a loss of
control over a subsidiary and the related requirements of paragraph 8A
of IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations
However if a firsttime adopter elects to apply IFRS 3 retrospectively to past
business combinations it shall also apply IFRS 10 in accordance with
paragraph C1 of this IFRS
Classification and measurement of financial assets
B8 An entity shall assess whether a financial asset meets the conditions in
paragraph 412 of IFRS 9 or the conditions in paragraph 412A of IFRS 9 on the
basis of the facts and circumstances that exist at the date of transition to IFRSs
B8A If it is impracticable to assess a modified time value of money element in
accordance with paragraphs B419B–B419D of IFRS 9 on the basis of the facts
and circumstances that exist at the date of transition to IFRSs an entity shall
assess the contractual cash flow characteristics of that financial asset on the
basis of the facts and circumstances that existed at the date of transition to IFRSs
without taking into account the requirements related to the modification of the
time value of money element in paragraphs B419B–B419D of IFRS 9 (In this
case the entity shall also apply paragraph 42R of IFRS 7 but references to
paragraph 724 of IFRS 9’ shall be read to mean this paragraph and references
to initial recognition of the financial asset’ shall be read to mean at the date of
transition to IFRSs’)
B8B If it is impracticable to assess whether the fair value of a prepayment feature is
insignificant in accordance with paragraph B4112(c) of IFRS 9 on the basis of
the facts and circumstances that exist at the date of transition to IFRSs an entity
shall assess the contractual cash flow characteristics of that financial asset on
the basis of the facts and circumstances that existed at the date of transition to
IFRSs without taking into account the exception for prepayment features in
IFRS 1
IFRS FoundationA66paragraph B4112 of IFRS 9 (In this case the entity shall also apply
paragraph 42S of IFRS 7 but references to paragraph 725 of IFRS 9’ shall be read
to mean this paragraph and references to initial recognition of the financial
asset’ shall be read to mean at the date of transition to IFRSs’)
B8C If it is impracticable (as defined in IAS 8) for an entity to apply retrospectively
the effective interest method in IFRS 9 the fair value of the financial asset or the
financial liability at the date of transition to IFRSs shall be the new gross
carrying amount of that financial asset or the new amortised cost of that
financial liability at the date of transition to IFRSs
Impairment of financial assets
B8D An entity shall apply the impairment requirements in Section 55 of IFRS 9
retrospectively subject to paragraphs 7215 and 7218–7220 of that IFRS
B8E At the date of transition to IFRSs an entity shall use reasonable and supportable
information that is available without undue cost or effort to determine the
credit risk at the date that financial instruments were initially recognised (or for
loan commitments and financial guarantee contracts the date that the entity
became a party to the irrevocable commitment in accordance with
paragraph 556 of IFRS 9) and compare that to the credit risk at the date of
transition to IFRSs (also see paragraphs B722–B723 of IFRS 9)
B8F When determining whether there has been a significant increase in credit risk
since initial recognition an entity may apply
(a) the requirements in paragraph 5510 and B5522–B5524 of IFRS 9 and
(b) the rebuttable presumption in paragraph 5511 of IFRS 9 for contractual
payments that are more than 30 days past due if an entity will apply the
impairment requirements by identifying significant increases in credit
risk since initial recognition for those financial instruments on the basis
of past due information
B8G If at the date of transition to IFRSs determining whether there has been a
significant increase in credit risk since the initial recognition of a financial
instrument would require undue cost or effort an entity shall recognise a loss
allowance at an amount equal to lifetime expected credit losses at each
reporting date until that financial instrument is derecognised (unless that
financial instrument is low credit risk at a reporting date in which case
paragraph B8F(a) applies)
Embedded derivatives
B9 A firsttime adopter shall assess whether an embedded derivative is required to
be separated from the host contract and accounted for as a derivative on the
basis of the conditions that existed at the later of the date it first became a party
to the contract and the date a reassessment is required by paragraph B4311 of
IFRS 9
Government loans
B10 A firsttime adopter shall classify all government loans received as a financial
liability or an equity instrument in accordance with IAS 32 Financial Instruments
IFRS 1
IFRS Foundation A67Presentation Except as permitted by paragraph B11 a firsttime adopter shall
apply the requirements in IFRS 9 Financial Instruments and IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance prospectively to
government loans existing at the date of transition to IFRSs and shall not
recognise the corresponding benefit of the government loan at a belowmarket
rate of interest as a government grant Consequently if a firsttime adopter did
not under its previous GAAP recognise and measure a government loan at a
belowmarket rate of interest on a basis consistent with IFRS requirements it
shall use its previous GAAP carrying amount of the loan at the date of transition
to IFRSs as the carrying amount of the loan in the opening IFRS statement of
financial position An entity shall apply IFRS 9 to the measurement of such
loans after the date of transition to IFRSs
B11 Despite paragraph B10 an entity may apply the requirements in IFRS 9 and
IAS 20 retrospectively to any government loan originated before the date of
transition to IFRSs provided that the information needed to do so had been
obtained at the time of initially accounting for that loan
B12 The requirements and guidance in paragraphs B10 and B11 do not preclude an
entity from being able to use the exemptions described in paragraphs D19–D19D
relating to the designation of previously recognised financial instruments at fair
value through profit or loss
IFRS 1
IFRS FoundationA68Appendix C
Exemptions for business combinations
This appendix is an integral part of the IFRS An entity shall apply the following requirements to
business combinations that the entity recognised before the date of transition to IFRSs This Appendix
should only be applied to business combinations within the scope of IFRS 3 Business Combinations
C1 A firsttime adopter may elect not to apply IFRS 3 retrospectively to past business
combinations (business combinations that occurred before the date of transition
to IFRSs) However if a firsttime adopter restates any business combination to
comply with IFRS 3 it shall restate all later business combinations and shall also
apply IFRS 10 from that same date For example if a firsttime adopter elects to
restate a business combination that occurred on 30 June 20X6 it shall restate all
business combinations that occurred between 30 June 20X6 and the date of
transition to IFRSs and it shall also apply IFRS 10 from 30 June 20X6
C2 An entity need not apply IAS 21 The Effects of Changes in Foreign Exchange Rates
retrospectively to fair value adjustments and goodwill arising in business
combinations that occurred before the date of transition to IFRSs If the entity
does not apply IAS 21 retrospectively to those fair value adjustments and
goodwill it shall treat them as assets and liabilities of the entity rather than as
assets and liabilities of the acquiree Therefore those goodwill and fair value
adjustments either are already expressed in the entity’s functional currency or
are nonmonetary foreign currency items which are reported using the
exchange rate applied in accordance with previous GAAP
C3 An entity may apply IAS 21 retrospectively to fair value adjustments and
goodwill arising in either
(a) all business combinations that occurred before the date of transition to
IFRSs or
(b) all business combinations that the entity elects to restate to comply with
IFRS 3 as permitted by paragraph C1 above
C4 If a firsttime adopter does not apply IFRS 3 retrospectively to a past business
combination this has the following consequences for that business
combination
(a) The firsttime adopter shall keep the same classification (as an
acquisition by the legal acquirer a reverse acquisition by the legal
acquiree or a uniting of interests) as in its previous GAAP financial
statements
(b) The firsttime adopter shall recognise all its assets and liabilities at the
date of transition to IFRSs that were acquired or assumed in a past
business combination other than
(i) some financial assets and financial liabilities derecognised in
accordance with previous GAAP (see paragraph B2) and
(ii) assets including goodwill and liabilities that were not
recognised in the acquirer’s consolidated statement of financial
position in accordance with previous GAAP and also would not
IFRS 1
IFRS Foundation A69qualify for recognition in accordance with IFRSs in the separate
statement of financial position of the acquiree (see (f)–(i) below)
The firsttime adopter shall recognise any resulting change by adjusting
retained earnings (or if appropriate another category of equity) unless
the change results from the recognition of an intangible asset that was
previously subsumed within goodwill (see (g)(i) below)
(c) The firsttime adopter shall exclude from its opening IFRS statement of
financial position any item recognised in accordance with previous
GAAP that does not qualify for recognition as an asset or liability under
IFRSs The firsttime adopter shall account for the resulting change as
follows
(i) the firsttime adopter may have classified a past business
combination as an acquisition and recognised as an intangible
asset an item that does not qualify for recognition as an asset in
accordance with IAS 38 Intangible Assets It shall reclassify that
item (and if any the related deferred tax and noncontrolling
interests) as part of goodwill (unless it deducted goodwill directly
from equity in accordance with previous GAAP see (g)(i) and (i)
below)
(ii) the firsttime adopter shall recognise all other resulting changes
in retained earnings1
(d) IFRSs require subsequent measurement of some assets and liabilities on a
basis that is not based on original cost such as fair value The firsttime
adopter shall measure these assets and liabilities on that basis in its
opening IFRS statement of financial position even if they were acquired
or assumed in a past business combination It shall recognise any
resulting change in the carrying amount by adjusting retained earnings
(or if appropriate another category of equity) rather than goodwill
(e) Immediately after the business combination the carrying amount in
accordance with previous GAAP of assets acquired and liabilities
assumed in that business combination shall be their deemed cost in
accordance with IFRSs at that date If IFRSs require a costbased
measurement of those assets and liabilities at a later date that deemed
cost shall be the basis for costbased depreciation or amortisation from
the date of the business combination
(f) If an asset acquired or liability assumed in a past business combination
was not recognised in accordance with previous GAAP it does not have a
deemed cost of zero in the opening IFRS statement of financial position
Instead the acquirer shall recognise and measure it in its consolidated
statement of financial position on the basis that IFRSs would require in
the statement of financial position of the acquiree To illustrate if the
acquirer had not in accordance with its previous GAAP capitalised
1 Such changes include reclassifications from or to intangible assets if goodwill was not recognised in
accordance with previous GAAP as an asset This arises if in accordance with previous GAAP the
entity (a) deducted goodwill directly from equity or (b) did not treat the business combination as an
acquisition
IFRS 1
IFRS FoundationA70leases acquired in a past business combination in which the acquiree was
a lessee it shall capitalise those leases in its consolidated financial
statements as IFRS 16 Leases would require the acquiree to do in its IFRS
statement of financial position Similarly if the acquirer had not in
accordance with its previous GAAP recognised a contingent liability that
still exists at the date of transition to IFRSs the acquirer shall recognise
that contingent liability at that date unless IAS 37 Provisions Contingent
Liabilities and Contingent Assets would prohibit its recognition in the
financial statements of the acquiree Conversely if an asset or liability
was subsumed in goodwill in accordance with previous GAAP but would
have been recognised separately under IFRS 3 that asset or liability
remains in goodwill unless IFRSs would require its recognition in the
financial statements of the acquiree
(g) The carrying amount of goodwill in the opening IFRS statement of
financial position shall be its carrying amount in accordance with
previous GAAP at the date of transition to IFRSs after the following two
adjustments
(i) If required by (c)(i) above the firsttime adopter shall increase the
carrying amount of goodwill when it reclassifies an item that it
recognised as an intangible asset in accordance with previous
GAAP Similarly if (f) above requires the firsttime adopter to
recognise an intangible asset that was subsumed in recognised
goodwill in accordance with previous GAAP the firsttime
adopter shall decrease the carrying amount of goodwill
accordingly (and if applicable adjust deferred tax and
noncontrolling interests)
(ii) Regardless of whether there is any indication that the goodwill
may be impaired the firsttime adopter shall apply IAS 36 in
testing the goodwill for impairment at the date of transition to
IFRSs and in recognising any resulting impairment loss in
retained earnings (or if so required by IAS 36 in revaluation
surplus) The impairment test shall be based on conditions at the
date of transition to IFRSs
(h) No other adjustments shall be made to the carrying amount of goodwill
at the date of transition to IFRSs For example the firsttime adopter
shall not restate the carrying amount of goodwill
(i) to exclude inprocess research and development acquired in that
business combination (unless the related intangible asset would
qualify for recognition in accordance with IAS 38 in the
statement of financial position of the acquiree)
(ii) to adjust previous amortisation of goodwill
(iii) to reverse adjustments to goodwill that IFRS 3 would not permit
but were made in accordance with previous GAAP because of
adjustments to assets and liabilities between the date of the
business combination and the date of transition to IFRSs
IFRS 1
IFRS Foundation A71(i) If the firsttime adopter recognised goodwill in accordance with previous
GAAP as a deduction from equity
(i) it shall not recognise that goodwill in its opening IFRS statement
of financial position Furthermore it shall not reclassify that
goodwill to profit or loss if it disposes of the subsidiary or if the
investment in the subsidiary becomes impaired
(ii) adjustments resulting from the subsequent resolution of a
contingency affecting the purchase consideration shall be
recognised in retained earnings
(j) In accordance with its previous GAAP the firsttime adopter may not
have consolidated a subsidiary acquired in a past business combination
(for example because the parent did not regard it as a subsidiary in
accordance with previous GAAP or did not prepare consolidated
financial statements) The firsttime adopter shall adjust the carrying
amounts of the subsidiary’s assets and liabilities to the amounts that
IFRSs would require in the subsidiary’s statement of financial position
The deemed cost of goodwill equals the difference at the date of
transition to IFRSs between
(i) the parent’s interest in those adjusted carrying amounts and
(ii) the cost in the parent’s separate financial statements of its
investment in the subsidiary
(k) The measurement of noncontrolling interests and deferred tax follows
from the measurement of other assets and liabilities Therefore the
above adjustments to recognised assets and liabilities affect
noncontrolling interests and deferred tax
C5 The exemption for past business combinations also applies to past acquisitions
of investments in associates interests in joint ventures and interests in joint
operations in which the activity of the joint operation constitutes a business as
defined in IFRS 3 Furthermore the date selected for paragraph C1 applies
equally for all such acquisitions
IFRS 1
IFRS FoundationA72Appendix D
Exemptions from other IFRSs
This appendix is an integral part of the IFRS
D1 An entity may elect to use one or more of the following exemptions
(a) sharebased payment transactions (paragraphs D2 and D3)
(b) insurance contracts (paragraph D4)
(c) deemed cost (paragraphs D5–D8B)
(d) leases (paragraphs D9 and D9B–D9E)
(e) [deleted]
(f) cumulative translation differences (paragraphs D12 and D13)
(g) investments in subsidiaries joint ventures and associates
(paragraphs D14–D15A)
(h) assets and liabilities of subsidiaries associates and joint ventures
(paragraphs D16 and D17)
(i) compound financial instruments (paragraph D18)
(j) designation of previously recognised financial instruments (paragraphs
D19–D19C)
(k) fair value measurement of financial assets or financial liabilities at
initial recognition (paragraph D20)
(l) decommissioning liabilities included in the cost of property plant and
equipment (paragraphs D21 and D21A)
(m) financial assets or intangible assets accounted for in accordance with
IFRIC 12 Service Concession Arrangements (paragraph D22)
(n) borrowing costs (paragraph D23)
(o) transfers of assets from customers (paragraph D24)
(p) extinguishing financial liabilities with equity instruments
(paragraph D25)
(q) severe hyperinflation (paragraphs D26–D30)
(r) joint arrangements (paragraph D31)
(s) stripping costs in the production phase of a surface mine
(paragraph D32) and
(t) designation of contracts to buy or sell a nonfinancial item
(paragraph D33)
An entity shall not apply these exemptions by analogy to other items
Sharebased payment transactions
D2 A firsttime adopter is encouraged but not required to apply IFRS 2 Sharebased
Payment to equity instruments that were granted on or before 7 November 2002
IFRS 1
IFRS Foundation A73A firsttime adopter is also encouraged but not required to apply IFRS 2 to
equity instruments that were granted after 7 November 2002 and vested before
the later of (a) the date of transition to IFRSs and (b) 1 January 2005 However if
a firsttime adopter elects to apply IFRS 2 to such equity instruments it may do
so only if the entity has disclosed publicly the fair value of those equity
instruments determined at the measurement date as defined in IFRS 2 For all
grants of equity instruments to which IFRS 2 has not been applied (eg equity
instruments granted on or before 7 November 2002) a firsttime adopter shall
nevertheless disclose the information required by paragraphs 44 and 45 of
IFRS 2 If a firsttime adopter modifies the terms or conditions of a grant of
equity instruments to which IFRS 2 has not been applied the entity is not
required to apply paragraphs 26–29 of IFRS 2 if the modification occurred before
the date of transition to IFRSs
D3 A firsttime adopter is encouraged but not required to apply IFRS 2 to liabilities
arising from sharebased payment transactions that were settled before the date
of transition to IFRSs A firsttime adopter is also encouraged but not required
to apply IFRS 2 to liabilities that were settled before 1 January 2005 For
liabilities to which IFRS 2 is applied a firsttime adopter is not required to
restate comparative information to the extent that the information relates to a
period or date that is earlier than 7 November 2002
Insurance contracts
D4 A firsttime adopter may apply the transitional provisions in IFRS 4 Insurance
Contracts IFRS 4 restricts changes in accounting policies for insurance contracts
including changes made by a firsttime adopter
Deemed cost
D5 An entity may elect to measure an item of property plant and equipment at the
date of transition to IFRSs at its fair value and use that fair value as its deemed
cost at that date
D6 A firsttime adopter may elect to use a previous GAAP revaluation of an item of
property plant and equipment at or before the date of transition to IFRSs as
deemed cost at the date of the revaluation if the revaluation was at the date of
the revaluation broadly comparable to
(a) fair value or
(b) cost or depreciated cost in accordance with IFRSs adjusted to reflect for
example changes in a general or specific price index
D7 The elections in paragraphs D5 and D6 are also available for
(a) investment property if an entity elects to use the cost model in IAS 40
Investment Property
(aa) rightofuse assets (IFRS 16 Leases) and
(b) intangible assets that meet
(i) the recognition criteria in IAS 38 (including reliable
measurement of original cost) and
IFRS 1
IFRS FoundationA74(ii) the criteria in IAS 38 for revaluation (including the existence of
an active market)
An entity shall not use these elections for other assets or for liabilities
D8 A firsttime adopter may have established a deemed cost in accordance with
previous GAAP for some or all of its assets and liabilities by measuring them at
their fair value at one particular date because of an event such as a privatisation
or initial public offering
(a) If the measurement date is at or before the date of transition to IFRSs the
entity may use such eventdriven fair value measurements as deemed
cost for IFRSs at the date of that measurement
(b) If the measurement date is after the date of transition to IFRSs but
during the period covered by the first IFRS financial statements the
eventdriven fair value measurements may be used as deemed cost when
the event occurs An entity shall recognise the resulting adjustments
directly in retained earnings (or if appropriate another category of
equity) at the measurement date At the date of transition to IFRSs the
entity shall either establish the deemed cost by applying the criteria in
paragraphs D5–D7 or measure assets and liabilities in accordance with
the other requirements in this IFRS
D8A Under some national accounting requirements exploration and development
costs for oil and gas properties in the development or production phases are
accounted for in cost centres that include all properties in a large geographical
area A firsttime adopter using such accounting under previous GAAP may elect
to measure oil and gas assets at the date of transition to IFRSs on the following
basis
(a) exploration and evaluation assets at the amount determined under the
entity’s previous GAAP and
(b) assets in the development or production phases at the amount
determined for the cost centre under the entity’s previous GAAP The
entity shall allocate this amount to the cost centre’s underlying assets
pro rata using reserve volumes or reserve values as of that date
The entity shall test exploration and evaluation assets and assets in the
development and production phases for impairment at the date of transition to
IFRSs in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources or
IAS 36 respectively and if necessary reduce the amount determined in
accordance with (a) or (b) above For the purposes of this paragraph oil and gas
assets comprise only those assets used in the exploration evaluation
development or production of oil and gas
D8B Some entities hold items of property plant and equipment rightofuse assets or
intangible assets that are used or were previously used in operations subject to
rate regulation The carrying amount of such items might include amounts that
were determined under previous GAAP but do not qualify for capitalisation in
accordance with IFRSs If this is the case a firsttime adopter may elect to use
the previous GAAP carrying amount of such an item at the date of transition to
IFRSs as deemed cost If an entity applies this exemption to an item it need not
IFRS 1
IFRS Foundation A75apply it to all items At the date of transition to IFRSs an entity shall test for
impairment in accordance with IAS 36 each item for which this exemption is
used For the purposes of this paragraph operations are subject to rate
regulation if they are governed by a framework for establishing the prices that
can be charged to customers for goods or services and that framework is subject
to oversight andor approval by a rate regulator (as defined in IFRS 14 Regulatory
Deferral Accounts)
Leases
D9 A firsttime adopter may assess whether a contract existing at the date of
transition to IFRSs contains a lease by applying paragraphs 9–11 of IFRS 16 to
those contracts on the basis of facts and circumstances existing at that date
D9A [Deleted]
D9B When a firsttime adopter that is a lessee recognises lease liabilities and
rightofuse assets it may apply the following approach to all of its leases (subject
to the practical expedients described in paragraph D9D)
(a) measure a lease liability at the date of transition to IFRSs A lessee
following this approach shall measure that lease liability at the present
value of the remaining lease payments (see paragraph D9E) discounted
using the lessee’s incremental borrowing rate (see paragraph D9E) at the
date of transition to IFRSs
(b) measure a rightofuse asset at the date of transition to IFRSs The lessee
shall choose on a leasebylease basis to measure that rightofuse asset
at either
(i) its carrying amount as if IFRS 16 had been applied since the
commencement date of the lease (see paragraph D9E) but
discounted using the lessee’s incremental borrowing rate at the
date of transition to IFRSs or
(ii) an amount equal to the lease liability adjusted by the amount of
any prepaid or accrued lease payments relating to that lease
recognised in the statement of financial position immediately
before the date of transition to IFRSs
(c) apply IAS 36 to rightofuse assets at the date of transition to IFRSs
D9C Notwithstanding the requirements in paragraph D9B a firsttime adopter that is
a lessee shall measure the rightofuse asset at fair value at the date of transition
to IFRSs for leases that meet the definition of investment property in IAS 40 and
are measured using the fair value model in IAS 40 from the date of transition to
IFRSs
D9D A firsttime adopter that is a lessee may do one or more of the following at the
date of transition to IFRSs applied on a leasebylease basis
(a) apply a single discount rate to a portfolio of leases with reasonably
similar characteristics (for example a similar remaining lease term for a
similar class of underlying asset in a similar economic environment)
IFRS 1
IFRS FoundationA76(b) elect not to apply the requirements in paragraph D9B to leases for which
the lease term (see paragraph D9E) ends within 12 months of the date of
transition to IFRSs Instead the entity shall account for (including
disclosure of information about) these leases as if they were shortterm
leases accounted for in accordance with paragraph 6 of IFRS 16
(c) elect not to apply the requirements in paragraph D9B to leases for which
the underlying asset is of low value (as described in paragraphs B3–B8 of
IFRS 16) Instead the entity shall account for (including disclosure of
information about) these leases in accordance with paragraph 6 of
IFRS 16
(d) exclude initial direct costs (see paragraph D9E) from the measurement of
the rightofuse asset at the date of transition to IFRSs
(e) use hindsight such as in determining the lease term if the contract
contains options to extend or terminate the lease
D9E Lease payments lessee lessee’s incremental borrowing rate commencement
date of the lease initial direct costs and lease term are defined terms in IFRS 16
and are used in this Standard with the same meaning
D10–
D11
[Deleted]
Cumulative translation differences
D12 IAS 21 requires an entity
(a) to recognise some translation differences in other comprehensive
income and accumulate these in a separate component of equity and
(b) on disposal of a foreign operation to reclassify the cumulative
translation difference for that foreign operation (including if applicable
gains and losses on related hedges) from equity to profit or loss as part of
the gain or loss on disposal
D13 However a firsttime adopter need not comply with these requirements for
cumulative translation differences that existed at the date of transition to IFRSs
If a firsttime adopter uses this exemption
(a) the cumulative translation differences for all foreign operations are
deemed to be zero at the date of transition to IFRSs and
(b) the gain or loss on a subsequent disposal of any foreign operation shall
exclude translation differences that arose before the date of transition to
IFRSs and shall include later translation differences
Investments in subsidiaries joint ventures and
associates
D14 When an entity prepares separate financial statements IAS 27 requires it to
account for its investments in subsidiaries joint ventures and associates either
(a) at cost
(b) in accordance with IFRS 9 or
(c) using the equity method as described in IAS 28
IFRS 1
IFRS Foundation A77D15 If a firsttime adopter measures such an investment at cost in accordance with
IAS 27 it shall measure that investment at one of the following amounts in its
separate opening IFRS statement of financial position
(a) cost determined in accordance with IAS 27 or
(b) deemed cost The deemed cost of such an investment shall be its
(i) fair value at the entity’s date of transition to IFRSs in its separate
financial statements or
(ii) previous GAAP carrying amount at that date
A firsttime adopter may choose either (i) or (ii) above to measure its
investment in each subsidiary joint venture or associate that it elects to
measure using a deemed cost
D15A If a firsttime adopter accounts for such an investment using the equity method
procedures as described in IAS 28
(a) the firsttime adopter applies the exemption for past business
combinations (Appendix C) to the acquisition of the investment
(b) if the entity becomes a firsttime adopter for its separate financial
statements earlier than for its consolidated financial statements and
(i) later than its parent the entity shall apply paragraph D16 in its
separate financial statements
(ii) later than its subsidiary the entity shall apply paragraph D17 in
its separate financial statements
Assets and liabilities of subsidiaries associates and
joint ventures
D16 If a subsidiary becomes a firsttime adopter later than its parent the subsidiary
shall in its financial statements measure its assets and liabilities at either
(a) the carrying amounts that would be included in the parent’s
consolidated financial statements based on the parent’s date of
transition to IFRSs if no adjustments were made for consolidation
procedures and for the effects of the business combination in which the
parent acquired the subsidiary (this election is not available to a
subsidiary of an investment entity as defined in IFRS 10 that is required
to be measured at fair value through profit or loss) or
(b) the carrying amounts required by the rest of this IFRS based on the
subsidiary’s date of transition to IFRSs These carrying amounts could
differ from those described in (a)
(i) when the exemptions in this IFRS result in measurements that
depend on the date of transition to IFRSs
(ii) when the accounting policies used in the subsidiary’s financial
statements differ from those in the consolidated financial
statements For example the subsidiary may use as its
accounting policy the cost model in IAS 16 Property Plant and
Equipment whereas the group may use the revaluation model
IFRS 1
IFRS FoundationA78A similar election is available to an associate or joint venture that
becomes a firsttime adopter later than an entity that has significant
influence or joint control over it
D17 However if an entity becomes a firsttime adopter later than its subsidiary (or
associate or joint venture) the entity shall in its consolidated financial
statements measure the assets and liabilities of the subsidiary (or associate or
joint venture) at the same carrying amounts as in the financial statements of the
subsidiary (or associate or joint venture) after adjusting for consolidation and
equity accounting adjustments and for the effects of the business combination
in which the entity acquired the subsidiary Notwithstanding this requirement
a noninvestment entity parent shall not apply the exception to consolidation
that is used by any investment entity subsidiaries Similarly if a parent becomes
a firsttime adopter for its separate financial statements earlier or later than for
its consolidated financial statements it shall measure its assets and liabilities at
the same amounts in both financial statements except for consolidation
adjustments
Compound financial instruments
D18 IAS 32 Financial Instruments Presentation requires an entity to split a compound
financial instrument at inception into separate liability and equity components
If the liability component is no longer outstanding retrospective application of
IAS 32 involves separating two portions of equity The first portion is in retained
earnings and represents the cumulative interest accreted on the liability
component The other portion represents the original equity component
However in accordance with this IFRS a firsttime adopter need not separate
these two portions if the liability component is no longer outstanding at the
date of transition to IFRSs
Designation of previously recognised financial
instruments
D19 IFRS 9 permits a financial liability (provided it meets certain criteria) to be
designated as a financial liability at fair value through profit or loss Despite
this requirement an entity is permitted to designate at the date of transition to
IFRSs any financial liability as at fair value through profit or loss provided the
liability meets the criteria in paragraph 422 of IFRS 9 at that date
D19A An entity may designate a financial asset as measured at fair value through
profit or loss in accordance with paragraph 415 of IFRS 9 on the basis of the
facts and circumstances that exist at the date of transition to IFRSs
D19B An entity may designate an investment in an equity instrument as at fair value
through other comprehensive income in accordance with paragraph 575 of
IFRS 9 on the basis of the facts and circumstances that exist at the date of
transition to IFRSs
D19C For a financial liability that is designated as a financial liability at fair value
through profit or loss an entity shall determine whether the treatment in
paragraph 577 of IFRS 9 would create an accounting mismatch in profit or loss
on the basis of the facts and circumstances that exist at the date of transition to
IFRSs
IFRS 1
IFRS Foundation A79Fair value measurement of financial assets or financial
liabilities at initial recognition
D20 Despite the requirements of paragraphs 7 and 9 an entity may apply the
requirements in paragraph B512A(b) of IFRS 9 prospectively to transactions
entered into on or after the date of transition to IFRSs
Decommissioning liabilities included in the cost of
property plant and equipment
D21 IFRIC 1 Changes in Existing Decommissioning Restoration and Similar Liabilities requires
specified changes in a decommissioning restoration or similar liability to be
added to or deducted from the cost of the asset to which it relates the adjusted
depreciable amount of the asset is then depreciated prospectively over its
remaining useful life A firsttime adopter need not comply with these
requirements for changes in such liabilities that occurred before the date of
transition to IFRSs If a firsttime adopter uses this exemption it shall
(a) measure the liability as at the date of transition to IFRSs in accordance
with IAS 37
(b) to the extent that the liability is within the scope of IFRIC 1 estimate the
amount that would have been included in the cost of the related asset
when the liability first arose by discounting the liability to that date
using its best estimate of the historical riskadjusted discount rate(s) that
would have applied for that liability over the intervening period and
(c) calculate the accumulated depreciation on that amount as at the date of
transition to IFRSs on the basis of the current estimate of the useful life
of the asset using the depreciation policy adopted by the entity in
accordance with IFRSs
D21A An entity that uses the exemption in paragraph D8A(b) (for oil and gas assets in
the development or production phases accounted for in cost centres that include
all properties in a large geographical area under previous GAAP) shall instead of
applying paragraph D21 or IFRIC 1
(a) measure decommissioning restoration and similar liabilities as at the
date of transition to IFRSs in accordance with IAS 37 and
(b) recognise directly in retained earnings any difference between that
amount and the carrying amount of those liabilities at the date of
transition to IFRSs determined under the entity’s previous GAAP
Financial assets or intangible assets accounted for in
accordance with IFRIC 12
D22 A firsttime adopter may apply the transitional provisions in IFRIC 12
Borrowing costs
D23 A firsttime adopter can elect to apply the requirements of IAS 23 from the date
of transition or from an earlier date as permitted by paragraph 28 of IAS 23
From the date on which an entity that applies this exemption begins to apply
IAS 23 the entity
IFRS 1
IFRS FoundationA80(a) shall not restate the borrowing cost component that was capitalised
under previous GAAP and that was included in the carrying amount of
assets at that date and
(b) shall account for borrowing costs incurred on or after that date in
accordance with IAS 23 including those borrowing costs incurred on or
after that date on qualifying assets already under construction
D24 [Deleted]
Extinguishing financial liabilities with equity instruments
D25 A firsttime adopter may apply the transitional provisions in IFRIC 19
Extinguishing Financial Liabilities with Equity Instruments
Severe hyperinflation
D26 If an entity has a functional currency that was or is the currency of a
hyperinflationary economy it shall determine whether it was subject to severe
hyperinflation before the date of transition to IFRSs This applies to entities that
are adopting IFRSs for the first time as well as entities that have previously
applied IFRSs
D27 The currency of a hyperinflationary economy is subject to severe hyperinflation
if it has both of the following characteristics
(a) a reliable general price index is not available to all entities with
transactions and balances in the currency
(b) exchangeability between the currency and a relatively stable foreign
currency does not exist
D28 The functional currency of an entity ceases to be subject to severe hyperinflation
on the functional currency normalisation date That is the date when the
functional currency no longer has either or both of the characteristics in
paragraph D27 or when there is a change in the entity’s functional currency to
a currency that is not subject to severe hyperinflation
D29 When an entity’s date of transition to IFRSs is on or after the functional
currency normalisation date the entity may elect to measure all assets and
liabilities held before the functional currency normalisation date at fair value on
the date of transition to IFRSs The entity may use that fair value as the deemed
cost of those assets and liabilities in the opening IFRS statement of financial
position
D30 When the functional currency normalisation date falls within a 12month
comparative period the comparative period may be less than 12 months
provided that a complete set of financial statements (as required by
paragraph 10 of IAS 1) is provided for that shorter period
Joint arrangements
D31 A firsttime adopter may apply the transition provisions in IFRS 11 with the
following exceptions
(a) When applying the transition provisions in IFRS 11 a firsttime adopter
shall apply these provisions at the date of transition to IFRS
IFRS 1
IFRS Foundation A81(b) When changing from proportionate consolidation to the equity method
a firsttime adopter shall test for impairment the investment in
accordance with IAS 36 as at the date of transition to IFRS regardless of
whether there is any indication that the investment may be impaired
Any resulting impairment shall be recognised as an adjustment to
retained earnings at the date of transition to IFRS
Stripping costs in the production phase of a surface
mine
D32 A firsttime adopter may apply the transitional provisions set out in
paragraphs A1 to A4 of IFRIC 20 Stripping Costs in the Production Phase of a Surface
Mine In that paragraph reference to the effective date shall be interpreted as
1 January 2013 or the beginning of the first IFRS reporting period whichever is
later
Designation of contracts to buy or sell a nonfinancial
item
D33 IFRS 9 permits some contracts to buy or sell a nonfinancial item to be
designated at inception as measured at fair value through profit or loss
(see paragraph 25 of IFRS 9) Despite this requirement an entity is permitted to
designate at the date of transition to IFRSs contracts that already exist on that
date as measured at fair value through profit or loss but only if they meet the
requirements of paragraph 25 of IFRS 9 at that date and the entity designates all
similar contracts
Revenue
D34 A firsttime adopter may apply the transition provisions in paragraph C5 of
IFRS 15 In those paragraphs references to the date of initial application’ shall
be interpreted as the beginning of the first IFRS reporting period If a firsttime
adopter decides to apply those transition provisions it shall also apply
paragraph C6 of IFRS 15
D35 A firsttime adopter is not required to restate contracts that were completed
before the earliest period presented A completed contract is a contract for
which the entity has transferred all of the goods or services identified in
accordance with previous GAAP
IFRS 1
IFRS FoundationA82Appendix E
Shortterm exemptions from IFRSs
This appendix is an integral part of the IFRS
Exemption from the requirement to restate comparative
information for IFRS 9
E1 If an entity’s first IFRS reporting period begins before 1 January 2019 and the
entity applies the completed version of IFRS 9 (issued in 2014) the comparative
information in the entity’s first IFRS financial statements need not comply with
IFRS 7 Financial Instruments Disclosure or the completed version of IFRS 9 (issued in
2014) to the extent that the disclosures required by IFRS 7 relate to items within
the scope of IFRS 9 For such entities references to the date of transition to
IFRSs’ shall mean in the case of IFRS 7 and IFRS 9 (2014) only the beginning of
the first IFRS reporting period
E2 An entity that chooses to present comparative information that does not comply
with IFRS 7 and the completed version of IFRS 9 (issued in 2014) in its first year
of transition shall
(a) apply the requirements of its previous GAAP in place of the requirements
of IFRS 9 to comparative information about items within the scope of
IFRS 9
(b) disclose this fact together with the basis used to prepare this
information
(c) treat any adjustment between the statement of financial position at the
comparative period’s reporting date (ie the statement of financial
position that includes comparative information under previous GAAP)
and the statement of financial position at the start of the first IFRS
reporting period (ie the first period that includes information that
complies with IFRS 7 and the completed version of IFRS 9 (issued in
2014)) as arising from a change in accounting policy and give the
disclosures required by paragraph 28(a)–(e) and (f)(i) of IAS 8
Paragraph 28(f)(i) applies only to amounts presented in the statement of
financial position at the comparative period’s reporting date
(d) apply paragraph 17(c) of IAS 1 to provide additional disclosures when
compliance with the specific requirements in IFRSs is insufficient to
enable users to understand the impact of particular transactions other
events and conditions on the entity’s financial position and financial
performance
IFRS 1
IFRS Foundation A83Disclosures about financial instruments
E3 A firsttime adopter may apply the transition provisions in paragraph 44G of
IFRS 72
E4 A firsttime adopter may apply the transition provisions in paragraph 44M of
IFRS 73
E4A A firsttime adopter may apply the transition provisions in paragraph 44AA of
IFRS 7
Employee benefits
E5 A firsttime adopter may apply the transition provisions in paragraph 173(b) of
IAS 19
Investment entities
E6 A firsttime adopter that is a parent shall assess whether it is an investment
entity as defined in IFRS 10 on the basis of the facts and circumstances that
exist at the date of transition to IFRSs
E7 A firsttime adopter that is an investment entity as defined in IFRS 10 may
apply the transition provisions in paragraphs C3C–C3D of IFRS 10 and
paragraphs 18C–18G of IAS 27 if its first IFRS financial statements are for an
annual period ending on or before 31 December 2014 The references in those
paragraphs to the annual period that immediately precedes the date of initial
application shall be read as the earliest annual period presented Consequently
the references in those paragraphs shall be read as the date of transition to
IFRSs
2 Paragraph E3 was added as a consequence of Limited Exemption from Comparative IFRS 7 Disclosures for
Firsttime Adopters (Amendment to IFRS 1) issued in January 2010 To avoid the potential use of
hindsight and to ensure that firsttime adopters are not disadvantaged as compared with current
IFRS preparers the Board decided that firsttime adopters should be permitted to use the same
transition provisions permitted for existing preparers of financial statements prepared in
accordance with IFRSs that are included in Improving Disclosures about Financial Instruments
(Amendments to IFRS 7)
3 Paragraph E4 was added as a consequence of Disclosures—Transfers of Financial Assets (Amendments to
IFRS 7) issued in October 2010 To avoid the potential use of hindsight and to ensure that firsttime
adopters are not disadvantaged as compared with current IFRS preparers the Board decided that
firsttime adopters should be permitted to use the same transition provisions permitted for existing
preparers of financial statements prepared in accordance with IFRSs that are included in
Disclosures—Transfers of Financial Assets (Amendments to IFRS 7)
IFRS 1
IFRS FoundationA84IFRS Standard 2
Sharebased Payment
In February 2004 the International Accounting Standards Board (the Board) issued IFRS 2
Sharebased Payment The Board amended IFRS 2 to clarify its scope in January 2008 and to
incorporate the guidance contained in two related Interpretations (IFRIC 8 Scope of IFRS 2
and IFRIC 11 IFRS 2—Group and Treasury Share Transactions) in June 2009
Other Standards have made minor consequential amendments to IFRS 2 They include
IFRS 10 Consolidated Financial Statements (issued May 2011) IFRS 11 Joint Arrangements (issued
May 2011) IFRS 13 Fair Value Measurement (issued May 2011) Annual Improvements to IFRSs
2010–2012 Cycle (issued December 2013) and IFRS 9 Financial Instruments (issued July 2014)
IFRS 2
IFRS Foundation A85CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 2
SHAREBASED PAYMENT
OBJECTIVE 1
SCOPE 2
RECOGNITION 7
EQUITYSETTLED SHAREBASED PAYMENT TRANSACTIONS 10
Overview 10
Transactions in which services are received 14
Transactions measured by reference to the fair value of the equity
instruments granted 16
Modifications to the terms and conditions on which equity instruments were
granted including cancellations and settlements 26
CASHSETTLED SHAREBASED PAYMENT TRANSACTIONS 30
SHAREBASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES 34
Sharebased payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement 35
Sharebased payment transactions in which the terms of the arrangement
provide the entity with a choice of settlement 41
SHAREBASED PAYMENT TRANSACTIONS AMONG GROUP ENTITIES (2009
AMENDMENTS) 43A
DISCLOSURES 44
TRANSITIONAL PROVISIONS 53
EFFECTIVE DATE 60
WITHDRAWAL OF INTERPRETATIONS 64
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 2 ISSUED IN FEBRUARY 2004
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 2
Vesting Conditions and Cancellations issued in January 2008
Group Cashsettled Sharebased Payment Transactions issued in June 2009
BASIS FOR CONCLUSIONS
IMPLEMENTATION GUIDANCE
TABLE OF CONCORDANCE
IFRS 2
IFRS FoundationA86International Financial Reporting Standard 2 Sharebased Payment (IFRS 2) is set out in
paragraphs 1–64 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 2 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 2
IFRS Foundation A87Introduction
Reasons for issuing the IFRS
IN1 Entities often grant shares or share options to employees or other parties Share
plans and share option plans are a common feature of employee remuneration
for directors senior executives and many other employees Some entities issue
shares or share options to pay suppliers such as suppliers of professional
services
IN2 Until this IFRS was issued there was no IFRS covering the recognition and
measurement of these transactions Concerns were raised about this gap in
IFRSs given the increasing prevalence of sharebased payment transactions in
many countries
Reasons for amending IFRS 2 in June 2009
IN2A In June 2009 the International Accounting Standards Board amended IFRS 2 to
clarify its scope and the accounting for group cashsettled sharebased payment
transactions in the separate or individual financial statements of the entity
receiving the goods or services when that entity has no obligation to settle the
sharebased payment transaction The amendments also incorporate the
guidance contained in the following Interpretations
● IFRIC 8 Scope of IFRS 2
● IFRIC 11 IFRS 2—Group and Treasury Share Transactions
As a result the Board withdrew IFRIC 8 and IFRIC 11
Main features of the IFRS
IN3 The IFRS requires an entity to recognise sharebased payment transactions in its
financial statements including transactions with employees or other parties to
be settled in cash other assets or equity instruments of the entity There are no
exceptions to the IFRS other than for transactions to which other Standards
apply
IN4 The IFRS sets out measurement principles and specific requirements for three
types of sharebased payment transactions
(a) equitysettled sharebased payment transactions in which the entity
receives goods or services as consideration for equity instruments of the
entity (including shares or share options)
(b) cashsettled sharebased payment transactions in which the entity
acquires goods or services by incurring liabilities to the supplier of those
goods or services for amounts that are based on the price (or value) of the
entity’s shares or other equity instruments of the entity and
IFRS 2
IFRS FoundationA88(c) transactions in which the entity receives or acquires goods or services
and the terms of the arrangement provide either the entity or the
supplier of those goods or services with a choice of whether the entity
settles the transaction in cash or by issuing equity instruments
IN5 For equitysettled sharebased payment transactions the IFRS requires an entity
to measure the goods or services received and the corresponding increase in
equity directly at the fair value of the goods or services received unless that fair
value cannot be estimated reliably If the entity cannot estimate reliably the fair
value of the goods or services received the entity is required to measure their
value and the corresponding increase in equity indirectly by reference to the
fair value of the equity instruments granted Furthermore
(a) for transactions with employees and others providing similar services
the entity is required to measure the fair value of the equity instruments
granted because it is typically not possible to estimate reliably the fair
value of employee services received The fair value of the equity
instruments granted is measured at grant date
(b) for transactions with parties other than employees (and those providing
similar services) there is a rebuttable presumption that the fair value of
the goods or services received can be estimated reliably That fair value is
measured at the date the entity obtains the goods or the counterparty
renders service In rare cases if the presumption is rebutted the
transaction is measured by reference to the fair value of the equity
instruments granted measured at the date the entity obtains the goods
or the counterparty renders service
(c) for goods or services measured by reference to the fair value of the equity
instruments granted the IFRS specifies that all nonvesting conditions
are taken into account in the estimate of the fair value of the equity
instruments However vesting conditions that are not market
conditions are not taken into account when estimating the fair value of
the shares or options at the relevant measurement date (as specified
above) Instead vesting conditions are taken into account by adjusting
the number of equity instruments included in the measurement of the
transaction amount so that ultimately the amount recognised for goods
or services received as consideration for the equity instruments granted
is based on the number of equity instruments that eventually vest
Hence on a cumulative basis no amount is recognised for goods or
services received if the equity instruments granted do not vest because of
failure to satisfy a vesting condition (other than a market condition)
(d) the IFRS requires the fair value of equity instruments granted to be based
on market prices if available and to take into account the terms and
conditions upon which those equity instruments were granted In the
absence of market prices fair value is estimated using a valuation
technique to estimate what the price of those equity instruments would
have been on the measurement date in an arm’s length transaction
between knowledgeable willing parties
IFRS 2
IFRS Foundation A89(e) the IFRS also sets out requirements if the terms and conditions of an
option or share grant are modified (eg an option is repriced) or if a grant
is cancelled repurchased or replaced with another grant of equity
instruments For example irrespective of any modification cancellation
or settlement of a grant of equity instruments to employees the IFRS
generally requires the entity to recognise as a minimum the services
received measured at the grant date fair value of the equity instruments
granted
IN6 For cashsettled sharebased payment transactions the IFRS requires an entity to
measure the goods or services acquired and the liability incurred at the fair
value of the liability Until the liability is settled the entity is required to
remeasure the fair value of the liability at the end of each reporting period and
at the date of settlement with any changes in value recognised in profit or loss
for the period
IN7 For sharebased payment transactions in which the terms of the arrangement
provide either the entity or the supplier of goods or services with a choice of
whether the entity settles the transaction in cash or by issuing equity
instruments the entity is required to account for that transaction or the
components of that transaction as a cashsettled sharebased payment
transaction if and to the extent that the entity has incurred a liability to settle
in cash (or other assets) or as an equitysettled sharebased payment transaction
if and to the extent that no such liability has been incurred
IN8 The IFRS prescribes various disclosure requirements to enable users of financial
statements to understand
(a) the nature and extent of sharebased payment arrangements that existed
during the period
(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 effect of sharebased payment transactions on the entity’s profit or
loss for the period and on its financial position
IFRS 2
IFRS FoundationA90International Financial Reporting Standard 2
Sharebased Payment
Objective
1 The objective of this IFRS is to specify the financial reporting by an entity when
it undertakes a sharebased payment transaction In particular it requires an entity
to reflect in its profit or loss and financial position the effects of sharebased
payment transactions including expenses associated with transactions in which
share options are granted to employees
Scope
2 An entity shall apply this IFRS in accounting for all sharebased payment
transactions whether or not the entity can identify specifically some or all of
the goods or services received including
(a) equitysettled sharebased payment transactions
(b) cashsettled sharebased payment transactions and
(c) transactions in which the entity receives or acquires goods or services
and the terms of the arrangement provide either the entity or the
supplier of those goods or services with a choice of whether the entity
settles the transaction in cash (or other assets) or by issuing equity
instruments
except as noted in paragraphs 3A–6 In the absence of specifically identifiable
goods or services other circumstances may indicate that goods or services have
been (or will be) received in which case this IFRS applies
3 [Deleted]
3A A sharebased payment transaction may be settled by another group entity (or a
shareholder of any group entity) on behalf of the entity receiving or acquiring
the goods or services Paragraph 2 also applies to an entity that
(a) receives goods or services when another entity in the same group (or a
shareholder of any group entity) has the obligation to settle the
sharebased payment transaction or
(b) has an obligation to settle a sharebased payment transaction when
another entity in the same group receives the goods or services
unless the transaction is clearly for a purpose other than payment for goods or
services supplied to the entity receiving them
4 For the purposes of this IFRS a transaction with an employee (or other party) in
hisher capacity as a holder of equity instruments of the entity is not a
sharebased payment transaction For example if an entity grants all holders of
a particular class of its equity instruments the right to acquire additional equity
instruments of the entity at a price that is less than the fair value of those equity
instruments and an employee receives such a right because heshe is a holder of
IFRS 2
IFRS Foundation A91equity instruments of that particular class the granting or exercise of that right
is not subject to the requirements of this IFRS
5 As noted in paragraph 2 this IFRS applies to sharebased payment transactions
in which an entity acquires or receives goods or services Goods includes
inventories consumables property plant and equipment intangible assets and
other nonfinancial assets However an entity shall not apply this IFRS to
transactions in which the entity acquires goods as part of the net assets acquired
in a business combination as defined by IFRS 3 Business Combinations (as revised in
2008) in a combination of entities or businesses under common control as
described in paragraphs B1–B4 of IFRS 3 or the contribution of a business on the
formation of a joint venture as defined by IFRS 11 Joint Arrangements Hence
equity instruments issued in a business combination in exchange for control of
the acquiree are not within the scope of this IFRS However equity instruments
granted to employees of the acquiree in their capacity as employees (eg in return
for continued service) are within the scope of this IFRS Similarly the
cancellation replacement or other modification of sharebased payment
arrangements because of a business combination or other equity restructuring
shall be accounted for in accordance with this IFRS IFRS 3 provides guidance on
determining whether equity instruments issued in a business combination are
part of the consideration transferred in exchange for control of the acquiree
(and therefore within the scope of IFRS 3) or are in return for continued service
to be recognised in the postcombination period (and therefore within the scope
of this IFRS)
6 This IFRS does not apply to sharebased payment transactions in which the entity
receives or acquires goods or services under a contract within the scope of
paragraphs 8–10 of IAS 32 Financial Instruments Presentation (as revised in 2003)1 or
paragraphs 24–27 of IFRS 9 Financial Instruments
6A This IFRS uses the term fair value’ in a way that differs in some respects from
the definition of fair value in IFRS 13 Fair Value Measurement Therefore when
applying IFRS 2 an entity measures fair value in accordance with this IFRS not
IFRS 13
Recognition
7 An entity shall recognise the goods or services received or acquired in a
sharebased payment transaction when it obtains the goods or as the
services are received The entity shall recognise a corresponding increase
in equity if the goods or services were received in an equitysettled
sharebased payment transaction or a liability if the goods or services
were acquired in a cashsettled sharebased payment transaction
8 When the goods or services received or acquired in a sharebased payment
transaction do not qualify for recognition as assets they shall be
recognised as expenses
9 Typically an expense arises from the consumption of goods or services For
example services are typically consumed immediately in which case an expense
1 The title of IAS 32 was amended in 2005
IFRS 2
IFRS FoundationA92is recognised as the counterparty renders service Goods might be consumed
over a period of time or in the case of inventories sold at a later date in which
case an expense is recognised when the goods are consumed or sold However
sometimes it is necessary to recognise an expense before the goods or services
are consumed or sold because they do not qualify for recognition as assets For
example an entity might acquire goods as part of the research phase of a project
to develop a new product Although those goods have not been consumed they
might not qualify for recognition as assets under the applicable IFRS
Equitysettled sharebased payment transactions
Overview
10 For equitysettled sharebased payment transactions the entity shall
measure the goods or services received and the corresponding increase in
equity directly at the fair value of the goods or services received unless
that fair value cannot be estimated reliably If the entity cannot estimate
reliably the fair value of the goods or services received the entity shall
measure their value and the corresponding increase in equity indirectly
by reference to2 the fair value of the equity instruments granted
11 To apply the requirements of paragraph 10 to transactions with employees and
others providing similar services3 the entity shall measure the fair value of the
services received by reference to the fair value of the equity instruments granted
because typically it is not possible to estimate reliably the fair value of the
services received as explained in paragraph 12 The fair value of those equity
instruments shall be measured at grant date
12 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 components of the employee’s remuneration
package It might also not be possible to measure the fair value of the total
remuneration package independently without measuring directly the fair value
of the equity instruments granted Furthermore shares or share options are
sometimes granted as part of a bonus arrangement rather than as a part of basic
remuneration eg as an incentive to the employees to remain in the entity’s
employ or to reward them for their efforts in improving the entity’s
performance By granting shares or share options in addition to other
remuneration the entity is paying additional remuneration to obtain additional
benefits Estimating the fair value of those additional benefits is likely to be
difficult Because of the difficulty of measuring directly the fair value of the
services received the entity shall measure the fair value of the employee services
received by reference to the fair value of the equity instruments granted
2 This IFRS uses the phrase by reference to’ rather than at’ because the transaction is ultimately
measured by multiplying the fair value of the equity instruments granted measured at the date
specified in paragraph 11 or 13 (whichever is applicable) by the number of equity instruments that
vest as explained in paragraph 19
3 In the remainder of this IFRS all references to employees also include others providing similar
services
IFRS 2
IFRS Foundation A9313 To apply the requirements of paragraph 10 to transactions with parties other
than employees there shall be a rebuttable presumption that the fair value of
the goods or services received can be estimated reliably That fair value shall be
measured at the date the entity obtains the goods or the counterparty renders
service In rare cases if the entity rebuts this presumption because it cannot
estimate reliably the fair value of the goods or services received the entity shall
measure the goods or services received and the corresponding increase in
equity indirectly by reference to the fair value of the equity instruments
granted measured at the date the entity obtains the goods or the counterparty
renders service
13A In particular if the identifiable consideration received (if any) by the entity
appears to be less than the fair value of the equity instruments granted or
liability incurred typically this situation indicates that other consideration (ie
unidentifiable goods or services) has been (or will be) received by the entity The
entity shall measure the identifiable goods or services received in accordance
with this IFRS The entity shall measure the unidentifiable goods or services
received (or to be received) as the difference between the fair value of the
sharebased payment and the fair value of any identifiable goods or services
received (or to be received) The entity shall measure the unidentifiable goods or
services received at the grant date However for cashsettled transactions the
liability shall be remeasured at the end of each reporting period until it is
settled in accordance with paragraphs 30–33
Transactions in which services are received
14 If the equity instruments granted vest immediately the counterparty is not
required to complete a specified period of service before becoming
unconditionally entitled to those equity instruments In the absence of evidence
to the contrary the entity shall presume that services rendered by the
counterparty as consideration for the equity instruments have been received In
this case on grant date the entity shall recognise the services received in full
with a corresponding increase in equity
15 If the equity instruments granted do not vest until the counterparty completes a
specified period of service the entity shall presume that the services to be
rendered by the counterparty as consideration for those equity instruments will
be received in the future during the vesting period The entity shall account for
those services as they are rendered by the counterparty during the vesting
period with a corresponding increase in equity For example
(a) if an employee is granted share options conditional upon completing
three years’ service then the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
received in the future over that threeyear vesting period
(b) if an employee is granted share options conditional upon the
achievement of a performance condition and remaining in the entity’s
employ until that performance condition is satisfied and the length of
the vesting period varies depending on when that performance
condition is satisfied the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
IFRS 2
IFRS FoundationA94received in the future over the expected vesting period The entity shall
estimate the length of the expected vesting period at grant date based
on the most likely outcome of the performance condition If the
performance condition is a market condition the estimate of the length of
the expected vesting period shall be consistent with the assumptions
used in estimating the fair value of the options granted and shall not be
subsequently revised If the performance condition is not a market
condition the entity shall revise its estimate of the length of the vesting
period if necessary if subsequent information indicates that the length
of the vesting period differs from previous estimates
Transactions measured by reference to the fair value of
the equity instruments granted
Determining the fair value of equity instruments granted
16 For transactions measured by reference to the fair value of the equity
instruments granted an entity shall measure the fair value of equity
instruments granted at the measurement date based on market prices if available
taking into account the terms and conditions upon which those equity
instruments were granted (subject to the requirements of paragraphs 19–22)
17 If market prices are not available the entity shall estimate the fair value of the
equity instruments granted using a valuation technique to estimate what the
price of those equity instruments would have been on the measurement date in
an arm’s length transaction between knowledgeable willing parties The
valuation technique shall be consistent with generally accepted valuation
methodologies for pricing financial instruments and shall incorporate all
factors and assumptions that knowledgeable willing market participants would
consider in setting the price (subject to the requirements of paragraphs 19–22)
18 Appendix B contains further guidance on the measurement of the fair value of
shares and share options focusing on the specific terms and conditions that are
common features of a grant of shares or share options to employees
Treatment of vesting conditions
19 A grant of equity instruments might be conditional upon satisfying specified
vesting conditions For example a grant of shares or share options to an
employee is typically conditional on the employee remaining in the entity’s
employ for a specified period of time There might be performance conditions
that must be satisfied such as the entity achieving a specified growth in profit
or a specified increase in the entity’s share price Vesting conditions other than
market conditions shall not be taken into account when estimating the fair
value of the shares or share options at the measurement date Instead vesting
conditions shall be taken into account by adjusting the number of equity
instruments included in the measurement of the transaction amount so that
ultimately the amount recognised for goods or services received as
consideration for the equity instruments granted shall be based on the number
of equity instruments that eventually vest Hence on a cumulative basis no
amount is recognised for goods or services received if the equity instruments
granted do not vest because of failure to satisfy a vesting conditionegthe
IFRS 2
IFRS Foundation A95counterparty fails to complete a specified service period or a performance
condition is not satisfied subject to the requirements of paragraph 21
20 To apply the requirements of paragraph 19 the entity shall recognise an amount
for the goods or services received during the vesting period based on the best
available estimate of the number of equity instruments expected to vest and
shall revise that estimate if necessary if subsequent information indicates that
the number of equity instruments expected to vest differs from previous
estimates On vesting date the entity shall revise the estimate to equal the
number of equity instruments that ultimately vested subject to the
requirements of paragraph 21
21 Market conditions such as a target share price upon which vesting
(or exercisability) is conditioned shall be taken into account when estimating
the fair value of the equity instruments granted Therefore for grants of equity
instruments with market conditions the entity shall recognise the goods or
services received from a counterparty who satisfies all other vesting conditions
(eg services received from an employee who remains in service for the specified
period of service) irrespective of whether that market condition is satisfied
Treatment of nonvesting conditions
21A Similarly an entity shall take into account all nonvesting conditions when
estimating the fair value of the equity instruments granted Therefore for
grants of equity instruments with nonvesting conditions the entity shall
recognise the goods or services received from a counterparty that satisfies all
vesting conditions that are not market conditions (eg services received from an
employee who remains in service for the specified period of service) irrespective
of whether those nonvesting conditions are satisfied
Treatment of a reload feature
22 For options with a reload feature the reload feature shall not be taken into
account when estimating the fair value of options granted at the measurement
date Instead a reload option shall be accounted for as a new option grant if and
when a reload option is subsequently granted
After vesting date
23 Having recognised the goods or services received in accordance with
paragraphs 10–22 and a corresponding increase in equity the entity shall make
no subsequent adjustment to total equity after vesting date For example the
entity shall not subsequently reverse the amount recognised for services
received from an employee if the vested equity instruments are later forfeited or
in the case of share options the options are not exercised However this
requirement does not preclude the entity from recognising a transfer within
equity ie a transfer from one component of equity to another
If the fair value of the equity instruments cannot be estimated
reliably
24 The requirements in paragraphs 16–23 apply when the entity is required to
measure a sharebased payment transaction by reference to the fair value of the
equity instruments granted In rare cases the entity may be unable to estimate
IFRS 2
IFRS FoundationA96reliably the fair value of the equity instruments granted at the measurement
date in accordance with the requirements in paragraphs 16–22 In these rare
cases only the entity shall instead
(a) measure the equity instruments at their intrinsic value initially at the
date the entity obtains the goods or the counterparty renders service and
subsequently at the end of each reporting period and at the date of final
settlement with any change in intrinsic value recognised in profit or
loss For a grant of share options the sharebased payment arrangement
is finally settled when the options are exercised are forfeited (eg upon
cessation of employment) or lapse (eg at the end of the option’s life)
(b) recognise the goods or services received based on the number of equity
instruments that ultimately vest or (where applicable) are ultimately
exercised To apply this requirement to share options for example the
entity shall recognise the goods or services received during the vesting
period if any in accordance with paragraphs 14 and 15 except that the
requirements in paragraph 15(b) concerning a market condition do not
apply The amount recognised for goods or services received during the
vesting period shall be based on the number of share options expected to
vest The entity shall revise that estimate if necessary if subsequent
information indicates that the number of share options expected to vest
differs from previous estimates On vesting date the entity shall revise
the estimate to equal the number of equity instruments that ultimately
vested After vesting date the entity shall reverse the amount recognised
for goods or services received if the share options are later forfeited or
lapse at the end of the share option’s life
25 If an entity applies paragraph 24 it is not necessary to apply paragraphs 26–29
because any modifications to the terms and conditions on which the equity
instruments were granted will be taken into account when applying the
intrinsic value method set out in paragraph 24 However if an entity settles a
grant of equity instruments to which paragraph 24 has been applied
(a) if the settlement occurs during the vesting period the entity shall
account for the settlement as an acceleration of vesting and shall
therefore recognise immediately the amount that would otherwise have
been recognised for services received over the remainder of the vesting
period
(b) any payment made on settlement shall be accounted for as the
repurchase of equity instruments ie as a deduction from equity except
to the extent that the payment exceeds the intrinsic value of the equity
instruments measured at the repurchase date Any such excess shall be
recognised as an expense
Modifications to the terms and conditions on which
equity instruments were granted including cancellations
and settlements
26 An entity might modify the terms and conditions on which the equity
instruments were granted For example it might reduce the exercise price of
options granted to employees (ie reprice the options) which increases the fair
IFRS 2
IFRS Foundation A97value of those options The requirements in paragraphs 27–29 to account for the
effects of modifications are expressed in the context of sharebased payment
transactions with employees However the requirements shall also be applied
to sharebased payment transactions with parties other than employees that are
measured by reference to the fair value of the equity instruments granted In
the latter case any references in paragraphs 27–29 to grant date shall instead
refer to the date the entity obtains the goods or the counterparty renders service
27 The entity shall recognise as a minimum the services received measured at the
grant date fair value of the equity instruments granted unless those equity
instruments do not vest because of failure to satisfy a vesting condition (other
than a market condition) that was specified at grant date This applies
irrespective of any modifications to the terms and conditions on which the
equity instruments were granted or a cancellation or settlement of that grant of
equity instruments In addition the entity shall recognise the effects of
modifications that increase the total fair value of the sharebased payment
arrangement or are otherwise beneficial to the employee Guidance on applying
this requirement is given in Appendix B
28 If a grant of equity instruments is cancelled or settled during the vesting period
(other than a grant cancelled by forfeiture when the vesting conditions are not
satisfied)
(a) the entity shall account for the cancellation or settlement as an
acceleration of vesting and shall therefore recognise immediately the
amount that otherwise would have been recognised for services received
over the remainder of the vesting period
(b) any payment made to the employee on the cancellation or settlement of
the grant shall be accounted for as the repurchase of an equity interest
ie as a deduction from equity except to the extent that the payment
exceeds the fair value of the equity instruments granted measured at the
repurchase date Any such excess shall be recognised as an expense
However if the sharebased payment arrangement included liability
components the entity shall remeasure the fair value of the liability at
the date of cancellation or settlement Any payment made to settle the
liability component shall be accounted for as an extinguishment of the
liability
(c) if new equity instruments are granted to the employee and on the date
when those new equity instruments are granted the entity identifies the
new equity instruments granted as replacement equity instruments for
the cancelled equity instruments the entity shall account for the
granting of replacement equity instruments in the same way as a
modification of the original grant of equity instruments in accordance
with paragraph 27 and the guidance in Appendix B The incremental
fair value granted is the difference between the fair value of the
replacement equity instruments and the net fair value of the cancelled
equity instruments at the date the replacement equity instruments are
granted The net fair value of the cancelled equity instruments is their
fair value immediately before the cancellation less the amount of any
payment made to the employee on cancellation of the equity
IFRS 2
IFRS FoundationA98instruments that is accounted for as a deduction from equity in
accordance with (b) above If the entity does not identify new equity
instruments granted as replacement equity instruments for the
cancelled equity instruments the entity shall account for those new
equity instruments as a new grant of equity instruments
28A If an entity or counterparty can choose whether to meet a nonvesting condition
the entity shall treat the entity’s or counterparty’s failure to meet that
nonvesting condition during the vesting period as a cancellation
29 If an entity repurchases vested equity instruments the payment made to the
employee shall be accounted for as a deduction from equity except to the extent
that the payment exceeds the fair value of the equity instruments repurchased
measured at the repurchase date Any such excess shall be recognised as an
expense
Cashsettled sharebased payment transactions
30 For cashsettled sharebased payment transactions the entity shall
measure the goods or services acquired and the liability incurred at the
fair value of the liability Until the liability is settled the entity shall
remeasure the fair value of the liability at the end of each reporting
period and at the date of settlement with any changes in fair value
recognised in profit or loss for the period
31 For example an entity might grant share appreciation rights to employees as
part of their remuneration package whereby the employees will become
entitled to a future cash payment (rather than an equity instrument) based on
the increase in the entity’s share price from a specified level over a specified
period of time Or an entity might grant to its employees a right to receive a
future cash payment by granting to them a right to shares (including shares to
be issued upon the exercise of share options) that are redeemable either
mandatorily (eg upon cessation of employment) or at the employee’s option
32 The entity shall recognise the services received and a liability to pay for those
services as the employees render service For example some share appreciation
rights vest immediately and the employees are therefore not required to
complete a specified period of service to become entitled to the cash payment
In the absence of evidence to the contrary the entity shall presume that the
services rendered by the employees in exchange for the share appreciation rights
have been received Thus the entity shall recognise immediately the services
received and a liability to pay for them If the share appreciation rights do not
vest until the employees have completed a specified period of service the entity
shall recognise the services received and a liability to pay for them as the
employees render service during that period
33 The liability shall be measured initially and at the end of each reporting period
until settled at the fair value of the share appreciation rights by applying an
option pricing model taking into account the terms and conditions on which
the share appreciation rights were granted and the extent to which the
employees have rendered service to date
IFRS 2
IFRS Foundation A99Sharebased payment transactions with cash alternatives
34 For sharebased payment transactions in which the terms of the
arrangement provide either the entity or the counterparty with the
choice of whether the entity settles the transaction in cash (or other
assets) or by issuing equity instruments the entity shall account for that
transaction or the components of that transaction as a cashsettled
sharebased payment transaction if and to the extent that the entity has
incurred a liability to settle in cash or other assets or as an equitysettled
sharebased payment transaction if and to the extent that no such
liability has been incurred
Sharebased payment transactions in which the terms of
the arrangement provide the counterparty with a choice
of settlement
35 If an entity has granted the counterparty the right to choose whether a
sharebased payment transaction is settled in cash4 or by issuing equity
instruments the entity has granted a compound financial instrument which
includes a debt component (ie the counterparty’s right to demand payment in
cash) and an equity component (ie the counterparty’s right to demand
settlement in equity instruments rather than in cash) For transactions with
parties other than employees in which the fair value of the goods or services
received is measured directly the entity shall measure the equity component of
the compound financial instrument as the difference between the fair value of
the goods or services received and the fair value of the debt component at the
date when the goods or services are received
36 For other transactions including transactions with employees the entity shall
measure the fair value of the compound financial instrument at the
measurement date taking into account the terms and conditions on which the
rights to cash or equity instruments were granted
37 To apply paragraph 36 the entity shall first measure the fair value of the debt
component and then measure the fair value of the equity component—taking
into account that the counterparty must forfeit the right to receive cash in order
to receive the equity instrument The fair value of the compound financial
instrument is the sum of the fair values of the two components However
sharebased payment transactions in which the counterparty has the choice of
settlement are often structured so that the fair value of one settlement
alternative is the same as the other For example the counterparty might have
the choice of receiving share options or cashsettled share appreciation rights
In such cases the fair value of the equity component is zero and hence the fair
value of the compound financial instrument is the same as the fair value of the
debt component Conversely if the fair values of the settlement alternatives
differ the fair value of the equity component usually will be greater than zero
in which case the fair value of the compound financial instrument will be
greater than the fair value of the debt component
4 In paragraphs 35–43 all references to cash also include other assets of the entity
IFRS 2
IFRS FoundationA10038 The entity shall account separately for the goods or services received or acquired
in respect of each component of the compound financial instrument For the
debt component the entity shall recognise the goods or services acquired and a
liability to pay for those goods or services as the counterparty supplies goods or
renders service in accordance with the requirements applying to cashsettled
sharebased payment transactions (paragraphs 30–33) For the equity
component (if any) the entity shall recognise the goods or services received and
an increase in equity as the counterparty supplies goods or renders service in
accordance with the requirements applying to equitysettled sharebased
payment transactions (paragraphs 10–29)
39 At the date of settlement the entity shall remeasure the liability to its fair value
If the entity issues equity instruments on settlement rather than paying cash
the liability shall be transferred direct to equity as the consideration for the
equity instruments issued
40 If the entity pays in cash on settlement rather than issuing equity instruments
that payment shall be applied to settle the liability in full Any equity
component previously recognised shall remain within equity By electing to
receive cash on settlement the counterparty forfeited the right to receive equity
instruments However this requirement does not preclude the entity from
recognising a transfer within equity ie a transfer from one component of equity
to another
Sharebased payment transactions in which the terms of
the arrangement provide the entity with a choice of
settlement
41 For a sharebased payment transaction in which the terms of the arrangement
provide an entity with the choice of whether to settle in cash or by issuing
equity instruments the entity shall determine whether it has a present
obligation to settle in cash and account for the sharebased payment transaction
accordingly The entity has a present obligation to settle in cash if the choice of
settlement in equity instruments has no commercial substance (eg because the
entity is legally prohibited from issuing shares) or the entity has a past practice
or a stated policy of settling in cash or generally settles in cash whenever the
counterparty asks for cash settlement
42 If the entity has a present obligation to settle in cash it shall account for the
transaction in accordance with the requirements applying to cashsettled
sharebased payment transactions in paragraphs 30–33
43 If no such obligation exists the entity shall account for the transaction in
accordance with the requirements applying to equitysettled sharebased
payment transactions in paragraphs 10–29 Upon settlement
(a) if the entity elects to settle in cash the cash payment shall be accounted
for as the repurchase of an equity interest ie as a deduction from equity
except as noted in (c) below
(b) if the entity elects to settle by issuing equity instruments no further
accounting is required (other than a transfer from one component of
equity to another if necessary) except as noted in (c) below
IFRS 2
IFRS Foundation A101(c) if the entity elects the settlement alternative with the higher fair value
as at the date of settlement the entity shall recognise an additional
expense for the excess value given ie the difference between the cash
paid and the fair value of the equity instruments that would otherwise
have been issued or the difference between the fair value of the equity
instruments issued and the amount of cash that would otherwise have
been paid whichever is applicable
Sharebased payment transactions among group entities
(2009 amendments)
43A For sharebased payment transactions among group entities in its separate or
individual financial statements the entity receiving the goods or services shall
measure the goods or services received as either an equitysettled or a
cashsettled sharebased payment transaction by assessing
(a) the nature of the awards granted and
(b) its own rights and obligations
The amount recognised by the entity receiving the goods or services may differ
from the amount recognised by the consolidated group or by another group
entity settling the sharebased payment transaction
43B The entity receiving the goods or services shall measure the goods or services
received as an equitysettled sharebased payment transaction when
(a) the awards granted are its own equity instruments or
(b) the entity has no obligation to settle the sharebased payment
transaction
The entity shall subsequently remeasure such an equitysettled sharebased
payment transaction only for changes in nonmarket vesting conditions in
accordance with paragraphs 19–21 In all other circumstances the entity
receiving the goods or services shall measure the goods or services received as a
cashsettled sharebased payment transaction
43C The entity settling a sharebased payment transaction when another entity in
the group receives the goods or services shall recognise the transaction as an
equitysettled sharebased payment transaction only if it is settled in the entity’s
own equity instruments Otherwise the transaction shall be recognised as a
cashsettled sharebased payment transaction
43D Some group transactions involve repayment arrangements that require one
group entity to pay another group entity for the provision of the sharebased
payments to the suppliers of goods or services In such cases the entity that
receives the goods or services shall account for the sharebased payment
transaction in accordance with paragraph 43B regardless of intragroup
repayment arrangements
IFRS 2
IFRS FoundationA102Disclosures
44 An entity shall disclose information that enables users of the financial
statements to understand the nature and extent of sharebased payment
arrangements that existed during the period
45 To give effect to the principle in paragraph 44 the entity shall disclose at least
the following
(a) a description of each type of sharebased payment arrangement that
existed at any time during the period including the general terms and
conditions of each arrangement such as vesting requirements the
maximum term of options granted and the method of settlement
(eg whether in cash or equity) An entity with substantially similar types
of sharebased payment arrangements may aggregate this information
unless separate disclosure of each arrangement is necessary to satisfy the
principle in paragraph 44
(b) the number and weighted average exercise prices of share options for
each of the following groups of options
(i) outstanding at the beginning of the period
(ii) granted during the period
(iii) forfeited during the period
(iv) exercised during the period
(v) expired during the period
(vi) outstanding at the end of the period and
(vii) exercisable at the end of the period
(c) for share options exercised during the period the weighted average
share price at the date of exercise If options were exercised on a regular
basis throughout the period the entity may instead disclose the
weighted average share price during the period
(d) for share options outstanding at the end of the period the range of
exercise prices and weighted average remaining contractual life If the
range of exercise prices is wide the outstanding options shall be divided
into ranges that are meaningful for assessing the number and timing of
additional shares that may be issued and the cash that may be received
upon exercise of those options
46 An entity shall disclose information that enables users of the financial
statements to understand how the fair value of the goods or services
received or the fair value of the equity instruments granted during the
period was determined
47 If the entity has measured the fair value of goods or services received as
consideration for equity instruments of the entity indirectly by reference to the
fair value of the equity instruments granted to give effect to the principle in
paragraph 46 the entity shall disclose at least the following
IFRS 2
IFRS Foundation A103(a) for share options granted during the period the weighted average fair
value of those options at the measurement date and information on how
that fair value was measured including
(i) the option pricing model used and the inputs to that model
including the weighted average share price exercise price
expected volatility option life expected dividends the riskfree
interest rate and any other inputs to the model including the
method used and the assumptions made to incorporate the
effects of expected early exercise
(ii) how expected volatility was determined including an
explanation of the extent to which expected volatility was based
on historical volatility and
(iii) whether and how any other features of the option grant were
incorporated into the measurement of fair value such as a
market condition
(b) for other equity instruments granted during the period (ie other than
share options) the number and weighted average fair value of those
equity instruments at the measurement date and information on how
that fair value was measured including
(i) if fair value was not measured on the basis of an observable
market price how it was determined
(ii) whether and how expected dividends were incorporated into the
measurement of fair value and
(iii) whether and how any other features of the equity instruments
granted were incorporated into the measurement of fair value
(c) for sharebased payment arrangements that were modified during the
period
(i) an explanation of those modifications
(ii) the incremental fair value granted (as a result of those
modifications) and
(iii) information on how the incremental fair value granted was
measured consistently with the requirements set out in (a) and
(b) above where applicable
48 If the entity has measured directly the fair value of goods or services received
during the period the entity shall disclose how that fair value was determined
eg whether fair value was measured at a market price for those goods or services
49 If the entity has rebutted the presumption in paragraph 13 it shall disclose that
fact and give an explanation of why the presumption was rebutted
50 An entity shall disclose information that enables users of the financial
statements to understand the effect of sharebased payment transactions
on the entity’s profit or loss for the period and on its financial position
51 To give effect to the principle in paragraph 50 the entity shall disclose at least
the following
IFRS 2
IFRS FoundationA104(a) the total expense recognised for the period arising from sharebased
payment transactions in which the goods or services received did not
qualify for recognition as assets and hence were recognised immediately
as an expense including separate disclosure of that portion of the total
expense that arises from transactions accounted for as equitysettled
sharebased payment transactions
(b) for liabilities arising from sharebased payment transactions
(i) the total carrying amount at the end of the period and
(ii) the total intrinsic value at the end of the period of liabilities for
which the counterparty’s right to cash or other assets had vested
by the end of the period (eg vested share appreciation rights)
52 If the information required to be disclosed by this IFRS does not satisfy the
principles in paragraphs 44 46 and 50 the entity shall disclose such additional
information as is necessary to satisfy them
Transitional provisions
53 For equitysettled sharebased payment transactions the entity shall apply this
IFRS to grants of shares share options or other equity instruments that were
granted after 7 November 2002 and had not yet vested at the effective date of
this IFRS
54 The entity is encouraged but not required to apply this IFRS to other grants of
equity instruments if the entity has disclosed publicly the fair value of those
equity instruments determined at the measurement date
55 For all grants of equity instruments to which this IFRS is applied the entity shall
restate comparative information and where applicable adjust the opening
balance of retained earnings for the earliest period presented
56 For all grants of equity instruments to which this IFRS has not been applied
(eg equity instruments granted on or before 7 November 2002) the entity shall
nevertheless disclose the information required by paragraphs 44 and 45
57 If after the IFRS becomes effective an entity modifies the terms or conditions of
a grant of equity instruments to which this IFRS has not been applied the entity
shall nevertheless apply paragraphs 26–29 to account for any such
modifications
58 For liabilities arising from sharebased payment transactions existing at the
effective date of this IFRS the entity shall apply the IFRS retrospectively For
these liabilities the entity shall restate comparative information including
adjusting the opening balance of retained earnings in the earliest period
presented for which comparative information has been restated except that the
entity is not required to restate comparative information to the extent that the
information relates to a period or date that is earlier than 7 November 2002
IFRS 2
IFRS Foundation A10559 The entity is encouraged but not required to apply retrospectively the IFRS to
other liabilities arising from sharebased payment transactions for example to
liabilities that were settled during a period for which comparative information
is presented
Effective date
60 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005 Earlier application is encouraged If an entity applies the IFRS
for a period beginning before 1 January 2005 it shall disclose that fact
61 IFRS 3 (as revised in 2008) and Improvements to IFRSs issued in April 2009 amended
paragraph 5 An entity shall apply those amendments for annual periods
beginning on or after 1 July 2009 Earlier application is permitted If an entity
applies IFRS 3 (revised 2008) for an earlier period the amendments shall also be
applied for that earlier period
62 An entity shall apply the following amendments retrospectively in annual
periods beginning on or after 1 January 2009
(a) the requirements in paragraph 21A in respect of the treatment of
nonvesting conditions
(b) the revised definitions of vest’ and vesting conditions’ in Appendix A
(c) the amendments in paragraphs 28 and 28A in respect of cancellations
Earlier application is permitted If an entity applies these amendments for a
period beginning before 1 January 2009 it shall disclose that fact
63 An entity shall apply the following amendments made by Group Cashsettled
Sharebased Payment Transactions issued in June 2009 retrospectively subject to the
transitional provisions in paragraphs 53–59 in accordance with IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors for annual periods beginning on
or after 1 January 2010
(a) the amendment of paragraph 2 the deletion of paragraph 3 and the
addition of paragraphs 3A and 43A–43D and of paragraphs B45 B47
B50 B54 B56–B58 and B60 in Appendix B in respect of the accounting
for transactions among group entities
(b) the revised definitions in Appendix A of the following terms
● cashsettled sharebased payment transaction
● equitysettled sharebased payment transaction
● sharebased payment arrangement and
● sharebased payment transaction
If the information necessary for retrospective application is not available an
entity shall reflect in its separate or individual financial statements the amounts
previously recognised in the group’s consolidated financial statements Earlier
application is permitted If an entity applies the amendments for a period
beginning before 1 January 2010 it shall disclose that fact
IFRS 2
IFRS FoundationA10663A IFRS 10 Consolidated Financial Statements and IFRS 11 issued in May 2011 amended
paragraph 5 and Appendix A An entity shall apply those amendments when it
applies IFRS 10 and IFRS 11
63B Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 15 and 19 In Appendix A the definitions of vesting conditions’ and
market condition’ were amended and the definitions of performance
condition’ and service condition’ were added An entity shall prospectively apply
that amendment to sharebased payment transactions for which the grant date
is on or after 1 July 2014 Earlier application is permitted If an entity applies
that amendment for an earlier period it shall disclose that fact
63C IFRS 9 as issued in July 2014 amended paragraph 6 An entity shall apply that
amendment when it applies IFRS 9
Withdrawal of Interpretations
64 Group Cashsettled Sharebased Payment Transactions issued in June 2009 supersedes
IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions
The amendments made by that document incorporated the previous
requirements set out in IFRIC 8 and IFRIC 11 as follows
(a) amended paragraph 2 and added paragraph 13A in respect of the
accounting for transactions in which the entity cannot identify
specifically some or all of the goods or services received Those
requirements were effective for annual periods beginning on or after
1 May 2006
(b) added paragraphs B46 B48 B49 B51–B53 B55 B59 and B61 in
Appendix B in respect of the accounting for transactions among group
entities Those requirements were effective for annual periods beginning
on or after 1 March 2007
Those requirements were applied retrospectively in accordance with the
requirements of IAS 8 subject to the transitional provisions of IFRS 2
IFRS 2
IFRS Foundation A107Appendix A
Defined terms
This appendix is an integral part of the IFRS
cashsettled
sharebased payment
transaction
A sharebased payment transaction in which the entity
acquires goods or services by incurring a liability to transfer cash
or other assets to the supplier of those goods or services for
amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or
another group entity
employees and others
providing similar
services
Individuals who render personal services to the entity and either
(a) the individuals are regarded as employees for legal or tax
purposes (b) the individuals work for the entity under its
direction in the same way as individuals who are regarded as
employees for legal or tax purposes or (c) the services rendered
are similar to those rendered by employees For example the
term encompasses all management personnel ie those persons
having authority and responsibility for planning directing and
controlling the activities of the entity including nonexecutive
directors
equity instrument A contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities5
equity instrument
granted
The right (conditional or unconditional) to an equity
instrument of the entity conferred by the entity on another
party under a sharebased payment arrangement
equitysettled
sharebased payment
transaction
A sharebased payment transaction in which the entity
(a) receives goods or services as consideration for its own
equity instruments (including shares or share
options) or
(b) receives goods or services but has no obligation to settle
the transaction with the supplier
fair value The amount for which an asset could be exchanged a liability
settled or an equity instrument granted could be exchanged
between knowledgeable willing parties in an arm’s length
transaction
5 The Conceptual Framework for Financial Reporting defines a liability as a present obligation of the entity
arising from past events the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits (ie an outflow of cash or other assets of the entity)
IFRS 2
IFRS FoundationA108grant date The date at which the entity and another party (including an
employee) agree to a sharebased payment arrangement
being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement
At grant date the entity confers on the counterparty the right to
cash other assets or equity instruments of the entity provided
the specified vesting conditions if any are met If that
agreement is subject to an approval process (for example by
shareholders) grant date is the date when that approval is
obtained
intrinsic value The difference between the fair value of the shares to which the
counterparty has the (conditional or unconditional) right to
subscribe or which it has the right to receive and the price (if
any) the counterparty is (or will be) required to pay for those
shares For example a share option with an exercise price of
CU156 on a share with a fair value of CU20 has an intrinsic value
of CU5
market condition A performance condition upon which the exercise price
vesting or exercisability of an equity instrument depends that is
related to the market price (or value) of the entity’s equity
instruments (or the equity instruments of another entity in the
same group) such as
(a) attaining a specified share price or a specified amount of
intrinsic value of a share optionor
(b) achieving a specified target that is based on the market
price (or value) of the entity’s equity instruments (or the
equity instruments of another entity in the same group)
relative to an index of market prices of equity
instruments of other entities
A market condition requires the counterparty to complete a
specified period of service (ie a service condition) the service
requirement can be explicit or implicit
measurement date The date at which the fair value of the equity instruments
granted is measured for the purposes of this IFRS For
transactions with employees and others providing similar
services the measurement date is grant date For transactions
with parties other than employees (and those providing similar
services) the measurement date is the date the entity obtains the
goods or the counterparty renders service
6 In this appendix monetary amounts are denominated in currency units (CU)’
IFRS 2
IFRS Foundation A109performance condition A vesting condition that requires
(a) the counterparty to complete a specified period of service
(ie a service condition) the service requirement can be
explicit or implicit and
(b) specified performance target(s) to be met while the
counterparty is rendering the service required in (a)
The period of achieving the performance target(s)
(a) shall not extend beyond the end of the service period and
(b) may start before the service period on the condition that
the commencement date of the performance target is not
substantially before the commencement of the service
period
A performance target is defined by reference to
(a) the entity’s own operations (or activities) or the
operations or activities of another entity in the same
group (ie a nonmarket condition) or
(b) the price (or value) of the entity’s equity instruments or
the equity instruments of another entity in the same
group (including shares and share options) (ie a market
condition)
A performance target might relate either to the performance of
the entity as a whole or to some part of the entity (or part of the
group) such as a division or an individual employee
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
service condition A vesting condition that requires the counterparty to complete
a specified period of service during which services are provided to
the entity If the counterparty regardless of the reason ceases to
provide service during the vesting period it has failed to satisfy
the condition A service condition does not require a
performance target to be met
IFRS 2
IFRS FoundationA110sharebased payment
arrangement
An agreement between the entity (or another group7 entity or
any shareholder of any group entity) and another party
(including an employee) that entitles the other party to receive
(a) cash or other assets of the entity for amounts that are
based on the price (or value) of equity instruments
(including shares or share options) of the entity or
another group entity or
(b) equity instruments (including shares or share options)
of the entity or another group entity
provided the specified vesting conditions if any are met
sharebased payment
transaction
A transaction in which the entity
(a) receives goods or services from the supplier of those
goods or services (including an employee) in a
sharebased payment arrangementor
(b) incurs an obligation to settle the transaction with the
supplier in a sharebased payment arrangement when
another group entity receives those goods or services
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 sharebased 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 conditions
vesting condition A condition that determines whether the entity receives the
services that entitle the counterparty to receive cash other assets
or equity instruments of the entity under a sharebased
payment arrangement A vesting condition is either a service
condition or a performance condition
vesting period The period during which all the specified vesting conditions of
a sharebased payment arrangement are to be satisfied
7 A group’ is defined in Appendix A of IFRS 10 Consolidated Financial Statements as a parent and its
subsidiaries’ from the perspective of the reporting entity’s ultimate parent
IFRS 2
IFRS Foundation A111Appendix B
Application guidance
This appendix is an integral part of the IFRS
Estimating the fair value of equity instruments granted
B1 Paragraphs B2–B41 of this appendix discuss measurement of the fair value of
shares and share options granted focusing on the specific terms and conditions
that are common features of a grant of shares or share options to employees
Therefore it is not exhaustive Furthermore because the valuation issues
discussed below focus on shares and share options granted to employees it is
assumed that the fair value of the shares or share options is measured at grant
date However many of the valuation issues discussed below (eg determining
expected volatility) also apply in the context of estimating the fair value of
shares or share options granted to parties other than employees at the date the
entity obtains the goods or the counterparty renders service
Shares
B2 For shares granted to employees the fair value of the shares shall be measured at
the market price of the entity’s shares (or an estimated market price if the
entity’s shares are not publicly traded) adjusted to take into account the terms
and conditions upon which the shares were granted (except for vesting
conditions that are excluded from the measurement of fair value in accordance
with paragraphs 19–21)
B3 For example if the employee is not entitled to receive dividends during the
vesting period this factor shall be taken into account when estimating the fair
value of the shares granted Similarly if the shares are subject to restrictions on
transfer after vesting date that factor shall be taken into account but only to
the extent that the postvesting restrictions affect the price that a
knowledgeable willing market participant would pay for that share For
example if the shares are actively traded in a deep and liquid market
postvesting transfer restrictions may have little if any effect on the price that a
knowledgeable willing market participant would pay for those shares
Restrictions on transfer or other restrictions that exist during the vesting period
shall not be taken into account when estimating the grant date fair value of the
shares granted because those restrictions stem from the existence of vesting
conditions which are accounted for in accordance with paragraphs 19–21
Share options
B4 For share options granted to employees in many cases market prices are not
available because the options granted are subject to terms and conditions that
do not apply to traded options If traded options with similar terms and
conditions do not exist the fair value of the options granted shall be estimated
by applying an option pricing model
B5 The entity shall consider factors that knowledgeable willing market
participants would consider in selecting the option pricing model to apply For
example many employee options have long lives are usually exercisable during
the period between vesting date and the end of the options’ life and are often
IFRS 2
IFRS FoundationA112exercised early These factors should be considered when estimating the grant
date fair value of the options For many entities this might preclude the use of
the BlackScholesMerton formula which does not allow for the possibility of
exercise before the end of the option’s life and may not adequately reflect the
effects of expected early exercise It also does not allow for the possibility that
expected volatility and other model inputs might vary over the option’s life
However for share options with relatively short contractual lives or that must
be exercised within a short period of time after vesting date the factors
identified above may not apply In these instances the BlackScholesMerton
formula may produce a value that is substantially the same as a more flexible
option pricing model
B6 All option pricing models take into account as a minimum the following
factors
(a) the exercise price of the option
(b) the life of the option
(c) the current price of the underlying shares
(d) the expected volatility of the share price
(e) the dividends expected on the shares (if appropriate) and
(f) the riskfree interest rate for the life of the option
B7 Other factors that knowledgeable willing market participants would consider in
setting the price shall also be taken into account (except for vesting conditions
and reload features that are excluded from the measurement of fair value in
accordance with paragraphs 19–22)
B8 For example a share option granted to an employee typically cannot be
exercised during specified periods (eg during the vesting period or during
periods specified by securities regulators) This factor shall be taken into
account if the option pricing model applied would otherwise assume that the
option could be exercised at any time during its life However if an entity uses
an option pricing model that values options that can be exercised only at the
end of the options’ life no adjustment is required for the inability to exercise
them during the vesting period (or other periods during the options’ life)
because the model assumes that the options cannot be exercised during those
periods
B9 Similarly another factor common to employee share options is the possibility of
early exercise of the option for example because the option is not freely
transferable or because the employee must exercise all vested options upon
cessation of employment The effects of expected early exercise shall be taken
into account as discussed in paragraphs B16–B21
B10 Factors that a knowledgeable willing market participant would not consider in
setting the price of a share option (or other equity instrument) shall not be taken
into account when estimating the fair value of share options (or other equity
instruments) granted For example for share options granted to employees
factors that affect the value of the option from the individual employee’s
IFRS 2
IFRS Foundation A113perspective only are not relevant to estimating the price that would be set by a
knowledgeable willing market participant
Inputs to option pricing models
B11 In estimating the expected volatility of and dividends on the underlying shares
the objective is to approximate the expectations that would be reflected in a
current market or negotiated exchange price for the option Similarly when
estimating the effects of early exercise of employee share options the objective
is to approximate the expectations that an outside party with access to detailed
information about employees’ exercise behaviour would develop based on
information available at the grant date
B12 Often there is likely to be a range of reasonable expectations about future
volatility dividends and exercise behaviour If so an expected value should be
calculated by weighting each amount within the range by its associated
probability of occurrence
B13 Expectations about the future are generally based on experience modified if the
future is reasonably expected to differ from the past In some circumstances
identifiable factors may indicate that unadjusted historical experience is a
relatively poor predictor of future experience For example if an entity with two
distinctly different lines of business disposes of the one that was significantly
less risky than the other historical volatility may not be the best information on
which to base reasonable expectations for the future
B14 In other circumstances historical information may not be available For
example a newly listed entity will have little if any historical data on the
volatility of its share price Unlisted and newly listed entities are discussed
further below
B15 In summary an entity should not simply base estimates of volatility exercise
behaviour and dividends on historical information without considering the
extent to which the past experience is expected to be reasonably predictive of
future experience
Expected early exercise
B16 Employees often exercise share options early for a variety of reasons For
example employee share options are typically nontransferable This often
causes employees to exercise their share options early because that is the only
way for the employees to liquidate their position Also employees who cease
employment are usually required to exercise any vested options within a short
period of time otherwise the share options are forfeited This factor also causes
the early exercise of employee share options Other factors causing early
exercise are risk aversion and lack of wealth diversification
B17 The means by which the effects of expected early exercise are taken into account
depends upon the type of option pricing model applied For example expected
early exercise could be taken into account by using an estimate of the option’s
expected life (which for an employee share option is the period of time from
grant date to the date on which the option is expected to be exercised) as an
input into an option pricing model (eg the BlackScholesMerton formula)
IFRS 2
IFRS FoundationA114Alternatively expected early exercise could be modelled in a binomial or similar
option pricing model that uses contractual life as an input
B18 Factors to consider in estimating early exercise include
(a) the length of the vesting period because the share option typically
cannot be exercised until the end of the vesting period Hence
determining the valuation implications of expected early exercise is
based on the assumption that the options will vest The implications of
vesting conditions are discussed in paragraphs 19–21
(b) the average length of time similar options have remained outstanding in
the past
(c) the price of the underlying shares Experience may indicate that the
employees tend to exercise options when the share price reaches a
specified level above the exercise price
(d) the employee’s level within the organisation For example experience
might indicate that higherlevel employees tend to exercise options later
than lowerlevel employees (discussed further in paragraph B21)
(e) expected volatility of the underlying shares On average employees
might tend to exercise options on highly volatile shares earlier than on
shares with low volatility
B19 As noted in paragraph B17 the effects of early exercise could be taken into
account by using an estimate of the option’s expected life as an input into an
option pricing model When estimating the expected life of share options
granted to a group of employees the entity could base that estimate on an
appropriately weighted average expected life for the entire employee group or
on appropriately weighted average lives for subgroups of employees within the
group based on more detailed data about employees’ exercise behaviour
(discussed further below)
B20 Separating an option grant into groups for employees with relatively
homogeneous exercise behaviour is likely to be important Option value is not a
linear function of option term value increases at a decreasing rate as the term
lengthens For example if all other assumptions are equal although a twoyear
option is worth more than a oneyear option it is not worth twice as much That
means that calculating estimated option value on the basis of a single weighted
average life that includes widely differing individual lives would overstate the
total fair value of the share options granted Separating options granted into
several groups each of which has a relatively narrow range of lives included in
its weighted average life reduces that overstatement
B21 Similar considerations apply when using a binomial or similar model For
example the experience of an entity that grants options broadly to all levels of
employees might indicate that toplevel executives tend to hold their options
longer than middlemanagement employees hold theirs and that lowerlevel
employees tend to exercise their options earlier than any other group In
addition employees who are encouraged or required to hold a minimum
amount of their employer’s equity instruments including options might on
average exercise options later than employees not subject to that provision In
IFRS 2
IFRS Foundation A115those situations separating options by groups of recipients with relatively
homogeneous exercise behaviour will result in a more accurate estimate of the
total fair value of the share options granted
Expected volatility
B22 Expected volatility is a measure of the amount by which a price is expected to
fluctuate during a period The measure of volatility used in option pricing
models is the annualised standard deviation of the continuously compounded
rates of return on the share over a period of time Volatility is typically
expressed in annualised terms that are comparable regardless of the time period
used in the calculation for example daily weekly or monthly price
observations
B23 The rate of return (which may be positive or negative) on a share for a period
measures how much a shareholder has benefited from dividends and
appreciation (or depreciation) of the share price
B24 The expected annualised volatility of a share is the range within which the
continuously compounded annual rate of return is expected to fall
approximately twothirds of the time For example to say that a share with an
expected continuously compounded rate of return of 12 per cent has a volatility
of 30 per cent means that the probability that the rate of return on the share for
one year will be between –18 per cent (12 – 30) and 42 per cent (12 + 30) is
approximately twothirds If the share price is CU100 at the beginning of the
year and no dividends are paid the yearend share price would be expected to be
between CU8353 (CU100 × e–018) and CU15220 (CU100 × e042) approximately
twothirds of the time
B25 Factors to consider in estimating expected volatility include
(a) implied volatility from traded share options on the entity’s shares or
other traded instruments of the entity that include option features (such
as convertible debt) if any
(b) the historical volatility of the share price over the most recent period
that is generally commensurate with the expected term of the option
(taking into account the remaining contractual life of the option and the
effects of expected early exercise)
(c) the length of time an entity’s shares have been publicly traded A newly
listed entity might have a high historical volatility compared with
similar entities that have been listed longer Further guidance for newly
listed entities is given below
(d) the tendency of volatility to revert to its mean ie its longterm average
level and other factors indicating that expected future volatility might
differ from past volatility For example if an entity’s share price was
extraordinarily volatile for some identifiable period of time because of a
failed takeover bid or a major restructuring that period could be
disregarded in computing historical average annual volatility
IFRS 2
IFRS FoundationA116(e) appropriate and regular intervals for price observations The price
observations should be consistent from period to period For example
an entity might use the closing price for each week or the highest price
for the week but it should not use the closing price for some weeks and
the highest price for other weeks Also the price observations should be
expressed in the same currency as the exercise price
Newly listed entities
B26 As noted in paragraph B25 an entity should consider historical volatility of the
share price over the most recent period that is generally commensurate with the
expected option term If a newly listed entity does not have sufficient
information on historical volatility it should nevertheless compute historical
volatility for the longest period for which trading activity is available It could
also consider the historical volatility of similar entities following a comparable
period in their lives For example an entity that has been listed for only one
year and grants options with an average expected life of five years might
consider the pattern and level of historical volatility of entities in the same
industry for the first six years in which the shares of those entities were publicly
traded
Unlisted entities
B27 An unlisted entity will not have historical information to consider when
estimating expected volatility Some factors to consider instead are set out
below
B28 In some cases an unlisted entity that regularly issues options or shares to
employees (or other parties) might have set up an internal market for its shares
The volatility of those share prices could be considered when estimating
expected volatility
B29 Alternatively the entity could consider the historical or implied volatility of
similar listed entities for which share price or option price information is
available to use when estimating expected volatility This would be appropriate
if the entity has based the value of its shares on the share prices of similar listed
entities
B30 If the entity has not based its estimate of the value of its shares on the share
prices of similar listed entities and has instead used another valuation
methodology to value its shares the entity could derive an estimate of expected
volatility consistent with that valuation methodology For example the entity
might value its shares on a net asset or earnings basis It could consider the
expected volatility of those net asset values or earnings
Expected dividends
B31 Whether expected dividends should be taken into account when measuring the
fair value of shares or options granted depends on whether the counterparty is
entitled to dividends or dividend equivalents
B32 For example if employees were granted options and are entitled to dividends on
the underlying shares or dividend equivalents (which might be paid in cash or
applied to reduce the exercise price) between grant date and exercise date the
IFRS 2
IFRS Foundation A117options granted should be valued as if no dividends will be paid on the
underlying shares ie the input for expected dividends should be zero
B33 Similarly when the grant date fair value of shares granted to employees is
estimated no adjustment is required for expected dividends if the employee is
entitled to receive dividends paid during the vesting period
B34 Conversely if the employees are not entitled to dividends or dividend
equivalents during the vesting period (or before exercise in the case of an
option) the grant date valuation of the rights to shares or options should take
expected dividends into account That is to say when the fair value of an option
grant is estimated expected dividends should be included in the application of
an option pricing model When the fair value of a share grant is estimated that
valuation should be reduced by the present value of dividends expected to be
paid during the vesting period
B35 Option pricing models generally call for expected dividend yield However the
models may be modified to use an expected dividend amount rather than a
yield An entity may use either its expected yield or its expected payments If
the entity uses the latter it should consider its historical pattern of increases in
dividends For example if an entity’s policy has generally been to increase
dividends by approximately 3 per cent per year its estimated option value
should not assume a fixed dividend amount throughout the option’s life unless
there is evidence that supports that assumption
B36 Generally the assumption about expected dividends should be based on publicly
available information An entity that does not pay dividends and has no plans to
do so should assume an expected dividend yield of zero However an emerging
entity with no history of paying dividends might expect to begin paying
dividends during the expected lives of its employee share options Those entities
could use an average of their past dividend yield (zero) and the mean dividend
yield of an appropriately comparable peer group
Riskfree interest rate
B37 Typically the riskfree interest rate is the implied yield currently available on
zerocoupon government issues of the country in whose currency the exercise
price is expressed with a remaining term equal to the expected term of the
option being valued (based on the option’s remaining contractual life and taking
into account the effects of expected early exercise) It may be necessary to use an
appropriate substitute if no such government issues exist or circumstances
indicate that the implied yield on zerocoupon government issues is not
representative of the riskfree interest rate (for example in high inflation
economies) Also an appropriate substitute should be used if market
participants would typically determine the riskfree interest rate by using that
substitute rather than the implied yield of zerocoupon government issues
when estimating the fair value of an option with a life equal to the expected
term of the option being valued
Capital structure effects
B38 Typically third parties not the entity write traded share options When these
share options are exercised the writer delivers shares to the option holder
IFRS 2
IFRS FoundationA118Those shares are acquired from existing shareholders Hence the exercise of
traded share options has no dilutive effect
B39 In contrast if share options are written by the entity new shares are issued
when those share options are exercised (either actually issued or issued in
substance if shares previously repurchased and held in treasury are used)
Given that the shares will be issued at the exercise price rather than the current
market price at the date of exercise this actual or potential dilution might
reduce the share price so that the option holder does not make as large a gain
on exercise as on exercising an otherwise similar traded option that does not
dilute the share price
B40 Whether this has a significant effect on the value of the share options granted
depends on various factors such as the number of new shares that will be issued
on exercise of the options compared with the number of shares already issued
Also if the market already expects that the option grant will take place the
market may have already factored the potential dilution into the share price at
the date of grant
B41 However the entity should consider whether the possible dilutive effect of the
future exercise of the share options granted might have an impact on their
estimated fair value at grant date Option pricing models can be adapted to take
into account this potential dilutive effect
Modifications to equitysettled sharebased payment
arrangements
B42 Paragraph 27 requires that irrespective of any modifications to the terms and
conditions on which the equity instruments were granted or a cancellation or
settlement of that grant of equity instruments the entity should recognise as a
minimum the services received measured at the grant date fair value of the
equity instruments granted unless those equity instruments do not vest because
of failure to satisfy a vesting condition (other than a market condition) that was
specified at grant date In addition the entity should recognise the effects of
modifications that increase the total fair value of the sharebased payment
arrangement or are otherwise beneficial to the employee
B43 To apply the requirements of paragraph 27
(a) if the modification increases the fair value of the equity instruments
granted (eg by reducing the exercise price) measured immediately
before and after the modification the entity shall include the
incremental fair value granted in the measurement of the amount
recognised for services received as consideration for the equity
instruments granted The incremental fair value granted is the
difference between the fair value of the modified equity instrument and
that of the original equity instrument both estimated as at the date of
the modification If the modification occurs during the vesting period
the incremental fair value granted is included in the measurement of the
amount recognised for services received over the period from the
modification date until the date when the modified equity instruments
vest in addition to the amount based on the grant date fair value of the
original equity instruments which is recognised over the remainder of
IFRS 2
IFRS Foundation A119the original vesting period If the modification occurs after vesting date
the incremental fair value granted is recognised immediately or over the
vesting period if the employee is required to complete an additional
period of service before becoming unconditionally entitled to those
modified equity instruments
(b) similarly if the modification increases the number of equity instruments
granted the entity shall include the fair value of the additional equity
instruments granted measured at the date of the modification in the
measurement of the amount recognised for services received as
consideration for the equity instruments granted consistently with the
requirements in (a) above For example if the modification occurs
during the vesting period the fair value of the additional equity
instruments granted is included in the measurement of the amount
recognised for services received over the period from the modification
date until the date when the additional equity instruments vest in
addition to the amount based on the grant date fair value of the equity
instruments originally granted which is recognised over the remainder
of the original vesting period
(c) if the entity modifies the vesting conditions in a manner that is
beneficial to the employee for example by reducing the vesting period
or by modifying or eliminating a performance condition (other than a
market condition changes to which are accounted for in accordance
with (a) above) the entity shall take the modified vesting conditions into
account when applying the requirements of paragraphs 19–21
B44 Furthermore if the entity modifies the terms or conditions of the equity
instruments granted in a manner that reduces the total fair value of the
sharebased payment arrangement or is not otherwise beneficial to the
employee the entity shall nevertheless continue to account for the services
received as consideration for the equity instruments granted as if that
modification had not occurred (other than a cancellation of some or all the
equity instruments granted which shall be accounted for in accordance with
paragraph 28) For example
(a) if the modification reduces the fair value of the equity instruments
granted measured immediately before and after the modification the
entity shall not take into account that decrease in fair value and shall
continue to measure the amount recognised for services received as
consideration for the equity instruments based on the grant date fair
value of the equity instruments granted
(b) if the modification reduces the number of equity instruments granted to
an employee that reduction shall be accounted for as a cancellation of
that portion of the grant in accordance with the requirements of
paragraph 28
(c) if the entity modifies the vesting conditions in a manner that is not
beneficial to the employee for example by increasing the vesting period
or by modifying or adding a performance condition (other than a market
condition changes to which are accounted for in accordance with (a)
IFRS 2
IFRS FoundationA120above) the entity shall not take the modified vesting conditions into
account when applying the requirements of paragraphs 19–21
Sharebased payment transactions among group entities
(2009 amendments)
B45 Paragraphs 43A–43C address the accounting for sharebased payment
transactions among group entities in each entity’s separate or individual
financial statements Paragraphs B46–B61 discuss how to apply the
requirements in paragraphs 43A–43C As noted in paragraph 43D sharebased
payment transactions among group entities may take place for a variety of
reasons depending on facts and circumstances Therefore this discussion is not
exhaustive and assumes that when the entity receiving the goods or services has
no obligation to settle the transaction the transaction is a parent’s equity
contribution to the subsidiary regardless of any intragroup repayment
arrangements
B46 Although the discussion below focuses on transactions with employees it also
applies to similar sharebased payment transactions with suppliers of goods or
services other than employees An arrangement between a parent and its
subsidiary may require the subsidiary to pay the parent for the provision of the
equity instruments to the employees The discussion below does not address
how to account for such an intragroup payment arrangement
B47 Four issues are commonly encountered in sharebased payment transactions
among group entities For convenience the examples below discuss the issues
in terms of a parent and its subsidiary
Sharebased payment arrangements involving an entity’s own
equity instruments
B48 The first issue is whether the following transactions involving an entity’s own
equity instruments should be accounted for as equitysettled or as cashsettled in
accordance with the requirements of this IFRS
(a) an entity grants to its employees rights to equity instruments of the
entity (eg share options) and either chooses or is required to buy equity
instruments (ie treasury shares) from another party to satisfy its
obligations to its employees and
(b) an entity’s employees are granted rights to equity instruments of the
entity (eg share options) either by the entity itself or by its shareholders
and the shareholders of the entity provide the equity instruments
needed
B49 The entity shall account for sharebased payment transactions in which it
receives services as consideration for its own equity instruments as
equitysettled This applies regardless of whether the entity chooses or is
required to buy those equity instruments from another party to satisfy its
obligations to its employees under the sharebased payment arrangement It
also applies regardless of whether
(a) the employee’s rights to the entity’s equity instruments were granted by
the entity itself or by its shareholder(s) or
IFRS 2
IFRS Foundation A121(b) the sharebased payment arrangement was settled by the entity itself or
by its shareholder(s)
B50 If the shareholder has an obligation to settle the transaction with its investee’s
employees it provides equity instruments of its investee rather than its own
Therefore if its investee is in the same group as the shareholder in accordance
with paragraph 43C the shareholder shall measure its obligation in accordance
with the requirements applicable to cashsettled sharebased payment
transactions in the shareholder’s separate financial statements and those
applicable to equitysettled sharebased payment transactions in the
shareholder’s consolidated financial statements
Sharebased payment arrangements involving equity instruments
of the parent
B51 The second issue concerns sharebased payment transactions between two or
more entities within the same group involving an equity instrument of another
group entity For example employees of a subsidiary are granted rights to
equity instruments of its parent as consideration for the services provided to the
subsidiary
B52 Therefore the second issue concerns the following sharebased payment
arrangements
(a) a parent grants rights to its equity instruments directly to the employees
of its subsidiary the parent (not the subsidiary) has the obligation to
provide the employees of the subsidiary with the equity instruments
and
(b) a subsidiary grants rights to equity instruments of its parent to its
employees the subsidiary has the obligation to provide its employees
with the equity instruments
A parent grants rights to its equity instruments to the employees of its
subsidiary (paragraph B52(a))
B53 The subsidiary does not have an obligation to provide its parent’s equity
instruments to the subsidiary’s employees Therefore in accordance with
paragraph 43B the subsidiary shall measure the services received from its
employees in accordance with the requirements applicable to equitysettled
sharebased payment transactions and recognise a corresponding increase in
equity as a contribution from the parent
B54 The parent has an obligation to settle the transaction with the subsidiary’s
employees by providing the parent’s own equity instruments Therefore in
accordance with paragraph 43C the parent shall measure its obligation in
accordance with the requirements applicable to equitysettled sharebased
payment transactions
A subsidiary grants rights to equity instruments of its parent to its
employees (paragraph B52(b))
B55 Because the subsidiary does not meet either of the conditions in paragraph 43B
it shall account for the transaction with its employees as cashsettled This
IFRS 2
IFRS FoundationA122requirement applies irrespective of how the subsidiary obtains the equity
instruments to satisfy its obligations to its employees
Sharebased payment arrangements involving cashsettled
payments to employees
B56 The third issue is how an entity that receives goods or services from its suppliers
(including employees) should account for sharebased arrangements that are
cashsettled when the entity itself does not have any obligation to make the
required payments to its suppliers For example consider the following
arrangements in which the parent (not the entity itself) has an obligation to
make the required cash payments to the employees of the entity
(a) the employees of the entity will receive cash payments that are linked to
the price of its equity instruments
(b) the employees of the entity will receive cash payments that are linked to
the price of its parent’s equity instruments
B57 The subsidiary does not have an obligation to settle the transaction with its
employees Therefore the subsidiary shall account for the transaction with its
employees as equitysettled and recognise a corresponding increase in equity as
a contribution from its parent The subsidiary shall remeasure the cost of the
transaction subsequently for any changes resulting from nonmarket vesting
conditions not being met in accordance with paragraphs 19–21 This differs
from the measurement of the transaction as cashsettled in the consolidated
financial statements of the group
B58 Because the parent has an obligation to settle the transaction with the
employees and the consideration is cash the parent (and the consolidated
group) shall measure its obligation in accordance with the requirements
applicable to cashsettled sharebased payment transactions in paragraph 43C
Transfer of employees between group entities
B59 The fourth issue relates to group sharebased payment arrangements that
involve employees of more than one group entity For example a parent might
grant rights to its equity instruments to the employees of its subsidiaries
conditional upon the completion of continuing service with the group for a
specified period An employee of one subsidiary might transfer employment to
another subsidiary during the specified vesting period without the employee’s
rights to equity instruments of the parent under the original sharebased
payment arrangement being affected If the subsidiaries have no obligation to
settle the sharebased payment transaction with their employees they account
for it as an equitysettled transaction Each subsidiary shall measure the services
received from the employee by reference to the fair value of the equity
instruments at the date the rights to those equity instruments were originally
granted by the parent as defined in Appendix A and the proportion of the
vesting period the employee served with each subsidiary
B60 If the subsidiary has an obligation to settle the transaction with its employees in
its parent’s equity instruments it accounts for the transaction as cashsettled
Each subsidiary shall measure the services received on the basis of grant date fair
value of the equity instruments for the proportion of the vesting period the
IFRS 2
IFRS Foundation A123employee served with each subsidiary In addition each subsidiary shall
recognise any change in the fair value of the equity instruments during the
employee’s service period with each subsidiary
B61 Such an employee after transferring between group entities may fail to satisfy a
vesting condition other than a market condition as defined in Appendix A
eg the employee leaves the group before completing the service period In this
case because the vesting condition is service to the group each subsidiary shall
adjust the amount previously recognised in respect of the services received from
the employee in accordance with the principles in paragraph 19 Hence if the
rights to the equity instruments granted by the parent do not vest because of an
employee’s failure to meet a vesting condition other than a market condition
no amount is recognised on a cumulative basis for the services received from
that employee in the financial statements of any group entity
IFRS 2
IFRS FoundationA124Appendix C
Amendments to other IFRSs
The amendments in this appendix become effective for annual financial statements covering periods
beginning on or after 1 January 2005 If an entity applies this Standard for an earlier period these
amendments become effective for that earlier period
*****
The amendments contained in this appendix when this Standard was issued in 2004 have been
incorporated into the relevant Standards published in this volume
IFRS 2
IFRS Foundation A125IFRS Standard 3
Business Combinations
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 22
Business Combinations which had originally been issued by the International Accounting
Standards Committee in October 1998 IAS 22 was itself a revised version of IAS 22 Business
Combinations that was issued in November 1983
In March 2004 the Board replaced IAS 22 and three related Interpretations (SIC9 Business
Combinations—Classification either as Acquisitions or Unitings of Interests SIC22 Business
Combinations—Subsequent Adjustment of Fair Values and Goodwill Initially Reported and SIC28
Business Combinations—Date of Exchange’ and Fair Value of Equity Instruments) when it issued
IFRS 3 Business Combinations
Minor amendments were made to IFRS 3 in March 2004 by IFRS 5 Noncurrent Assets Held for
Sale and Discontinued Operations and IAS 1 Presentation of Financial Statements (as revised in
September 2007) which amended the terminology used throughout the Standards
including IFRS 3
In January 2008 the Board issued a revised IFRS 3
Other Standards have made minor consequential amendments to IFRS 3 They include
Improvements to IFRSs (issued in May 2010) IFRS 10 Consolidated Financial Statements (issued
May 2011) IFRS 13 Fair Value Measurement (issued May 2011) Investment Entities (Amendments
to IFRS 10 IFRS 12 and IAS 27) (issued October 2012) IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued November 2013) Annual
Improvements to IFRSs 2010–2012 Cycle (issued December 2013) Annual Improvements to IFRSs
2011–2013 Cycle (issued December 2013) IFRS 15 Revenue from Contracts with Customers (issued
May 2014) IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases (issued January
2016)
IFRS 3
IFRS Foundation A127CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 3
BUSINESS COMBINATIONS
OBJECTIVE 1
SCOPE 2
IDENTIFYING A BUSINESS COMBINATION 3
THE ACQUISITION METHOD 4
Identifying the acquirer 6
Determining the acquisition date 8
Recognising and measuring the identifiable assets acquired the liabilities
assumed and any noncontrolling interest in the acquiree 10
Recognising and measuring goodwill or a gain from a bargain purchase 32
Additional guidance for applying the acquisition method to particular types
of business combinations 41
Measurement period 45
Determining what is part of the business combination transaction 51
SUBSEQUENT MEASUREMENT AND ACCOUNTING 54
Reacquired rights 55
Contingent liabilities 56
Indemnification assets 57
Contingent consideration 58
DISCLOSURES 59
EFFECTIVE DATE AND TRANSITION 64
Effective date 64
Transition 65
REFERENCE TO IFRS 9 67A
WITHDRAWAL OF IFRS 3 (2004) 68
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 3 ISSUED IN JANUARY
2008 BASIS FOR CONCLUSIONS
APPENDIX
Amendments to the Basis for Conclusions on other IFRSs
IFRS 3
IFRS FoundationA128DISSENTING OPINIONS
ILLUSTRATIVE EXAMPLES
APPENDIX
Amendments to guidance on other IFRSs
COMPARISON OF IFRS 3 (AS REVISED IN 2008) AND SFAS 141(R)
TABLE OF CONCORDANCE
IFRS 3
IFRS Foundation A129International Financial Reporting Standard 3 Business Combinations (IFRS 3) is set out in
paragraphs 1–68 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the IFRS Definitions of other terms are given in the
Glossary for International Financial Reporting Standards IFRS 3 should be read in the
context of its objective and the Basis for Conclusions the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance
IFRS 3
IFRS FoundationA130Introduction
Reasons for issuing the IFRS
IN1 The revised International Financial Reporting Standard 3 Business Combinations
(IFRS 3) is part of a joint effort by the International Accounting Standards Board
(IASB) and the US Financial Accounting Standards Board (FASB) to improve
financial reporting while promoting the international convergence of
accounting standards Each board decided to address the accounting for
business combinations in two phases The IASB and the FASB deliberated the
first phase separately The FASB concluded its first phase in June 2001 by issuing
FASB Statement No 141 Business Combinations The IASB concluded its first phase
in March 2004 by issuing the previous version of IFRS 3 Business Combinations The
boards’ primary conclusion in the first phase was that virtually all business
combinations are acquisitions Accordingly the boards decided to require the
use of one method of accounting for business combinations—the acquisition
method
IN2 The second phase of the project addressed the guidance for applying the
acquisition method The boards decided that a significant improvement could
be made to financial reporting if they had similar standards for accounting for
business combinations Thus they decided to conduct the second phase of the
project as a joint effort with the objective of reaching the same conclusions The
boards concluded the second phase of the project by issuing this IFRS and FASB
Statement No 141 (revised 2007) Business Combinations and the related
amendments to IAS 27 Consolidated and Separate Financial Statements and FASB
Statement No 160 Noncontrolling Interests in Consolidated Financial Statements1
IN3 The IFRS replaces IFRS 3 (as issued in 2004) and comes into effect for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009 Earlier
application is permitted provided that IAS 27 (as amended in 2008) is applied at
the same time
Main features of the IFRS
IN4 The objective of the IFRS is to enhance the relevance reliability and
comparability of the information that an entity provides in its financial
statements about a business combination and its effects It does that by
establishing principles and requirements for how an acquirer
(a) recognises and measures in its financial statements the identifiable
assets acquired the liabilities assumed and any noncontrolling interest
in the acquiree
1 The requirements for consolidated financial statements in IAS 27 were superseded by IFRS 10
Consolidated Financial Statements issued in May 2011 Topic 810 Consolidation in the FASB Accounting
Standards Codification® codified the guidance in SFAS 160
IFRS 3
IFRS Foundation A131(b) recognises and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and
(c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination
Core principle
IN5 An acquirer of a business recognises the assets acquired and liabilities assumed
at their acquisitiondate fair values and discloses information that enables users
to evaluate the nature and financial effects of the acquisition
Applying the acquisition method
IN6 A business combination must be accounted for by applying the acquisition
method unless it is a combination involving entities or businesses under
common control or the acquiree is a subsidiary of an investment entity as
defined in IFRS 10 Consolidated Financial Statements which is required to be
measured at fair value through profit or loss One of the parties to a business
combination can always be identified as the acquirer being the entity that
obtains control of the other business (the acquiree) Formations of a joint
venture or the acquisition of an asset or a group of assets that does not
constitute a business are not business combinations
IN7 The IFRS establishes principles for recognising and measuring the identifiable
assets acquired the liabilities assumed and any noncontrolling interest in the
acquiree Any classifications or designations made in recognising these items
must be made in accordance with the contractual terms economic conditions
acquirer’s operating or accounting policies and other factors that exist at the
acquisition date
IN8 Each identifiable asset and liability is measured at its acquisitiondate fair value
Noncontrolling interests in an acquiree that are present ownership interests
and entitle their holders to a proportionate share of the entity’s net assets in the
event of liquidation are measured at either fair value or the present ownership
instruments’ proportionate share in the recognised amounts of the acquiree’s
net identifiable assets All other components of noncontrolling interests shall
be measured at their acquisitiondate fair values unless another measurement
basis is required by IFRSs
IN9 The IFRS provides limited exceptions to these recognition and measurement
principles
(a) Leases and insurance contracts are required to be classified on the basis
of the contractual terms and other factors at the inception of the
contract (or when the terms have changed) rather than on the basis of
the factors that exist at the acquisition date
(b) Only those contingent liabilities assumed in a business combination that
are a present obligation and can be measured reliably are recognised
(c) Some assets and liabilities are required to be recognised or measured in
accordance with other IFRSs rather than at fair value The assets and
liabilities affected are those falling within the scope of IAS 12 Income
IFRS 3
IFRS FoundationA132Taxes IAS 19 Employee Benefits IFRS 2 Sharebased Payment and IFRS 5
Noncurrent Assets Held for Sale and Discontinued Operations
(d) There are special requirements for measuring a reacquired right
(e) Indemnification assets are recognised and measured on a basis that is
consistent with the item that is subject to the indemnification even if
that measure is not fair value
IN10 The IFRS requires the acquirer having recognised the identifiable assets the
liabilities and any noncontrolling interests to identify any difference between
(a) the aggregate of the consideration transferred any noncontrolling
interest in the acquiree and in a business combination achieved in
stages the acquisitiondate fair value of the acquirer’s previously held
equity interest in the acquiree and
(b) the net identifiable assets acquired
The difference will generally be recognised as goodwill If the acquirer has
made a gain from a bargain purchase that gain is recognised in profit or loss
IN11 The consideration transferred in a business combination (including any
contingent consideration) is measured at fair value
IN12 In general an acquirer measures and accounts for assets acquired and liabilities
assumed or incurred in a business combination after the business combination
has been completed in accordance with other applicable IFRSs However the
IFRS provides accounting requirements for reacquired rights contingent
liabilities contingent consideration and indemnification assets
Disclosure
IN13 The IFRS requires the acquirer to disclose information that enables users of its
financial statements to evaluate the nature and financial effect of business
combinations that occurred during the current reporting period or after the
reporting date but before the financial statements are authorised for issue After
a business combination the acquirer must disclose any adjustments recognised
in the current reporting period that relate to business combinations that
occurred in the current or previous reporting periods
IFRS 3
IFRS Foundation A133International Financial Reporting Standard 3
Business Combinations
Objective
1 The objective of this IFRS is to improve the relevance reliability and
comparability of the information that a reporting entity provides in its financial
statements about a business combination and its effects To accomplish that this
IFRS establishes principles and requirements for how the acquirer
(a) recognises and measures in its financial statements the identifiable assets
acquired the liabilities assumed and any noncontrolling interest in the
acquiree
(b) recognises and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and
(c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination
Scope
2 This IFRS applies to a transaction or other event that meets the definition of a
business combination This IFRS does not apply to
(a) the accounting for the formation of a joint arrangement in the financial
statements of the joint arrangement itself
(b) the acquisition of an asset or a group of assets that does not constitute a
business In such cases the acquirer shall identify and recognise the
individual identifiable assets acquired (including those assets that meet
the definition of and recognition criteria for intangible assets in IAS 38
Intangible Assets) and liabilities assumed The cost of the group shall be
allocated to the individual identifiable assets and liabilities on the basis
of their relative fair values at the date of purchase Such a transaction or
event does not give rise to goodwill
(c) a combination of entities or businesses under common control
(paragraphs B1–B4 provide related application guidance)
2A The requirements of this Standard do not apply to the acquisition by an
investment entity as defined in IFRS 10 Consolidated Financial Statementsofan
investment in a subsidiary that is required to be measured at fair value through
profit or loss
Identifying a business combination
3 An entity shall determine whether a transaction or other event is a
business combination by applying the definition in this IFRS which
requires that the assets acquired and liabilities assumed constitute a
business If the assets acquired are not a business the reporting entity
IFRS 3
IFRS FoundationA134shall account for the transaction or other event as an asset acquisition
Paragraphs B5–B12 provide guidance on identifying a business
combination and the definition of a business
The acquisition method
4 An entity shall account for each business combination by applying the
acquisition method
5 Applying the acquisition method requires
(a) identifying the acquirer
(b) determining the acquisition date
(c) recognising and measuring the identifiable assets acquired the
liabilities assumed and any noncontrolling interest in the acquiree and
(d) recognising and measuring goodwill or a gain from a bargain purchase
Identifying the acquirer
6 For each business combination one of the combining entities shall be
identified as the acquirer
7 The guidance in IFRS 10 shall be used to identify the acquirer—the entity that
obtains control of another entity ie the acquiree If a business combination has
occurred but applying the guidance in IFRS 10 does not clearly indicate which of
the combining entities is the acquirer the factors in paragraphs B14–B18 shall
be considered in making that determination
Determining the acquisition date
8 The acquirer shall identify the acquisition date which is the date on
which it obtains control of the acquiree
9 The date on which the acquirer obtains control of the acquiree is generally the
date on which the acquirer legally transfers the consideration acquires the
assets and assumes the liabilities of the acquiree—the closing date However the
acquirer might obtain control on a date that is either earlier or later than the
closing date For example the acquisition date precedes the closing date if a
written agreement provides that the acquirer obtains control of the acquiree on
a date before the closing date An acquirer shall consider all pertinent facts and
circumstances in identifying the acquisition date
Recognising and measuring the identifiable assets
acquired the liabilities assumed and any noncontrolling
interest in the acquiree
Recognition principle
10 As of the acquisition date the acquirer shall recognise separately from
goodwill the identifiable assets acquired the liabilities assumed and any
noncontrolling interest in the acquiree Recognition of identifiable
assets acquired and liabilities assumed is subject to the conditions
specified in paragraphs 11 and 12
IFRS 3
IFRS Foundation A135Recognition conditions
11 To qualify for recognition as part of applying the acquisition method the
identifiable assets acquired and liabilities assumed must meet the definitions of
assets and liabilities in the Framework2 for the Preparation and Presentation of
Financial Statements at the acquisition date For example costs the acquirer
expects but is not obliged to incur in the future to effect its plan to exit an
activity of an acquiree or to terminate the employment of or relocate an
acquiree’s employees are not liabilities at the acquisition date Therefore the
acquirer does not recognise those costs as part of applying the acquisition
method Instead the acquirer recognises those costs in its postcombination
financial statements in accordance with other IFRSs
12 In addition to qualify for recognition as part of applying the acquisition
method the identifiable assets acquired and liabilities assumed must be part of
what the acquirer and the acquiree (or its former owners) exchanged in the
business combination transaction rather than the result of separate
transactions The acquirer shall apply the guidance in paragraphs 51–53 to
determine which assets acquired or liabilities assumed are part of the exchange
for the acquiree and which if any are the result of separate transactions to be
accounted for in accordance with their nature and the applicable IFRSs
13 The acquirer’s application of the recognition principle and conditions may
result in recognising some assets and liabilities that the acquiree had not
previously recognised as assets and liabilities in its financial statements For
example the acquirer recognises the acquired identifiable intangible assets
such as a brand name a patent or a customer relationship that the acquiree did
not recognise as assets in its financial statements because it developed them
internally and charged the related costs to expense
14 Paragraphs B31–B40 provide guidance on recognising intangible assets
Paragraphs 22–28B specify the types of identifiable assets and liabilities that
include items for which this IFRS provides limited exceptions to the recognition
principle and conditions
Classifying or designating identifiable assets acquired and liabilities
assumed in a business combination
15 At the acquisition date the acquirer shall classify or designate the
identifiable assets acquired and liabilities assumed as necessary to apply
other IFRSs subsequently The acquirer shall make those classifications
or designations on the basis of the contractual terms economic
conditions its operating or accounting policies and other pertinent
conditions as they exist at the acquisition date
16 In some situations IFRSs provide for different accounting depending on how an
entity classifies or designates a particular asset or liability Examples of
2 IASC’s Framework for the Preparation and Presentation of Financial Statements was adopted by the IASB in
2001 In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial
Reporting
IFRS 3
IFRS FoundationA136classifications or designations that the acquirer shall make on the basis of the
pertinent conditions as they exist at the acquisition date include but are not
limited to
(a) classification of particular financial assets and liabilities as measured at
fair value through profit or loss or at amortised cost or as a financial
asset measured at fair value through other comprehensive income in
accordance with IFRS 9 Financial Instruments
(b) designation of a derivative instrument as a hedging instrument in
accordance with IFRS 9 and
(c) assessment of whether an embedded derivative should be separated from
a host contract in accordance with IFRS 9 (which is a matter of
classification’ as this IFRS uses that term)
17 This IFRS provides two exceptions to the principle in paragraph 15
(a) classification of a lease contract in which the acquiree is the lessor as
either an operating lease or a finance lease in accordance with IFRS 16
Leases and
(b) classification of a contract as an insurance contract in accordance with
IFRS 4 Insurance Contracts
The acquirer shall classify those contracts on the basis of the contractual terms
and other factors at the inception of the contract (or if the terms of the contract
have been modified in a manner that would change its classification at the date
of that modification which might be the acquisition date)
Measurement principle
18 The acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisitiondate fair values
19 For each business combination the acquirer shall measure at the acquisition
date components of noncontrolling interests in the acquiree that are present
ownership interests and entitle their holders to a proportionate share of the
entity’s net assets in the event of liquidation at either
(a) fair value or
(b) the present ownership instruments’ proportionate share in the
recognised amounts of the acquiree’s identifiable net assets
All other components of noncontrolling interests shall be measured at their
acquisitiondate fair values unless another measurement basis is required by
IFRSs
20 Paragraphs 24–31 specify the types of identifiable assets and liabilities that
include items for which this IFRS provides limited exceptions to the
measurement principle
Exceptions to the recognition or measurement principles
21 This IFRS provides limited exceptions to its recognition and measurement
principles Paragraphs 22–31 specify both the particular items for which
IFRS 3
IFRS Foundation A137exceptions are provided and the nature of those exceptions The acquirer shall
account for those items by applying the requirements in paragraphs 22–31
which will result in some items being
(a) recognised either by applying recognition conditions in addition to those
in paragraphs 11 and 12 or by applying the requirements of other IFRSs
with results that differ from applying the recognition principle and
conditions
(b) measured at an amount other than their acquisitiondate fair values
Exception to the recognition principle
Contingent liabilities
22 IAS 37 Provisions Contingent Liabilities and Contingent Assets defines a contingent
liability as
(a) a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or nonoccurrence of one or
more uncertain future events not wholly within the control of the entity
or
(b) a present obligation that arises from past events but is not recognised
because
(i) it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation or
(ii) the amount of the obligation cannot be measured with sufficient
reliability
23 The requirements in IAS 37 do not apply in determining which contingent
liabilities to recognise as of the acquisition date Instead the acquirer shall
recognise as of the acquisition date a contingent liability assumed in a business
combination if it is a present obligation that arises from past events and its fair
value can be measured reliably Therefore contrary to IAS 37 the acquirer
recognises a contingent liability assumed in a business combination at the
acquisition date even if it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation
Paragraph 56 provides guidance on the subsequent accounting for contingent
liabilities
Exceptions to both the recognition and measurement principles
Income taxes
24 The acquirer shall recognise and measure a deferred tax asset or liability arising
from the assets acquired and liabilities assumed in a business combination in
accordance with IAS 12 Income Taxes
25 The acquirer shall account for the potential tax effects of temporary differences
and carryforwards of an acquiree that exist at the acquisition date or arise as a
result of the acquisition in accordance with IAS 12
IFRS 3
IFRS FoundationA138Employee benefits
26 The acquirer shall recognise and measure a liability (or asset if any) related to
the acquiree’s employee benefit arrangements in accordance with IAS 19
Employee Benefits
Indemnification assets
27 The seller in a business combination may contractually indemnify the acquirer
for the outcome of a contingency or uncertainty related to all or part of a
specific asset or liability For example the seller may indemnify the acquirer
against losses above a specified amount on a liability arising from a particular
contingency in other words the seller will guarantee that the acquirer’s
liability will not exceed a specified amount As a result the acquirer obtains an
indemnification asset The acquirer shall recognise an indemnification asset at
the same time that it recognises the indemnified item measured on the same
basis as the indemnified item subject to the need for a valuation allowance for
uncollectible amounts Therefore if the indemnification relates to an asset or a
liability that is recognised at the acquisition date and measured at its
acquisitiondate fair value the acquirer shall recognise the indemnification
asset at the acquisition date measured at its acquisitiondate fair value For an
indemnification asset measured at fair value the effects of uncertainty about
future cash flows because of collectibility considerations are included in the fair
value measure and a separate valuation allowance is not necessary
(paragraph B41 provides related application guidance)
28 In some circumstances the indemnification may relate to an asset or a liability
that is an exception to the recognition or measurement principles For example
an indemnification may relate to a contingent liability that is not recognised at
the acquisition date because its fair value is not reliably measurable at that date
Alternatively an indemnification may relate to an asset or a liability for
example one that results from an employee benefit that is measured on a basis
other than acquisitiondate fair value In those circumstances the
indemnification asset shall be recognised and measured using assumptions
consistent with those used to measure the indemnified item subject to
management’s assessment of the collectibility of the indemnification asset and
any contractual limitations on the indemnified amount Paragraph 57 provides
guidance on the subsequent accounting for an indemnification asset
Leases in which the acquiree is the lessee
28A The acquirer shall recognise rightofuse assets and lease liabilities for leases
identified in accordance with IFRS 16 in which the acquiree is the lessee The
acquirer is not required to recognise rightofuse assets and lease liabilities for
(a) leases for which the lease term (as defined in IFRS 16) ends within
12 months of the acquisition date or
(b) leases for which the underlying asset is of low value (as described in
paragraphs B3–B8 of IFRS 16)
28B The acquirer shall measure the lease liability at the present value of the
remaining lease payments (as defined in IFRS 16) as if the acquired lease were a
new lease at the acquisition date The acquirer shall measure the rightofuse
IFRS 3
IFRS Foundation A139asset at the same amount as the lease liability adjusted to reflect favourable or
unfavourable terms of the lease when compared with market terms
Exceptions to the measurement principle
Reacquired rights
29 The acquirer shall measure the value of a reacquired right recognised as an
intangible asset on the basis of the remaining contractual term of the related
contract regardless of whether market participants would consider potential
contractual renewals when measuring its fair value Paragraphs B35 and B36
provide related application guidance
Sharebased payment transactions
30 The acquirer shall measure a liability or an equity instrument related to
sharebased payment transactions of the acquiree or the replacement of an
acquiree’s sharebased payment transactions with sharebased payment
transactions of the acquirer in accordance with the method in IFRS 2 Sharebased
Payment at the acquisition date (This IFRS refers to the result of that method as
the marketbased measure’ of the sharebased payment transaction)
Assets held for sale
31 The acquirer shall measure an acquired noncurrent asset (or disposal group)
that is classified as held for sale at the acquisition date in accordance with IFRS 5
Noncurrent Assets Held for Sale and Discontinued Operations at fair value less costs to
sell in accordance with paragraphs 15–18 of that IFRS
Recognising and measuring goodwill or a gain from a
bargain purchase
32 The acquirer shall recognise goodwill as of the acquisition date measured
as the excess of (a) over (b) below
(a) the aggregate of
(i) the consideration transferred measured in accordance with
this IFRS which generally requires acquisitiondate fair
value (see paragraph 37)
(ii) the amount of any noncontrolling interest in the acquiree
measured in accordance with this IFRS and
(iii) in a business combination achieved in stages (see
paragraphs 41 and 42) the acquisitiondate fair value of the
acquirer’s previously held equity interest in the acquiree
(b) the net of the acquisitiondate amounts of the identifiable assets
acquired and the liabilities assumed measured in accordance with
this IFRS
33 In a business combination in which the acquirer and the acquiree (or its former
owners) exchange only equity interests the acquisitiondate fair value of the
acquiree’s equity interests may be more reliably measurable than the
acquisitiondate fair value of the acquirer’s equity interests If so the acquirer
shall determine the amount of goodwill by using the acquisitiondate fair value
IFRS 3
IFRS FoundationA140of the acquiree’s equity interests instead of the acquisitiondate fair value of the
equity interests transferred To determine the amount of goodwill in a business
combination in which no consideration is transferred the acquirer shall use the
acquisitiondate fair value of the acquirer’s interest in the acquiree in place of
the acquisitiondate fair value of the consideration transferred
(paragraph 32(a)(i)) Paragraphs B46–B49 provide related application guidance
Bargain purchases
34 Occasionally an acquirer will make a bargain purchase which is a business
combination in which the amount in paragraph 32(b) exceeds the aggregate of
the amounts specified in paragraph 32(a) If that excess remains after applying
the requirements in paragraph 36 the acquirer shall recognise the resulting
gain in profit or loss on the acquisition date The gain shall be attributed to the
acquirer
35 A bargain purchase might happen for example in a business combination that
is a forced sale in which the seller is acting under compulsion However the
recognition or measurement exceptions for particular items discussed in
paragraphs 22–31 may also result in recognising a gain (or change the amount
of a recognised gain) on a bargain purchase
36 Before recognising a gain on a bargain purchase the acquirer shall reassess
whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and shall recognise any additional assets or liabilities that are
identified in that review The acquirer shall then review the procedures used to
measure the amounts this IFRS requires to be recognised at the acquisition date
for all of the following
(a) the identifiable assets acquired and liabilities assumed
(b) the noncontrolling interest in the acquiree if any
(c) for a business combination achieved in stages the acquirer’s previously
held equity interest in the acquiree and
(d) the consideration transferred
The objective of the review is to ensure that the measurements appropriately
reflect consideration of all available information as of the acquisition date
Consideration transferred
37 The consideration transferred in a business combination shall be measured at
fair value which shall be calculated as the sum of the acquisitiondate fair
values of the assets transferred by the acquirer the liabilities incurred by the
acquirer to former owners of the acquiree and the equity interests issued by the
acquirer (However any portion of the acquirer’s sharebased payment awards
exchanged for awards held by the acquiree’s employees that is included in
consideration transferred in the business combination shall be measured in
accordance with paragraph 30 rather than at fair value) Examples of potential
forms of consideration include cash other assets a business or a subsidiary of
the acquirer contingent consideration ordinary or preference equity instruments
options warrants and member interests of mutual entities
IFRS 3
IFRS Foundation A14138 The consideration transferred may include assets or liabilities of the acquirer
that have carrying amounts that differ from their fair values at the acquisition
date (for example nonmonetary assets or a business of the acquirer) If so the
acquirer shall remeasure the transferred assets or liabilities to their fair values
as of the acquisition date and recognise the resulting gains or losses if any in
profit or loss However sometimes the transferred assets or liabilities remain
within the combined entity after the business combination (for example
because the assets or liabilities were transferred to the acquiree rather than to
its former owners) and the acquirer therefore retains control of them In that
situation the acquirer shall measure those assets and liabilities at their carrying
amounts immediately before the acquisition date and shall not recognise a gain
or loss in profit or loss on assets or liabilities it controls both before and after the
business combination
Contingent consideration
39 The consideration the acquirer transfers in exchange for the acquiree includes
any asset or liability resulting from a contingent consideration arrangement (see
paragraph 37) The acquirer shall recognise the acquisitiondate fair value of
contingent consideration as part of the consideration transferred in exchange
for the acquiree
40 The acquirer shall classify an obligation to pay contingent consideration that
meets the definition of a financial instrument as a financial liability or as equity
on the basis of the definitions of an equity instrument and a financial liability in
paragraph 11 of IAS 32 Financial Instruments Presentation The acquirer shall
classify as an asset a right to the return of previously transferred consideration if
specified conditions are met Paragraph 58 provides guidance on the
subsequent accounting for contingent consideration
Additional guidance for applying the acquisition method
to particular types of business combinations
A business combination achieved in stages
41 An acquirer sometimes obtains control of an acquiree in which it held an equity
interest immediately before the acquisition date For example on 31 December
20X1 Entity A holds a 35 per cent noncontrolling equity interest in Entity B On
that date Entity A purchases an additional 40 per cent interest in Entity B
which gives it control of Entity B This IFRS refers to such a transaction as a
business combination achieved in stages sometimes also referred to as a step
acquisition
42 In a business combination achieved in stages the acquirer shall remeasure its
previously held equity interest in the acquiree at its acquisitiondate fair value
and recognise the resulting gain or loss if any in profit or loss or other
comprehensive income as appropriate In prior reporting periods the acquirer
may have recognised changes in the value of its equity interest in the acquiree in
other comprehensive income If so the amount that was recognised in other
comprehensive income shall be recognised on the same basis as would be
required if the acquirer had disposed directly of the previously held equity
interest
IFRS 3
IFRS FoundationA142A business combination achieved without the transfer of
consideration
43 An acquirer sometimes obtains control of an acquiree without transferring
consideration The acquisition method of accounting for a business
combination applies to those combinations Such circumstances include
(a) The acquiree repurchases a sufficient number of its own shares for an
existing investor (the acquirer) to obtain control
(b) Minority veto rights lapse that previously kept the acquirer from
controlling an acquiree in which the acquirer held the majority voting
rights
(c) The acquirer and acquiree agree to combine their businesses by contract
alone The acquirer transfers no consideration in exchange for control of
an acquiree and holds no equity interests in the acquiree either on the
acquisition date or previously Examples of business combinations
achieved by contract alone include bringing two businesses together in a
stapling arrangement or forming a dual listed corporation
44 In a business combination achieved by contract alone the acquirer shall
attribute to the owners of the acquiree the amount of the acquiree’s net assets
recognised in accordance with this IFRS In other words the equity interests in
the acquiree held by parties other than the acquirer are a noncontrolling
interest in the acquirer’s postcombination financial statements even if the
result is that all of the equity interests in the acquiree are attributed to the
noncontrolling interest
Measurement period
45 If the initial accounting for a business combination is incomplete by the
end of the reporting period in which the combination occurs the
acquirer shall report in its financial statements provisional amounts for
the items for which the accounting is incomplete During the
measurement period the acquirer shall retrospectively adjust the
provisional amounts recognised at the acquisition date to reflect new
information obtained about facts and circumstances that existed as of
the acquisition date and if known would have affected the measurement
of the amounts recognised as of that date During the measurement
period the acquirer shall also recognise additional assets or liabilities if
new information is obtained about facts and circumstances that existed
as of the acquisition date and if known would have resulted in the
recognition of those assets and liabilities as of that date The
measurement period ends as soon as the acquirer receives the
information it was seeking about facts and circumstances that existed as
of the acquisition date or learns that more information is not obtainable
However the measurement period shall not exceed one year from the
acquisition date
46 The measurement period is the period after the acquisition date during which
the acquirer may adjust the provisional amounts recognised for a business
combination The measurement period provides the acquirer with a reasonable
IFRS 3
IFRS Foundation A143time to obtain the information necessary to identify and measure the following
as of the acquisition date in accordance with the requirements of this IFRS
(a) the identifiable assets acquired liabilities assumed and any
noncontrolling interest in the acquiree
(b) the consideration transferred for the acquiree (or the other amount used
in measuring goodwill)
(c) in a business combination achieved in stages the equity interest in the
acquiree previously held by the acquirer and
(d) the resulting goodwill or gain on a bargain purchase
47 The acquirer shall consider all pertinent factors in determining whether
information obtained after the acquisition date should result in an adjustment
to the provisional amounts recognised or whether that information results from
events that occurred after the acquisition date Pertinent factors include the
date when additional information is obtained and whether the acquirer can
identify a reason for a change to provisional amounts Information that is
obtained shortly after the acquisition date is more likely to reflect circumstances
that existed at the acquisition date than is information obtained several months
later For example unless an intervening event that changed its fair value can
be identified the sale of an asset to a third party shortly after the acquisition
date for an amount that differs significantly from its provisional fair value
measured at that date is likely to indicate an error in the provisional amount
48 The acquirer recognises an increase (decrease) in the provisional amount
recognised for an identifiable asset (liability) by means of a decrease (increase) in
goodwill However new information obtained during the measurement period
may sometimes result in an adjustment to the provisional amount of more than
one asset or liability For example the acquirer might have assumed a liability
to pay damages related to an accident in one of the acquiree’s facilities part or
all of which are covered by the acquiree’s liability insurance policy If the
acquirer obtains new information during the measurement period about the
acquisitiondate fair value of that liability the adjustment to goodwill resulting
from a change to the provisional amount recognised for the liability would be
offset (in whole or in part) by a corresponding adjustment to goodwill resulting
from a change to the provisional amount recognised for the claim receivable
from the insurer
49 During the measurement period the acquirer shall recognise adjustments to the
provisional amounts as if the accounting for the business combination had been
completed at the acquisition date Thus the acquirer shall revise comparative
information for prior periods presented in financial statements as needed
including making any change in depreciation amortisation or other income
effects recognised in completing the initial accounting
50 After the measurement period ends the acquirer shall revise the accounting for
a business combination only to correct an error in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors
IFRS 3
IFRS FoundationA144Determining what is part of the business combination
transaction
51 The acquirer and the acquiree may have a preexisting relationship or
other arrangement before negotiations for the business combination
began or they may enter into an arrangement during the negotiations
that is separate from the business combination In either situation the
acquirer shall identify any amounts that are not part of what the acquirer
and the acquiree (or its former owners) exchanged in the business
combination ie amounts that are not part of the exchange for the
acquiree The acquirer shall recognise as part of applying the acquisition
method only the consideration transferred for the acquiree and the assets
acquired and liabilities assumed in the exchange for the acquiree
Separate transactions shall be accounted for in accordance with the
relevant IFRSs
52 A transaction entered into by or on behalf of the acquirer or primarily for the
benefit of the acquirer or the combined entity rather than primarily for the
benefit of the acquiree (or its former owners) before the combination is likely to
be a separate transaction The following are examples of separate transactions
that are not to be included in applying the acquisition method
(a) a transaction that in effect settles preexisting relationships between the
acquirer and acquiree
(b) a transaction that remunerates employees or former owners of the
acquiree for future services and
(c) a transaction that reimburses the acquiree or its former owners for
paying the acquirer’s acquisitionrelated costs
Paragraphs B50–B62 provide related application guidance
Acquisitionrelated costs
53 Acquisitionrelated costs are costs the acquirer incurs to effect a business
combination Those costs include finder’s fees advisory legal accounting
valuation and other professional or consulting fees general administrative
costs including the costs of maintaining an internal acquisitions department
and costs of registering and issuing debt and equity securities The acquirer
shall account for acquisitionrelated costs as expenses in the periods in which
the costs are incurred and the services are received with one exception The
costs to issue debt or equity securities shall be recognised in accordance with
IAS 32 and IFRS 9
Subsequent measurement and accounting
54 In general an acquirer shall subsequently measure and account for assets
acquired liabilities assumed or incurred and equity instruments issued
in a business combination in accordance with other applicable IFRSs for
those items depending on their nature However this IFRS provides
IFRS 3
IFRS Foundation A145guidance on subsequently measuring and accounting for the following
assets acquired liabilities assumed or incurred and equity instruments
issued in a business combination
(a) reacquired rights
(b) contingent liabilities recognised as of the acquisition date
(c) indemnification assets and
(d) contingent consideration
Paragraph B63 provides related application guidance
Reacquired rights
55 A reacquired right recognised as an intangible asset shall be amortised over the
remaining contractual period of the contract in which the right was granted
An acquirer that subsequently sells a reacquired right to a third party shall
include the carrying amount of the intangible asset in determining the gain or
loss on the sale
Contingent liabilities
56 After initial recognition and until the liability is settled cancelled or expires the
acquirer shall measure a contingent liability recognised in a business
combination at the higher of
(a) the amount that would be recognised in accordance with IAS 37 and
(b) the amount initially recognised less if appropriate the cumulative
amount of income recognised in accordance with the principles of
IFRS 15 Revenue from Contracts with Customers
This requirement does not apply to contracts accounted for in accordance with
IFRS 9
Indemnification assets
57 At the end of each subsequent reporting period the acquirer shall measure an
indemnification asset that was recognised at the acquisition date on the same
basis as the indemnified liability or asset subject to any contractual limitations
on its amount and for an indemnification asset that is not subsequently
measured at its fair value management’s assessment of the collectibility of the
indemnification asset The acquirer shall derecognise the indemnification asset
only when it collects the asset sells it or otherwise loses the right to it
Contingent consideration
58 Some changes in the fair value of contingent consideration that the acquirer
recognises after the acquisition date may be the result of additional information
that the acquirer obtained after that date about facts and circumstances that
existed at the acquisition date Such changes are measurement period
adjustments in accordance with paragraphs 45–49 However changes resulting
from events after the acquisition date such as meeting an earnings target
reaching a specified share price or reaching a milestone on a research and
development project are not measurement period adjustments The acquirer
IFRS 3
IFRS FoundationA146shall account for changes in the fair value of contingent consideration that are
not measurement period adjustments as follows
(a) Contingent consideration classified as equity shall not be remeasured
and its subsequent settlement shall be accounted for within equity
(b) Other contingent consideration that
(i) is within the scope of IFRS 9 shall be measured at fair value at
each reporting date and changes in fair value shall be recognised
in profit or loss in accordance with IFRS 9
(ii) is not within the scope of IFRS 9 shall be measured at fair value at
each reporting date and changes in fair value shall be recognised
in profit or loss
Disclosures
59 The acquirer shall disclose information that enables users of its financial
statements to evaluate the nature and financial effect of a business
combination that occurs either
(a) during the current reporting period or
(b) after the end of the reporting period but before the financial
statements are authorised for issue
60 To meet the objective in paragraph 59 the acquirer shall disclose the
information specified in paragraphs B64—B66
61 The acquirer shall disclose information that enables users of its financial
statements to evaluate the financial effects of adjustments recognised in
the current reporting period that relate to business combinations that
occurred in the period or previous reporting periods
62 To meet the objective in paragraph 61 the acquirer shall disclose the
information specified in paragraph B67
63 If the specific disclosures required by this and other IFRSs do not meet the
objectives set out in paragraphs 59 and 61 the acquirer shall disclose whatever
additional information is necessary to meet those objectives
Effective date and transition
Effective date
64 This IFRS shall be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after 1 July 2009 Earlier application is permitted However
this IFRS shall be applied only at the beginning of an annual reporting period
that begins on or after 30 June 2007 If an entity applies this IFRS before 1 July
2009 it shall disclose that fact and apply IAS 27 (as amended in 2008) at the
same time
64A [Deleted]
IFRS 3
IFRS Foundation A14764B Improvements to IFRSs issued in May 2010 amended paragraphs 19 30 and B56 and
added paragraphs B62A and B62B An entity shall apply those amendments for
annual periods beginning on or after 1 July 2010 Earlier application is
permitted If an entity applies the amendments for an earlier period it shall
disclose that fact Application should be prospective from the date when the
entity first applied this IFRS
64C Paragraphs 65A–65E were added by Improvements to IFRSs issued in May 2010 An
entity shall apply those amendments for annual periods beginning on or after
1 July 2010 Earlier application is permitted If an entity applies the
amendments for an earlier period it shall disclose that fact The amendments
shall be applied to contingent consideration balances arising from business
combinations with an acquisition date prior to the application of this IFRS as
issued in 2008
64D [Deleted]
64E IFRS 10 issued in May 2011 amended paragraphs 7 B13 B63(e) and Appendix A
An entity shall apply those amendments when it applies IFRS 10
64F IFRS 13 Fair Value Measurement issued in May 2011 amended paragraphs 20 29
33 47 amended the definition of fair value in Appendix A and amended
paragraphs B22 B40 B43–B46 B49 and B64 An entity shall apply those
amendments when it applies IFRS 13
64G Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraph 7 and added paragraph 2A An entity shall apply
those amendments for annual periods beginning on or after 1 January 2014
Earlier application of Investment Entities is permitted If an entity applies these
amendments earlier it shall also apply all amendments included in Investment
Entities at the same time
64H [Deleted]
64I Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 40 and 58 and added paragraph 67A and its related heading An
entity shall apply that amendment prospectively to business combinations for
which the acquisition date is on or after 1 July 2014 Earlier application is
permitted An entity may apply the amendment earlier provided that IFRS 9 and
IAS 37 (both as amended by Annual Improvements to IFRSs 2010–2012 Cycle) have also
been applied If an entity applies that amendment earlier it shall disclose that
fact
64J Annual Improvements Cycle 2011–2013 issued in December 2013 amended
paragraph 2(a) An entity shall apply that amendment prospectively for annual
periods beginning on or after 1 July 2014 Earlier application is permitted If an
entity applies that amendment for an earlier period it shall disclose that fact
64K IFRS 15 Revenue from Contracts with Customers issued in May 2014 amended
paragraph 56 An entity shall apply that amendment when it applies IFRS 15
64L IFRS 9 as issued in July 2014 amended paragraphs 16 42 53 56 58 and B41
and deleted paragraphs 64A 64D and 64H An entity shall apply those
amendments when it applies IFRS 9
IFRS 3
IFRS FoundationA14864M IFRS 16 issued in January 2016 amended paragraphs 14 17 B32 and B42
deleted paragraphs B28–B30 and their related heading and added paragraphs
28A–28B and their related heading An entity shall apply those amendments
when it applies IFRS 16
Transition
65 Assets and liabilities that arose from business combinations whose acquisition
dates preceded the application of this IFRS shall not be adjusted upon
application of this IFRS
65A Contingent consideration balances arising from business combinations whose
acquisition dates preceded the date when an entity first applied this IFRS as
issued in 2008 shall not be adjusted upon first application of this IFRS
Paragraphs 65B–65E shall be applied in the subsequent accounting for those
balances Paragraphs 65B–65E shall not apply to the accounting for contingent
consideration balances arising from business combinations with acquisition
dates on or after the date when the entity first applied this IFRS as issued in
2008 In paragraphs 65B–65E business combination refers exclusively to
business combinations whose acquisition date preceded the application of this
IFRS as issued in 2008
65B If a business combination agreement provides for an adjustment to the cost of
the combination contingent on future events the acquirer shall include the
amount of that adjustment in the cost of the combination at the acquisition
date if the adjustment is probable and can be measured reliably
65C A business combination agreement may allow for adjustments to the cost of the
combination that are contingent on one or more future events The adjustment
might for example be contingent on a specified level of profit being maintained
or achieved in future periods or on the market price of the instruments issued
being maintained It is usually possible to estimate the amount of any such
adjustment at the time of initially accounting for the combination without
impairing the reliability of the information even though some uncertainty
exists If the future events do not occur or the estimate needs to be revised the
cost of the business combination shall be adjusted accordingly
65D However when a business combination agreement provides for such an
adjustment that adjustment is not included in the cost of the combination at
the time of initially accounting for the combination if it either is not probable or
cannot be measured reliably If that adjustment subsequently becomes probable
and can be measured reliably the additional consideration shall be treated as an
adjustment to the cost of the combination
65E In some circumstances the acquirer may be required to make a subsequent
payment to the seller as compensation for a reduction in the value of the assets
given equity instruments issued or liabilities incurred or assumed by the
acquirer in exchange for control of the acquiree This is the case for example
when the acquirer guarantees the market price of equity or debt instruments
issued as part of the cost of the business combination and is required to issue
additional equity or debt instruments to restore the originally determined cost
In such cases no increase in the cost of the business combination is recognised
In the case of equity instruments the fair value of the additional payment is
IFRS 3
IFRS Foundation A149offset by an equal reduction in the value attributed to the instruments initially
issued In the case of debt instruments the additional payment is regarded as a
reduction in the premium or an increase in the discount on the initial issue
66 An entity such as a mutual entity that has not yet applied IFRS 3 and had one or
more business combinations that were accounted for using the purchase
method shall apply the transition provisions in paragraphs B68 and B69
Income taxes
67 For business combinations in which the acquisition date was before this IFRS is
applied the acquirer shall apply the requirements of paragraph 68 of IAS 12 as
amended by this IFRS prospectively That is to say the acquirer shall not adjust
the accounting for prior business combinations for previously recognised
changes in recognised deferred tax assets However from the date when this
IFRS is applied the acquirer shall recognise as an adjustment to profit or loss
(or if IAS 12 requires outside profit or loss) changes in recognised deferred tax
assets
Reference to IFRS 9
67A If an entity applies this Standard but does not yet apply IFRS 9 any reference to
IFRS 9 should be read as a reference to IAS 39
Withdrawal of IFRS 3 (2004)
68 This IFRS supersedes IFRS 3 Business Combinations (as issued in 2004)
IFRS 3
IFRS FoundationA150Appendix A
Defined terms
This appendix is an integral part of the IFRS
acquiree The business or businesses that the acquirer obtains control of in
a business combination
acquirer The entity that obtains control of the acquiree
acquisition date The date on which the acquirer obtains control of the acquiree
business An integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in
the form of dividends lower costs or other economic benefits
directly to investors or other owners members or participants
business combination A transaction or other event in which an acquirer obtains
control of one or more businesses Transactions sometimes
referred to as true mergers’ or mergers of equals’ are also
business combinations as that term is used in this IFRS
contingent
consideration
Usually an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree
as part of the exchange for control of the acquiree if specified
future events occur or conditions are met However contingent
consideration also may give the acquirer the right to the return of
previously transferred consideration if specified conditions are
met
equity interests For the purposes of this IFRS equity interests is used broadly to
mean ownership interests of investorowned entities and owner
member or participant interests of mutual entities
fair value Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (See IFRS 13)
goodwill An asset representing the future economic benefits arising from
other assets acquired in a business combination that are not
individually identified and separately recognised
identifiable An asset is identifiable if it either
(a) is separable ie capable of being separated or divided from
the entity and sold transferred licensed rented or
exchanged either individually or together with a related
contract identifiable asset or liability regardless of
whether the entity intends to do so or
(b) 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
intangible asset An identifiable nonmonetary asset without physical substance
IFRS 3
IFRS Foundation A151mutual entity An entity other than an investorowned entity that provides
dividends lower costs or other economic benefits directly to its
owners members or participants For example a mutual
insurance company a credit union and a cooperative entity are
all mutual entities
noncontrolling
interest
The equity in a subsidiary not attributable directly or indirectly
to a parent
owners For the purposes of this IFRS owners is used broadly to include
holders of equity interests of investorowned entities and
owners or members of or participants in mutual entities
IFRS 3
IFRS FoundationA152Appendix B
Application guidance
This appendix is an integral part of the IFRS
Business combinations of entities under common control
(application of paragraph 2(c))
B1 This IFRS does not apply to a business combination of entities or businesses
under common control A business combination involving entities or businesses
under common control is a business combination in which all of the combining
entities or businesses are ultimately controlled by the same party or parties both
before and after the business combination and that control is not transitory
B2 A group of individuals shall be regarded as controlling an entity when as a
result of contractual arrangements they collectively have the power to govern
its financial and operating policies so as to obtain benefits from its activities
Therefore a business combination is outside the scope of this IFRS when the
same group of individuals has as a result of contractual arrangements ultimate
collective power to govern the financial and operating policies of each of the
combining entities so as to obtain benefits from their activities and that
ultimate collective power is not transitory
B3 An entity may be controlled by an individual or by a group of individuals acting
together under a contractual arrangement and that individual or group of
individuals may not be subject to the financial reporting requirements of IFRSs
Therefore it is not necessary for combining entities to be included as part of the
same consolidated financial statements for a business combination to be
regarded as one involving entities under common control
B4 The extent of noncontrolling interests in each of the combining entities before
and after the business combination is not relevant to determining whether the
combination involves entities under common control Similarly the fact that
one of the combining entities is a subsidiary that has been excluded from the
consolidated financial statements is not relevant to determining whether a
combination involves entities under common control
Identifying a business combination (application of paragraph 3)
B5 This IFRS defines a business combination as a transaction or other event in
which an acquirer obtains control of one or more businesses An acquirer might
obtain control of an acquiree in a variety of ways for example
(a) by transferring cash cash equivalents or other assets (including net
assets that constitute a business)
(b) by incurring liabilities
(c) by issuing equity interests
(d) by providing more than one type of consideration or
(e) without transferring consideration including by contract alone (see
paragraph 43)
IFRS 3
IFRS Foundation A153B6 A business combination may be structured in a variety of ways for legal taxation
or other reasons which include but are not limited to
(a) one or more businesses become subsidiaries of an acquirer or the net
assets of one or more businesses are legally merged into the acquirer
(b) one combining entity transfers its net assets or its owners transfer their
equity interests to another combining entity or its owners
(c) all of the combining entities transfer their net assets or the owners of
those entities transfer their equity interests to a newly formed entity
(sometimes referred to as a rollup or puttogether transaction) or
(d) a group of former owners of one of the combining entities obtains
control of the combined entity
Definition of a business (application of paragraph 3)
B7 A business consists of inputs and processes applied to those inputs that have the
ability to create outputs Although businesses usually have outputs outputs are
not required for an integrated set to qualify as a business The three elements of
a business are defined as follows
(a) Input Any economic resource that creates or has the ability to create
outputs when one or more processes are applied to it Examples include
noncurrent assets (including intangible assets or rights to use
noncurrent assets) intellectual property the ability to obtain access to
necessary materials or rights and employees
(b) Process Any system standard protocol convention or rule that when
applied to an input or inputs creates or has the ability to create outputs
Examples include strategic management processes operational
processes and resource management processes These processes typically
are documented but an organised workforce having the necessary skills
and experience following rules and conventions may provide the
necessary processes that are capable of being applied to inputs to create
outputs (Accounting billing payroll and other administrative systems
typically are not processes used to create outputs)
(c) Output The result of inputs and processes applied to those inputs that
provide or have the ability to provide a return in the form of dividends
lower costs or other economic benefits directly to investors or other
owners members or participants
B8 To be capable of being conducted and managed for the purposes defined an
integrated set of activities and assets requires two essential elements—inputs and
processes applied to those inputs which together are or will be used to create
outputs However a business need not include all of the inputs or processes that
the seller used in operating that business if market participants are capable of
acquiring the business and continuing to produce outputs for example by
integrating the business with their own inputs and processes
B9 The nature of the elements of a business varies by industry and by the structure
of an entity’s operations (activities) including the entity’s stage of development
IFRS 3
IFRS FoundationA154Established businesses often have many different types of inputs processes and
outputs whereas new businesses often have few inputs and processes and
sometimes only a single output (product) Nearly all businesses also have
liabilities but a business need not have liabilities
B10 An integrated set of activities and assets in the development stage might not
have outputs If not the acquirer should consider other factors to determine
whether the set is a business Those factors include but are not limited to
whether the set
(a) has begun planned principal activities
(b) has employees intellectual property and other inputs and processes that
could be applied to those inputs
(c) is pursuing a plan to produce outputs and
(d) will be able to obtain access to customers that will purchase the outputs
Not all of those factors need to be present for a particular integrated set of
activities and assets in the development stage to qualify as a business
B11 Determining whether a particular set of assets and activities is a business should
be based on whether the integrated set is capable of being conducted and
managed as a business by a market participant Thus in evaluating whether a
particular set is a business it is not relevant whether a seller operated the set as
a business or whether the acquirer intends to operate the set as a business
B12 In the absence of evidence to the contrary a particular set of assets and activities
in which goodwill is present shall be presumed to be a business However a
business need not have goodwill
Identifying the acquirer (application of paragraphs 6 and 7)
B13 The guidance in IFRS 10 Consolidated Financial Statements shall be used to identify
the acquirer—the entity that obtains control of the acquiree If a business
combination has occurred but applying the guidance in IFRS 10 does not clearly
indicate which of the combining entities is the acquirer the factors in
paragraphs B14–B18 shall be considered in making that determination
B14 In a business combination effected primarily by transferring cash or other assets
or by incurring liabilities the acquirer is usually the entity that transfers the
cash or other assets or incurs the liabilities
B15 In a business combination effected primarily by exchanging equity interests the
acquirer is usually the entity that issues its equity interests However in some
business combinations commonly called reverse acquisitions’ the issuing
entity is the acquiree Paragraphs B19–B27 provide guidance on accounting for
reverse acquisitions Other pertinent facts and circumstances shall also be
considered in identifying the acquirer in a business combination effected by
exchanging equity interests including
(a) the relative voting rights in the combined entity after the business
combination—The acquirer is usually the combining entity whose owners
as a group retain or receive the largest portion of the voting rights in the
IFRS 3
IFRS Foundation A155combined entity In determining which group of owners retains or
receives the largest portion of the voting rights an entity shall consider
the existence of any unusual or special voting arrangements and options
warrants or convertible securities
(b) the existence of a large minority voting interest in the combined entity if no other
owner or organised group of owners has a significant voting interest—The
acquirer is usually the combining entity whose single owner or
organised group of owners holds the largest minority voting interest in
the combined entity
(c) the composition of the governing body of the combined entity—The acquirer is
usually the combining entity whose owners have the ability to elect or
appoint or to remove a majority of the members of the governing body of
the combined entity
(d) the composition of the senior management of the combined entity—The acquirer is
usually the combining entity whose (former) management dominates
the management of the combined entity
(e) the terms of the exchange of equity interests—The acquirer is usually the
combining entity that pays a premium over the precombination fair
value of the equity interests of the other combining entity or entities
B16 The acquirer is usually the combining entity whose relative size (measured in
for example assets revenues or profit) is significantly greater than that of the
other combining entity or entities
B17 In a business combination involving more than two entities determining the
acquirer shall include a consideration of among other things which of the
combining entities initiated the combination as well as the relative size of the
combining entities
B18 A new entity formed to effect a business combination is not necessarily the
acquirer If a new entity is formed to issue equity interests to effect a business
combination one of the combining entities that existed before the business
combination shall be identified as the acquirer by applying the guidance in
paragraphs B13–B17 In contrast a new entity that transfers cash or other assets
or incurs liabilities as consideration may be the acquirer
Reverse acquisitions
B19 A reverse acquisition occurs when the entity that issues securities (the legal
acquirer) is identified as the acquiree for accounting purposes on the basis of the
guidance in paragraphs B13–B18 The entity whose equity interests are acquired
(the legal acquiree) must be the acquirer for accounting purposes for the
transaction to be considered a reverse acquisition For example reverse
acquisitions sometimes occur when a private operating entity wants to become a
public entity but does not want to register its equity shares To accomplish that
the private entity will arrange for a public entity to acquire its equity interests in
exchange for the equity interests of the public entity In this example the
public entity is the legal acquirer because it issued its equity interests and the
IFRS 3
IFRS FoundationA156private entity is the legal acquiree because its equity interests were acquired
However application of the guidance in paragraphs B13–B18 results in
identifying
(a) the public entity as the acquiree for accounting purposes (the
accounting acquiree) and
(b) the private entity as the acquirer for accounting purposes (the
accounting acquirer)
The accounting acquiree must meet the definition of a business for the
transaction to be accounted for as a reverse acquisition and all of the
recognition and measurement principles in this IFRS including the requirement
to recognise goodwill apply
Measuring the consideration transferred
B20 In a reverse acquisition the accounting acquirer usually issues no consideration
for the acquiree Instead the accounting acquiree usually issues its equity
shares to the owners of the accounting acquirer Accordingly the
acquisitiondate fair value of the consideration transferred by the accounting
acquirer for its interest in the accounting acquiree is based on the number of
equity interests the legal subsidiary would have had to issue to give the owners
of the legal parent the same percentage equity interest in the combined entity
that results from the reverse acquisition The fair value of the number of equity
interests calculated in that way can be used as the fair value of consideration
transferred in exchange for the acquiree
Preparation and presentation of consolidated financial
statements
B21 Consolidated financial statements prepared following a reverse acquisition are
issued under the name of the legal parent (accounting acquiree) but described in
the notes as a continuation of the financial statements of the legal subsidiary
(accounting acquirer) with one adjustment which is to adjust retroactively the
accounting acquirer’s legal capital to reflect the legal capital of the accounting
acquiree That adjustment is required to reflect the capital of the legal parent
(the accounting acquiree) Comparative information presented in those
consolidated financial statements also is retroactively adjusted to reflect the
legal capital of the legal parent (accounting acquiree)
B22 Because the consolidated financial statements represent the continuation of the
financial statements of the legal subsidiary except for its capital structure the
consolidated financial statements reflect
(a) the assets and liabilities of the legal subsidiary (the accounting acquirer)
recognised and measured at their precombination carrying amounts
(b) the assets and liabilities of the legal parent (the accounting acquiree)
recognised and measured in accordance with this IFRS
(c) the retained earnings and other equity balances of the legal subsidiary
(accounting acquirer) before the business combination
IFRS 3
IFRS Foundation A157(d) the amount recognised as issued equity interests in the consolidated
financial statements determined by adding the issued equity interest of
the legal subsidiary (the accounting acquirer) outstanding immediately
before the business combination to the fair value of the legal parent
(accounting acquiree) However the equity structure (ie the number and
type of equity interests issued) reflects the equity structure of the legal
parent (the accounting acquiree) including the equity interests the legal
parent issued to effect the combination Accordingly the equity
structure of the legal subsidiary (the accounting acquirer) is restated
using the exchange ratio established in the acquisition agreement to
reflect the number of shares of the legal parent (the accounting acquiree)
issued in the reverse acquisition
(e) the noncontrolling interest’s proportionate share of the legal
subsidiary’s (accounting acquirer’s) precombination carrying amounts
of retained earnings and other equity interests as discussed in
paragraphs B23 and B24
Noncontrolling interest
B23 In a reverse acquisition some of the owners of the legal acquiree (the accounting
acquirer) might not exchange their equity interests for equity interests of the
legal parent (the accounting acquiree) Those owners are treated as a
noncontrolling interest in the consolidated financial statements after the
reverse acquisition That is because the owners of the legal acquiree that do not
exchange their equity interests for equity interests of the legal acquirer have an
interest in only the results and net assets of the legal acquiree—not in the results
and net assets of the combined entity Conversely even though the legal
acquirer is the acquiree for accounting purposes the owners of the legal
acquirer have an interest in the results and net assets of the combined entity
B24 The assets and liabilities of the legal acquiree are measured and recognised in
the consolidated financial statements at their precombination carrying
amounts (see paragraph B22(a)) Therefore in a reverse acquisition the
noncontrolling interest reflects the noncontrolling shareholders’ proportionate
interest in the precombination carrying amounts of the legal acquiree’s net
assets even if the noncontrolling interests in other acquisitions are measured at
their fair value at the acquisition date
Earnings per share
B25 As noted in paragraph B22(d) the equity structure in the consolidated financial
statements following a reverse acquisition reflects the equity structure of the
legal acquirer (the accounting acquiree) including the equity interests issued by
the legal acquirer to effect the business combination
B26 In calculating the weighted average number of ordinary shares outstanding (the
denominator of the earnings per share calculation) during the period in which
the reverse acquisition occurs
(a) the number of ordinary shares outstanding from the beginning of that
period to the acquisition date shall be computed on the basis of the
weighted average number of ordinary shares of the legal acquiree
IFRS 3
IFRS FoundationA158(accounting acquirer) outstanding during the period multiplied by the
exchange ratio established in the merger agreement and
(b) the number of ordinary shares outstanding from the acquisition date to
the end of that period shall be the actual number of ordinary shares of
the legal acquirer (the accounting acquiree) outstanding during that
period
B27 The basic earnings per share for each comparative period before the acquisition
date presented in the consolidated financial statements following a reverse
acquisition shall be calculated by dividing
(a) the profit or loss of the legal acquiree attributable to ordinary
shareholders in each of those periods by
(b) the legal acquiree’s historical weighted average number of ordinary
shares outstanding multiplied by the exchange ratio established in the
acquisition agreement
Recognising particular assets acquired and liabilities assumed
(application of paragraphs 10–13)
B28–
B30
[Deleted]
Intangible assets
B31 The acquirer shall recognise separately from goodwill the identifiable
intangible assets acquired in a business combination An intangible asset is
identifiable if it meets either the separability criterion or the contractuallegal
criterion
B32 An intangible asset that meets the contractuallegal criterion is identifiable even
if the asset is not transferable or separable from the acquiree or from other
rights and obligations For example
(a) [deleted]
(b) an acquiree owns and operates a nuclear power plant The licence to
operate that power plant is an intangible asset that meets the
contractuallegal criterion for recognition separately from goodwill even
if the acquirer cannot sell or transfer it separately from the acquired
power plant An acquirer may recognise the fair value of the operating
licence and the fair value of the power plant as a single asset for financial
reporting purposes if the useful lives of those assets are similar
(c) an acquiree owns a technology patent It has licensed that patent to
others for their exclusive use outside the domestic market receiving a
specified percentage of future foreign revenue in exchange Both the
technology patent and the related licence agreement meet the
contractuallegal criterion for recognition separately from goodwill even
if selling or exchanging the patent and the related licence agreement
separately from one another would not be practical
B33 The separability criterion means that an acquired intangible asset is capable of
being separated or divided from the acquiree and sold transferred licensed
IFRS 3
IFRS Foundation A159rented or exchanged either individually or together with a related contract
identifiable asset or liability An intangible asset that the acquirer would be able
to sell license or otherwise exchange for something else of value meets the
separability criterion even if the acquirer does not intend to sell license or
otherwise exchange it An acquired intangible asset meets the separability
criterion if there is evidence of exchange transactions for that type of asset or an
asset of a similar type even if those transactions are infrequent and regardless of
whether the acquirer is involved in them For example customer and subscriber
lists are frequently licensed and thus meet the separability criterion Even if an
acquiree believes its customer lists have characteristics different from other
customer lists the fact that customer lists are frequently licensed generally
means that the acquired customer list meets the separability criterion
However a customer list acquired in a business combination would not meet
the separability criterion if the terms of confidentiality or other agreements
prohibit an entity from selling leasing or otherwise exchanging information
about its customers
B34 An intangible asset that is not individually separable from the acquiree or
combined entity meets the separability criterion if it is separable in combination
with a related contract identifiable asset or liability For example
(a) market participants exchange deposit liabilities and related depositor
relationship intangible assets in observable exchange transactions
Therefore the acquirer should recognise the depositor relationship
intangible asset separately from goodwill
(b) an acquiree owns a registered trademark and documented but
unpatented technical expertise used to manufacture the trademarked
product To transfer ownership of a trademark the owner is also
required to transfer everything else necessary for the new owner to
produce a product or service indistinguishable from that produced by
the former owner Because the unpatented technical expertise must be
separated from the acquiree or combined entity and sold if the related
trademark is sold it meets the separability criterion
Reacquired rights
B35 As part of a business combination an acquirer may reacquire a right that it had
previously granted to the acquiree to use one or more of the acquirer’s
recognised or unrecognised assets Examples of such rights include a right to
use the acquirer’s trade name under a franchise agreement or a right to use the
acquirer’s technology under a technology licensing agreement A reacquired
right is an identifiable intangible asset that the acquirer recognises separately
from goodwill Paragraph 29 provides guidance on measuring a reacquired
right and paragraph 55 provides guidance on the subsequent accounting for a
reacquired right
B36 If the terms of the contract giving rise to a reacquired right are favourable or
unfavourable relative to the terms of current market transactions for the same
or similar items the acquirer shall recognise a settlement gain or loss
Paragraph B52 provides guidance for measuring that settlement gain or loss
IFRS 3
IFRS FoundationA160Assembled workforce and other items that are not identifiable
B37 The acquirer subsumes into goodwill the value of an acquired intangible asset
that is not identifiable as of the acquisition date For example an acquirer may
attribute value to the existence of an assembled workforce which is an existing
collection of employees that permits the acquirer to continue to operate an
acquired business from the acquisition date An assembled workforce does not
represent the intellectual capital of the skilled workforce—the (often specialised)
knowledge and experience that employees of an acquiree bring to their jobs
Because the assembled workforce is not an identifiable asset to be recognised
separately from goodwill any value attributed to it is subsumed into goodwill
B38 The acquirer also subsumes into goodwill any value attributed to items that do
not qualify as assets at the acquisition date For example the acquirer might
attribute value to potential contracts the acquiree is negotiating with
prospective new customers at the acquisition date Because those potential
contracts are not themselves assets at the acquisition date the acquirer does not
recognise them separately from goodwill The acquirer should not subsequently
reclassify the value of those contracts from goodwill for events that occur after
the acquisition date However the acquirer should assess the facts and
circumstances surrounding events occurring shortly after the acquisition to
determine whether a separately recognisable intangible asset existed at the
acquisition date
B39 After initial recognition an acquirer accounts for intangible assets acquired in a
business combination in accordance with the provisions of IAS 38 Intangible
Assets However as described in paragraph 3 of IAS 38 the accounting for some
acquired intangible assets after initial recognition is prescribed by other IFRSs
B40 The identifiability criteria determine whether an intangible asset is recognised
separately from goodwill However the criteria neither provide guidance for
measuring the fair value of an intangible asset nor restrict the assumptions used
in measuring the fair value of an intangible asset For example the acquirer
would take into account the assumptions that market participants would use
when pricing the intangible asset such as expectations of future contract
renewals in measuring fair value It is not necessary for the renewals
themselves to meet the identifiability criteria (However see paragraph 29
which establishes an exception to the fair value measurement principle for
reacquired rights recognised in a business combination) Paragraphs 36 and 37
of IAS 38 provide guidance for determining whether intangible assets should be
combined into a single unit of account with other intangible or tangible assets
Measuring the fair value of particular identifiable assets and a
noncontrolling interest in an acquiree (application of
paragraphs 18 and 19)
Assets with uncertain cash flows (valuation allowances)
B41 The acquirer shall not recognise a separate valuation allowance as of the
acquisition date for assets acquired in a business combination that are measured
at their acquisitiondate fair values because the effects of uncertainty about
future cash flows are included in the fair value measure For example because
IFRS 3
IFRS Foundation A161this IFRS requires the acquirer to measure acquired receivables including loans
at their acquisitiondate fair values in accounting for a business combination
the acquirer does not recognise a separate valuation allowance for the
contractual cash flows that are deemed to be uncollectible at that date or a loss
allowance for expected credit losses
Assets subject to operating leases in which the acquiree
is the lessor
B42 In measuring the acquisitiondate fair value of an asset such as a building or a
patent that is subject to an operating lease in which the acquiree is the lessor
the acquirer shall take into account the terms of the lease The acquirer does not
recognise a separate asset or liability if the terms of an operating lease are either
favourable or unfavourable when compared with market terms
Assets that the acquirer intends not to use or to use in a
way that is different from the way other market
participants would use them
B43 To protect its competitive position or for other reasons the acquirer may intend
not to use an acquired nonfinancial asset actively or it may not intend to use
the asset according to its highest and best use For example that might be the
case for an acquired research and development intangible asset that the acquirer
plans to use defensively by preventing others from using it Nevertheless the
acquirer shall measure the fair value of the nonfinancial asset assuming its
highest and best use by market participants in accordance with the appropriate
valuation premise both initially and when measuring fair value less costs of
disposal for subsequent impairment testing
Noncontrolling interest in an acquiree
B44 This IFRS allows the acquirer to measure a noncontrolling interest in the
acquiree at its fair value at the acquisition date Sometimes an acquirer will be
able to measure the acquisitiondate fair value of a noncontrolling interest on
the basis of a quoted price in an active market for the equity shares (ie those not
held by the acquirer) In other situations however a quoted price in an active
market for the equity shares will not be available In those situations the
acquirer would measure the fair value of the noncontrolling interest using
other valuation techniques
B45 The fair values of the acquirer’s interest in the acquiree and the noncontrolling
interest on a pershare basis might differ The main difference is likely to be the
inclusion of a control premium in the pershare fair value of the acquirer’s
interest in the acquiree or conversely the inclusion of a discount for lack of
control (also referred to as a noncontrolling interest discount) in the pershare
fair value of the noncontrolling interest if market participants would take into
account such a premium or discount when pricing the noncontrolling interest
IFRS 3
IFRS FoundationA162Measuring goodwill or a gain from a bargain purchase
Measuring the acquisitiondate fair value of the
acquirer’s interest in the acquiree using valuation
techniques (application of paragraph 33)
B46 In a business combination achieved without the transfer of consideration the
acquirer must substitute the acquisitiondate fair value of its interest in the
acquiree for the acquisitiondate fair value of the consideration transferred to
measure goodwill or a gain on a bargain purchase (see paragraphs 32–34)
Special considerations in applying the acquisition
method to combinations of mutual entities (application
of paragraph 33)
B47 When two mutual entities combine the fair value of the equity or member
interests in the acquiree (or the fair value of the acquiree) may be more reliably
measurable than the fair value of the member interests transferred by the
acquirer In that situation paragraph 33 requires the acquirer to determine the
amount of goodwill by using the acquisitiondate fair value of the acquiree’s
equity interests instead of the acquisitiondate fair value of the acquirer’s equity
interests transferred as consideration In addition the acquirer in a
combination of mutual entities shall recognise the acquiree’s net assets as a
direct addition to capital or equity in its statement of financial position not as
an addition to retained earnings which is consistent with the way in which
other types of entities apply the acquisition method
B48 Although they are similar in many ways to other businesses mutual entities
have distinct characteristics that arise primarily because their members are both
customers and owners Members of mutual entities generally expect to receive
benefits for their membership often in the form of reduced fees charged for
goods and services or patronage dividends The portion of patronage dividends
allocated to each member is often based on the amount of business the member
did with the mutual entity during the year
B49 A fair value measurement of a mutual entity should include the assumptions
that market participants would make about future member benefits as well as
any other relevant assumptions market participants would make about the
mutual entity For example a present value technique may be used to measure
the fair value of a mutual entity The cash flows used as inputs to the model
should be based on the expected cash flows of the mutual entity which are
likely to reflect reductions for member benefits such as reduced fees charged for
goods and services
Determining what is part of the business combination
transaction (application of paragraphs 51 and 52)
B50 The acquirer should consider the following factors which are neither mutually
exclusive nor individually conclusive to determine whether a transaction is part
of the exchange for the acquiree or whether the transaction is separate from the
business combination
IFRS 3
IFRS Foundation A163(a) the reasons for the transaction—Understanding the reasons why the
parties to the combination (the acquirer and the acquiree and their
owners directors and managers—and their agents) entered into a
particular transaction or arrangement may provide insight into whether
it is part of the consideration transferred and the assets acquired or
liabilities assumed For example if a transaction is arranged primarily
for the benefit of the acquirer or the combined entity rather than
primarily for the benefit of the acquiree or its former owners before the
combination that portion of the transaction price paid (and any related
assets or liabilities) is less likely to be part of the exchange for the
acquiree Accordingly the acquirer would account for that portion
separately from the business combination
(b) who initiated the transaction—Understanding who initiated the
transaction may also provide insight into whether it is part of the
exchange for the acquiree For example a transaction or other event
that is initiated by the acquirer may be entered into for the purpose of
providing future economic benefits to the acquirer or combined entity
with little or no benefit received by the acquiree or its former owners
before the combination On the other hand a transaction or
arrangement initiated by the acquiree or its former owners is less likely
to be for the benefit of the acquirer or the combined entity and more
likely to be part of the business combination transaction
(c) the timing of the transaction—The timing of the transaction may also
provide insight into whether it is part of the exchange for the acquiree
For example a transaction between the acquirer and the acquiree that
takes place during the negotiations of the terms of a business
combination may have been entered into in contemplation of the
business combination to provide future economic benefits to the
acquirer or the combined entity If so the acquiree or its former owners
before the business combination are likely to receive little or no benefit
from the transaction except for benefits they receive as part of the
combined entity
Effective settlement of a preexisting relationship
between the acquirer and acquiree in a business
combination (application of paragraph 52(a))
B51 The acquirer and acquiree may have a relationship that existed before they
contemplated the business combination referred to here as a preexisting
relationship’ A preexisting relationship between the acquirer and acquiree
may be contractual (for example vendor and customer or licensor and licensee)
or noncontractual (for example plaintiff and defendant)
B52 If the business combination in effect settles a preexisting relationship the
acquirer recognises a gain or loss measured as follows
(a) for a preexisting noncontractual relationship (such as a lawsuit) fair
value
(b) for a preexisting contractual relationship the lesser of (i) and (ii)
IFRS 3
IFRS FoundationA164(i) the amount by which the contract is favourable or unfavourable
from the perspective of the acquirer when compared with terms
for current market transactions for the same or similar items
(An unfavourable contract is a contract that is unfavourable in
terms of current market terms It is not necessarily an onerous
contract in which the unavoidable costs of meeting the
obligations under the contract exceed the economic benefits
expected to be received under it)
(ii) the amount of any stated settlement provisions in the contract
available to the counterparty to whom the contract is
unfavourable
If (ii) is less than (i) the difference is included as part of the business
combination accounting
The amount of gain or loss recognised may depend in part on whether the
acquirer had previously recognised a related asset or liability and the reported
gain or loss therefore may differ from the amount calculated by applying the
above requirements
B53 A preexisting relationship may be a contract that the acquirer recognises as a
reacquired right If the contract includes terms that are favourable or
unfavourable when compared with pricing for current market transactions for
the same or similar items the acquirer recognises separately from the business
combination a gain or loss for the effective settlement of the contract measured
in accordance with paragraph B52
Arrangements for contingent payments to employees or
selling shareholders (application of paragraph 52(b))
B54 Whether arrangements for contingent payments to employees or selling
shareholders are contingent consideration in the business combination or are
separate transactions depends on the nature of the arrangements
Understanding the reasons why the acquisition agreement includes a provision
for contingent payments who initiated the arrangement and when the parties
entered into the arrangement may be helpful in assessing the nature of the
arrangement
B55 If it is not clear whether an arrangement for payments to employees or selling
shareholders is part of the exchange for the acquiree or is a transaction separate
from the business combination the acquirer should consider the following
indicators
(a) Continuing employment—The terms of continuing employment by the
selling shareholders who become key employees may be an indicator of
the substance of a contingent consideration arrangement The relevant
terms of continuing employment may be included in an employment
agreement acquisition agreement or some other document A
contingent consideration arrangement in which the payments are
automatically forfeited if employment terminates is remuneration for
postcombination services Arrangements in which the contingent
IFRS 3
IFRS Foundation A165payments are not affected by employment termination may indicate that
the contingent payments are additional consideration rather than
remuneration
(b) Duration of continuing employment—If the period of required employment
coincides with or is longer than the contingent payment period that fact
may indicate that the contingent payments are in substance
remuneration
(c) Level of remuneration—Situations in which employee remuneration other
than the contingent payments is at a reasonable level in comparison
with that of other key employees in the combined entity may indicate
that the contingent payments are additional consideration rather than
remuneration
(d) Incremental payments to employees—If selling shareholders who do not
become employees receive lower contingent payments on a pershare
basis than the selling shareholders who become employees of the
combined entity that fact may indicate that the incremental amount of
contingent payments to the selling shareholders who become employees
is remuneration
(e) Number of shares owned—The relative number of shares owned by the
selling shareholders who remain as key employees may be an indicator
of the substance of the contingent consideration arrangement For
example if the selling shareholders who owned substantially all of the
shares in the acquiree continue as key employees that fact may indicate
that the arrangement is in substance a profitsharing arrangement
intended to provide remuneration for postcombination services
Alternatively if selling shareholders who continue as key employees
owned only a small number of shares of the acquiree and all selling
shareholders receive the same amount of contingent consideration on a
pershare basis that fact may indicate that the contingent payments are
additional consideration The preacquisition ownership interests held
by parties related to selling shareholders who continue as key employees
such as family members should also be considered
(f) Linkage to the valuation—If the initial consideration transferred at the
acquisition date is based on the low end of a range established in the
valuation of the acquiree and the contingent formula relates to that
valuation approach that fact may suggest that the contingent payments
are additional consideration Alternatively if the contingent payment
formula is consistent with prior profitsharing arrangements that fact
may suggest that the substance of the arrangement is to provide
remuneration
(g) Formula for determining consideration—The formula used to determine the
contingent payment may be helpful in assessing the substance of the
arrangement For example if a contingent payment is determined on
the basis of a multiple of earnings that might suggest that the obligation
is contingent consideration in the business combination and that the
formula is intended to establish or verify the fair value of the acquiree
In contrast a contingent payment that is a specified percentage of
IFRS 3
IFRS FoundationA166earnings might suggest that the obligation to employees is a
profitsharing arrangement to remunerate employees for services
rendered
(h) Other agreements and issues—The terms of other arrangements with selling
shareholders (such as agreements not to compete executory contracts
consulting contracts and property lease agreements) and the income tax
treatment of contingent payments may indicate that contingent
payments are attributable to something other than consideration for the
acquiree For example in connection with the acquisition the acquirer
might enter into a property lease arrangement with a significant selling
shareholder If the lease payments specified in the lease contract are
significantly below market some or all of the contingent payments to
the lessor (the selling shareholder) required by a separate arrangement
for contingent payments might be in substance payments for the use of
the leased property that the acquirer should recognise separately in its
postcombination financial statements In contrast if the lease contract
specifies lease payments that are consistent with market terms for the
leased property the arrangement for contingent payments to the selling
shareholder may be contingent consideration in the business
combination
Acquirer sharebased payment awards exchanged for
awards held by the acquiree’s employees (application of
paragraph 52(b))
B56 An acquirer may exchange its sharebased payment awards3 (replacement
awards) for awards held by employees of the acquiree Exchanges of share
options or other sharebased payment awards in conjunction with a business
combination are accounted for as modifications of sharebased payment awards
in accordance with IFRS 2 Sharebased Payment If the acquirer replaces the
acquiree awards either all or a portion of the marketbased measure of the
acquirer’s replacement awards shall be included in measuring the consideration
transferred in the business combination Paragraphs B57–B62 provide guidance
on how to allocate the marketbased measure However in situations in which
acquiree awards would expire as a consequence of a business combination and if
the acquirer replaces those awards when it is not obliged to do so all of the
marketbased measure of the replacement awards shall be recognised as
remuneration cost in the postcombination financial statements in accordance
with IFRS 2 That is to say none of the marketbased measure of those awards
shall be included in measuring the consideration transferred in the business
combination The acquirer is obliged to replace the acquiree awards if the
acquiree or its employees have the ability to enforce replacement For example
for the purposes of applying this guidance the acquirer is obliged to replace the
acquiree’s awards if replacement is required by
(a) the terms of the acquisition agreement
(b) the terms of the acquiree’s awards or
3 In paragraphs B56–B62 the term sharebased payment awards’ refers to vested or unvested
sharebased payment transactions
IFRS 3
IFRS Foundation A167(c) applicable laws or regulations
B57 To determine the portion of a replacement award that is part of the
consideration transferred for the acquiree and the portion that is remuneration
for postcombination service the acquirer shall measure both the replacement
awards granted by the acquirer and the acquiree awards as of the acquisition
date in accordance with IFRS 2 The portion of the marketbased measure of the
replacement award that is part of the consideration transferred in exchange for
the acquiree equals the portion of the acquiree award that is attributable to
precombination service
B58 The portion of the replacement award attributable to precombination service is
the marketbased measure of the acquiree award multiplied by the ratio of the
portion of the vesting period completed to the greater of the total vesting period
or the original vesting period of the acquiree award The vesting period is the
period during which all the specified vesting conditions are to be satisfied
Vesting conditions are defined in IFRS 2
B59 The portion of a nonvested replacement award attributable to postcombination
service and therefore recognised as remuneration cost in the postcombination
financial statements equals the total marketbased measure of the replacement
award less the amount attributed to precombination service Therefore the
acquirer attributes any excess of the marketbased measure of the replacement
award over the marketbased measure of the acquiree award to postcombination
service and recognises that excess as remuneration cost in the postcombination
financial statements The acquirer shall attribute a portion of a replacement
award to postcombination service if it requires postcombination service
regardless of whether employees had rendered all of the service required for
their acquiree awards to vest before the acquisition date
B60 The portion of a nonvested replacement award attributable to precombination
service as well as the portion attributable to postcombination service shall
reflect the best available estimate of the number of replacement awards
expected to vest For example if the marketbased measure of the portion of a
replacement award attributed to precombination service is CU100 and the
acquirer expects that only 95 per cent of the award will vest the amount
included in consideration transferred in the business combination is CU95
Changes in the estimated number of replacement awards expected to vest are
reflected in remuneration cost for the periods in which the changes or
forfeitures occur not as adjustments to the consideration transferred in the
business combination Similarly the effects of other events such as
modifications or the ultimate outcome of awards with performance conditions
that occur after the acquisition date are accounted for in accordance with IFRS 2
in determining remuneration cost for the period in which an event occurs
B61 The same requirements for determining the portions of a replacement award
attributable to precombination and postcombination service apply regardless
of whether a replacement award is classified as a liability or as an equity
instrument in accordance with the provisions of IFRS 2 All changes in the
marketbased measure of awards classified as liabilities after the acquisition date
IFRS 3
IFRS FoundationA168and the related income tax effects are recognised in the acquirer’s
postcombination financial statements in the period(s) in which the changes
occur
B62 The income tax effects of replacement awards of sharebased payments shall be
recognised in accordance with the provisions of IAS 12 Income Taxes
Equitysettled sharebased payment transactions of the
acquiree
B62A The acquiree may have outstanding sharebased payment transactions that the
acquirer does not exchange for its sharebased payment transactions If vested
those acquiree sharebased payment transactions are part of the noncontrolling
interest in the acquiree and are measured at their marketbased measure If
unvested they are measured at their marketbased measure as if the acquisition
date were the grant date in accordance with paragraphs 19 and 30
B62B The marketbased measure of unvested sharebased payment transactions is
allocated to the noncontrolling interest on the basis of the ratio of the portion
of the vesting period completed to the greater of the total vesting period and the
original vesting period of the sharebased payment transaction The balance is
allocated to postcombination service
Other IFRSs that provide guidance on subsequent measurement
and accounting (application of paragraph 54)
B63 Examples of other IFRSs that provide guidance on subsequently measuring and
accounting for assets acquired and liabilities assumed or incurred in a business
combination include
(a) IAS 38 prescribes the accounting for identifiable intangible assets
acquired in a business combination The acquirer measures goodwill at
the amount recognised at the acquisition date less any accumulated
impairment losses IAS 36 Impairment of Assets prescribes the accounting
for impairment losses
(b) IFRS 4 Insurance Contracts provides guidance on the subsequent
accounting for an insurance contract acquired in a business
combination
(c) IAS 12 prescribes the subsequent accounting for deferred tax assets
(including unrecognised deferred tax assets) and liabilities acquired in a
business combination
(d) IFRS 2 provides guidance on subsequent measurement and accounting
for the portion of replacement sharebased payment awards issued by an
acquirer that is attributable to employees’ future services
(e) IFRS 10 provides guidance on accounting for changes in a parent’s
ownership interest in a subsidiary after control is obtained
IFRS 3
IFRS Foundation A169Disclosures (application of paragraphs 59 and 61)
B64 To meet the objective in paragraph 59 the acquirer shall disclose the following
information for each business combination that occurs during the reporting
period
(a) the name and a description of the acquiree
(b) the acquisition date
(c) the percentage of voting equity interests acquired
(d) the primary reasons for the business combination and a description of
how the acquirer obtained control of the acquiree
(e) a qualitative description of the factors that make up the goodwill
recognised such as expected synergies from combining operations of the
acquiree and the acquirer intangible assets that do not qualify for
separate recognition or other factors
(f) the acquisitiondate fair value of the total consideration transferred and
the acquisitiondate fair value of each major class of consideration such
as
(i) cash
(ii) other tangible or intangible assets including a business or
subsidiary of the acquirer
(iii) liabilities incurred for example a liability for contingent
consideration and
(iv) equity interests of the acquirer including the number of
instruments or interests issued or issuable and the method of
measuring the fair value of those instruments or interests
(g) for contingent consideration arrangements and indemnification assets
(i) the amount recognised as of the acquisition date
(ii) a description of the arrangement and the basis for determining
the amount of the payment and
(iii) an estimate of the range of outcomes (undiscounted) or if a
range cannot be estimated that fact and the reasons why a range
cannot be estimated If the maximum amount of the payment is
unlimited the acquirer shall disclose that fact
(h) for acquired receivables
(i) the fair value of the receivables
(ii) the gross contractual amounts receivable and
(iii) the best estimate at the acquisition date of the contractual cash
flows not expected to be collected
The disclosures shall be provided by major class of receivable such as
loans direct finance leases and any other class of receivables
IFRS 3
IFRS FoundationA170(i) the amounts recognised as of the acquisition date for each major class of
assets acquired and liabilities assumed
(j) for each contingent liability recognised in accordance with
paragraph 23 the information required in paragraph 85 of IAS 37
Provisions Contingent Liabilities and Contingent Assets If a contingent liability
is not recognised because its fair value cannot be measured reliably the
acquirer shall disclose
(i) the information required by paragraph 86 of IAS 37 and
(ii) the reasons why the liability cannot be measured reliably
(k) the total amount of goodwill that is expected to be deductible for tax
purposes
(l) for transactions that are recognised separately from the acquisition of
assets and assumption of liabilities in the business combination in
accordance with paragraph 51
(i) a description of each transaction
(ii) how the acquirer accounted for each transaction
(iii) the amounts recognised for each transaction and the line item in
the financial statements in which each amount is recognised
and
(iv) if the transaction is the effective settlement of a preexisting
relationship the method used to determine the settlement
amount
(m) the disclosure of separately recognised transactions required by (l) shall
include the amount of acquisitionrelated costs and separately the
amount of those costs recognised as an expense and the line item or
items in the statement of comprehensive income in which those
expenses are recognised The amount of any issue costs not recognised as
an expense and how they were recognised shall also be disclosed
(n) in a bargain purchase (see paragraphs 34–36)
(i) the amount of any gain recognised in accordance with
paragraph 34 and the line item in the statement of
comprehensive income in which the gain is recognised and
(ii) a description of the reasons why the transaction resulted in a
gain
(o) for each business combination in which the acquirer holds less than
100 per cent of the equity interests in the acquiree at the acquisition
date
(i) the amount of the noncontrolling interest in the acquiree
recognised at the acquisition date and the measurement basis for
that amount and
(ii) for each noncontrolling interest in an acquiree measured at fair
value the valuation technique(s) and significant inputs used to
measure that value
IFRS 3
IFRS Foundation A171(p) in a business combination achieved in stages
(i) the acquisitiondate fair value of the equity interest in the
acquiree held by the acquirer immediately before the acquisition
date and
(ii) the amount of any gain or loss recognised as a result of
remeasuring to fair value the equity interest in the acquiree held
by the acquirer before the business combination (see
paragraph 42) and the line item in the statement of
comprehensive income in which that gain or loss is recognised
(q) the following information
(i) the amounts of revenue and profit or loss of the acquiree since
the acquisition date included in the consolidated statement of
comprehensive income for the reporting period and
(ii) the revenue and profit or loss of the combined entity for the
current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as
of the beginning of the annual reporting period
If disclosure of any of the information required by this subparagraph is
impracticable the acquirer shall disclose that fact and explain why the
disclosure is impracticable This IFRS uses the term impracticable’ with
the same meaning as in IAS 8 Accounting Policies Changes in Accounting
Estimates and Errors
B65 For individually immaterial business combinations occurring during the
reporting period that are material collectively the acquirer shall disclose in
aggregate the information required by paragraph B64(e)–(q)
B66 If the acquisition date of a business combination is after the end of the reporting
period but before the financial statements are authorised for issue the acquirer
shall disclose the information required by paragraph B64 unless the initial
accounting for the business combination is incomplete at the time the financial
statements are authorised for issue In that situation the acquirer shall describe
which disclosures could not be made and the reasons why they cannot be made
B67 To meet the objective in paragraph 61 the acquirer shall disclose the following
information for each material business combination or in the aggregate for
individually immaterial business combinations that are material collectively
(a) if the initial accounting for a business combination is incomplete (see
paragraph 45) for particular assets liabilities noncontrolling interests
or items of consideration and the amounts recognised in the financial
statements for the business combination thus have been determined
only provisionally
(i) the reasons why the initial accounting for the business
combination is incomplete
(ii) the assets liabilities equity interests or items of consideration
for which the initial accounting is incomplete and
IFRS 3
IFRS FoundationA172(iii) the nature and amount of any measurement period adjustments
recognised during the reporting period in accordance with
paragraph 49
(b) for each reporting period after the acquisition date until the entity
collects sells or otherwise loses the right to a contingent consideration
asset or until the entity settles a contingent consideration liability or the
liability is cancelled or expires
(i) any changes in the recognised amounts including any
differences arising upon settlement
(ii) any changes in the range of outcomes (undiscounted) and the
reasons for those changes and
(iii) the valuation techniques and key model inputs used to measure
contingent consideration
(c) for contingent liabilities recognised in a business combination the
acquirer shall disclose the information required by paragraphs 84 and 85
of IAS 37 for each class of provision
(d) a reconciliation of the carrying amount of goodwill at the beginning and
end of the reporting period showing separately
(i) the gross amount and accumulated impairment losses at the
beginning of the reporting period
(ii) additional goodwill recognised during the reporting period
except goodwill included in a disposal group that on acquisition
meets the criteria to be classified as held for sale in accordance
with IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations
(iii) adjustments resulting from the subsequent recognition of
deferred tax assets during the reporting period in accordance
with paragraph 67
(iv) goodwill included in a disposal group classified as held for sale in
accordance with IFRS 5 and goodwill derecognised during the
reporting period without having previously been included in a
disposal group classified as held for sale
(v) impairment losses recognised during the reporting period in
accordance with IAS 36 (IAS 36 requires disclosure of
information about the recoverable amount and impairment of
goodwill in addition to this requirement)
(vi) net exchange rate differences arising during the reporting period
in accordance with IAS 21 The Effects of Changes in Foreign Exchange
Rates
(vii) any other changes in the carrying amount during the reporting
period
(viii) the gross amount and accumulated impairment losses at the end
of the reporting period
IFRS 3
IFRS Foundation A173(e) the amount and an explanation of any gain or loss recognised in the
current reporting period that both
(i) relates to the identifiable assets acquired or liabilities assumed in
a business combination that was effected in the current or
previous reporting period and
(ii) is of such a size nature or incidence that disclosure is relevant to
understanding the combined entity’s financial statements
Transitional provisions for business combinations involving only
mutual entities or by contract alone (application of paragraph 66)
B68 Paragraph 64 provides that this IFRS applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009 Earlier
application is permitted However an entity shall apply this IFRS only at the
beginning of an annual reporting period that begins on or after 30 June 2007 If
an entity applies this IFRS before its effective date the entity shall disclose that
fact and shall apply IAS 27 (as amended in 2008) at the same time
B69 The requirement to apply this IFRS prospectively has the following effect for a
business combination involving only mutual entities or by contract alone if the
acquisition date for that business combination is before the application of this
IFRS
(a) Classification—An entity shall continue to classify the prior business
combination in accordance with the entity’s previous accounting
policies for such combinations
(b) Previously recognised goodwill—At the beginning of the first annual period
in which this IFRS is applied the carrying amount of goodwill arising
from the prior business combination shall be its carrying amount at that
date in accordance with the entity’s previous accounting policies In
determining that amount the entity shall eliminate the carrying
amount of any accumulated amortisation of that goodwill and the
corresponding decrease in goodwill No other adjustments shall be made
to the carrying amount of goodwill
(c) Goodwill previously recognised as a deduction from equity—The entity’s previous
accounting policies may have resulted in goodwill arising from the prior
business combination being recognised as a deduction from equity In
that situation the entity shall not recognise that goodwill as an asset at
the beginning of the first annual period in which this IFRS is applied
Furthermore the entity shall not recognise in profit or loss any part of
that goodwill when it disposes of all or part of the business to which that
goodwill relates or when a cashgenerating unit to which the goodwill
relates becomes impaired
(d) Subsequent accounting for goodwill—From the beginning of the first annual
period in which this IFRS is applied an entity shall discontinue
amortising goodwill arising from the prior business combination and
shall test goodwill for impairment in accordance with IAS 36
IFRS 3
IFRS FoundationA174(e) Previously recognised negative goodwill—An entity that accounted for the
prior business combination by applying the purchase method may have
recognised a deferred credit for an excess of its interest in the net fair
value of the acquiree’s identifiable assets and liabilities over the cost of
that interest (sometimes called negative goodwill) If so the entity shall
derecognise the carrying amount of that deferred credit at the beginning
of the first annual period in which this IFRS is applied with a
corresponding adjustment to the opening balance of retained earnings
at that date
IFRS 3
IFRS Foundation A175Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual reporting periods beginning on or
after 1 July 2009 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period Amended paragraphs are shown with new text underlined and
deleted text struck through
*****
The amendments contained in this appendix when this revised IFRS was issued in 2008 have been
incorporated into the relevant IFRSs published in this volume
IFRS 3
IFRS FoundationA176IFRS Standard 4
Insurance Contracts
In March 2004 the International Accounting Standards Board (the Board) issued IFRS 4
Insurance Contracts In August 2005 the Board amended the scope of IFRS 4 to clarify that
most financial guarantee contracts would apply the financial instruments requirements In
December 2005 the Board issued revised guidance on implementing IFRS 4
Other Standards have made minor consequential amendments to IFRS 4 They include
IFRS 13 Fair Value Measurement (issued May 2011) IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued November 2013) IFRS 15
Revenue from Contracts with Customers (issued May 2014) IFRS 9 Financial Instruments (issued July
2014) and IFRS 16 Leases (issued January 2016)
IFRS 4
IFRS Foundation A177CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 4
INSURANCE CONTRACTS
OBJECTIVE 1
SCOPE 2
Embedded derivatives 7
Unbundling of deposit components 10
RECOGNITION AND MEASUREMENT 13
Temporary exemption from some other IFRSs 13
Changes in accounting policies 21
Insurance contracts acquired in a business combination or portfolio transfer 31
Discretionary participation features 34
DISCLOSURE 36
Explanation of recognised amounts 36
Nature and extent of risks arising from insurance contracts 38
EFFECTIVE DATE AND TRANSITION 40
Disclosure 42
Redesignation of financial assets 45
APPENDICES
A Defined terms
B Definition of an insurance contract
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 4 ISSUED IN MARCH 2004
APPROVAL BY THE BOARD OF FINANCIAL GUARANTEE CONTRACTS
(AMENDMENTS TO IAS 39 AND IFRS 4) ISSUED IN AUGUST 2005
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
IFRS 4
IFRS FoundationA178International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) is set out in
paragraphs 1–45 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 4 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 4
IFRS Foundation A179Introduction
Reasons for issuing the IFRS
IN1 This is the first IFRS to deal with insurance contracts Accounting practices for
insurance contracts have been diverse and have often differed from practices in
other sectors Because many entities will adopt IFRSs in 2005 the International
Accounting Standards Board has issued this IFRS
(a) to make limited improvements to accounting for insurance contracts
until the Board completes the second phase of its project on insurance
contracts
(b) to require any entity issuing insurance contracts (an insurer) to disclose
information about those contracts
IN2 This IFRS is a stepping stone to phase II of this project The Board is committed
to completing phase II without delay once it has investigated all relevant
conceptual and practical questions and completed its full due process
Main features of the IFRS
IN3 The IFRS applies to all insurance contracts (including reinsurance contracts) that
an entity issues and to reinsurance contracts that it holds except for specified
contracts covered by other IFRSs It does not apply to other assets and liabilities
of an insurer such as financial assets and financial liabilities within the scope of
IFRS 9 Financial Instruments Furthermore it does not address accounting by
policyholders
IN4 The IFRS exempts an insurer temporarily (ie during phase I of this project) from
some requirements of other IFRSs including the requirement to consider the
Framework1 in selecting accounting policies for insurance contracts However
the IFRS
(a) prohibits provisions for possible claims under contracts that are not in
existence at the end of the reporting period (such as catastrophe and
equalisation provisions)
(b) requires a test for the adequacy of recognised insurance liabilities and an
impairment test for reinsurance assets
(c) requires an insurer to keep insurance liabilities in its statement of
financial position until they are discharged or cancelled or expire and
to present insurance liabilities without offsetting them against related
reinsurance assets
IN5 The IFRS permits an insurer to change its accounting policies for insurance
contracts only if as a result its financial statements present information that is
more relevant and no less reliable or more reliable and no less relevant
1 The reference to the Framework is to IASC’s Framework for the Preparation and Presentation of Financial
Statements adopted by the IASB in 2001 In September 2010 the IASB replaced the Framework with
the Conceptual Framework for Financial Reporting
IFRS 4
IFRS FoundationA180In particular an insurer cannot introduce any of the following practices
although it may continue using accounting policies that involve them
(a) measuring insurance liabilities on an undiscounted basis
(b) measuring contractual rights to future investment management fees at
an amount that exceeds their fair value as implied by a comparison with
current fees charged by other market participants for similar services
(c) using nonuniform accounting policies for the insurance liabilities of
subsidiaries
IN6 The IFRS permits the introduction of an accounting policy that involves
remeasuring designated insurance liabilities consistently in each period to
reflect current market interest rates (and if the insurer so elects other current
estimates and assumptions) Without this permission an insurer would have
been required to apply the change in accounting policies consistently to all
similar liabilities
IN7 An insurer need not change its accounting policies for insurance contracts to
eliminate excessive prudence However if an insurer already measures its
insurance contracts with sufficient prudence it should not introduce additional
prudence
IN8 There is a rebuttable presumption that an insurer’s financial statements will
become less relevant and reliable if it introduces an accounting policy that
reflects future investment margins in the measurement of insurance contracts
IN9 When an insurer changes its accounting policies for insurance liabilities it may
reclassify some or all financial assets as at fair value through profit or loss’
IN10 The IFRS
(a) clarifies that an insurer need not account for an embedded derivative
separately at fair value if the embedded derivative meets the definition of
an insurance contract
(b) requires an insurer to unbundle (ie account separately for) deposit
components of some insurance contracts to avoid the omission of assets
and liabilities from its statement of financial position
(c) clarifies the applicability of the practice sometimes known as shadow
accounting’
(d) permits an expanded presentation for insurance contracts acquired in a
business combination or portfolio transfer
(e) addresses limited aspects of discretionary participation features
contained in insurance contracts or financial instruments
IN11 The IFRS requires disclosure to help users understand
(a) the amounts in the insurer’s financial statements that arise from
insurance contracts
(b) the nature and extent of risks arising from insurance contracts
IN12–
IN13
[Deleted]
IFRS 4
IFRS Foundation A181International Financial Reporting Standard 4
Insurance Contracts
Objective
1 The objective of this IFRS is to specify the financial reporting for insurance
contracts by any entity that issues such contracts (described in this IFRS as an
insurer) until the Board completes the second phase of its project on insurance
contracts In particular this IFRS requires
(a) limited improvements to accounting by insurers for insurance contracts
(b) disclosure that identifies and explains the amounts in an insurer’s
financial statements arising from insurance contracts and helps users of
those financial statements understand the amount timing and
uncertainty of future cash flows from insurance contracts
Scope
2 An entity shall apply this IFRS to
(a) insurance contracts (including reinsurance contracts) that it issues and
reinsurance contracts that it holds
(b) financial instruments that it issues with a discretionary participation feature
(see paragraph 35) IFRS 7 Financial Instruments Disclosures requires
disclosure about financial instruments including financial instruments
that contain such features
3 This IFRS does not address other aspects of accounting by insurers such as
accounting for financial assets held by insurers and financial liabilities issued by
insurers (see IAS 32 Financial Instruments Presentation IFRS 7 and IFRS 9 Financial
Instruments) except in the transitional provisions in paragraph 45
4 An entity shall not apply this IFRS to
(a) product warranties issued directly by a manufacturer dealer or retailer
(see IFRS 15 Revenue from Contracts with Customers and IAS 37 Provisions
Contingent Liabilities and Contingent Assets)
(b) employers’ assets and liabilities under employee benefit plans (see IAS 19
Employee Benefits and IFRS 2 Sharebased Payment) and retirement benefit
obligations reported by defined benefit retirement plans (see IAS 26
Accounting and Reporting by Retirement Benefit Plans)
(c) contractual rights or contractual obligations that are contingent on the
future use of or right to use a nonfinancial item (for example some
licence fees royalties variable lease payments and similar items) as well
as a lessee’s residual value guarantee embedded in a lease (see IFRS 16
Leases IFRS 15 Revenue from Contracts with Customers and IAS 38 Intangible
Assets)
IFRS 4
IFRS FoundationA182(d) financial guarantee contracts unless the issuer has previously asserted
explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts in which case the
issuer may elect to apply either IAS 32 IFRS 7 and IFRS 9 or this IFRS to
such financial guarantee contracts The issuer may make that election
contract by contract but the election for each contract is irrevocable
(e) contingent consideration payable or receivable in a business
combination (see IFRS 3 Business Combinations)
(f) direct insurance contracts that the entity holds (ie direct insurance contracts
in which the entity is the policyholder) However a cedant shall apply this
IFRS to reinsurance contracts that it holds
5 For ease of reference this IFRS describes any entity that issues an insurance
contract as an insurer whether or not the issuer is regarded as an insurer for
legal or supervisory purposes
6 A reinsurance contract is a type of insurance contract Accordingly all
references in this IFRS to insurance contracts also apply to reinsurance
contracts
Embedded derivatives
7 IFRS 9 requires an entity to separate some embedded derivatives from their host
contract measure them at fair value and include changes in their fair value in
profit or loss IFRS 9 applies to derivatives embedded in an insurance contract
unless the embedded derivative is itself an insurance contract
8 As an exception to the requirements in IFRS 9 an insurer need not separate and
measure at fair value a policyholder’s option to surrender an insurance contract
for a fixed amount (or for an amount based on a fixed amount and an interest
rate) even if the exercise price differs from the carrying amount of the host
insurance liability However the requirements in IFRS 9 do apply to a put option
or cash surrender option embedded in an insurance contract if the surrender
value varies in response to the change in a financial variable (such as an equity
or commodity price or index) or a nonfinancial variable that is not specific to a
party to the contract Furthermore those requirements also apply if the
holder’s ability to exercise a put option or cash surrender option is triggered by
a change in such a variable (for example a put option that can be exercised if a
stock market index reaches a specified level)
9 Paragraph 8 applies equally to options to surrender a financial instrument
containing a discretionary participation feature
Unbundling of deposit components
10 Some insurance contracts contain both an insurance component and a deposit
component In some cases an insurer is required or permitted to unbundle those
components
(a) unbundling is required if both the following conditions are met
IFRS 4
IFRS Foundation A183(i) the insurer can measure the deposit component (including
any embedded surrender options) separately (ie without
considering the insurance component)
(ii) the insurer’s accounting policies do not otherwise require it to
recognise all obligations and rights arising from the deposit
component
(b) unbundling is permitted but not required if the insurer can measure
the deposit component separately as in (a)(i) but its accounting policies
require it to recognise all obligations and rights arising from the deposit
component regardless of the basis used to measure those rights and
obligations
(c) unbundling is prohibited if an insurer cannot measure the deposit
component separately as in (a)(i)
11 The following is an example of a case when an insurer’s accounting policies do
not require it to recognise all obligations arising from a deposit component A
cedant receives compensation for losses from a reinsurer but the contract obliges
the cedant to repay the compensation in future years That obligation arises
from a deposit component If the cedant’s accounting policies would otherwise
permit it to recognise the compensation as income without recognising the
resulting obligation unbundling is required
12 To unbundle a contract an insurer shall
(a) apply this IFRS to the insurance component
(b) apply IFRS 9 to the deposit component
Recognition and measurement
Temporary exemption from some other IFRSs
13 Paragraphs 10–12 of IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors specify criteria for an entity to use in developing an accounting policy if
no IFRS applies specifically to an item However this IFRS exempts an insurer
from applying those criteria to its accounting policies for
(a) insurance contracts that it issues (including related acquisition costs and
related intangible assets such as those described in paragraphs 31 and
32) and
(b) reinsurance contracts that it holds
14 Nevertheless this IFRS does not exempt an insurer from some implications of
the criteria in paragraphs 10–12 of IAS 8 Specifically an insurer
(a) shall not recognise as a liability any provisions for possible future claims
if those claims arise under insurance contracts that are not in existence
at the end of the reporting period (such as catastrophe provisions and
equalisation provisions)
(b) shall carry out the liability adequacy test described in paragraphs 15–19
IFRS 4
IFRS FoundationA184(c) shall remove an insurance liability (or a part of an insurance liability)
from its statement of financial position when and only when it is
extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires
(d) shall not offset
(i) reinsurance assets against the related insurance liabilities or
(ii) income or expense from reinsurance contracts against the
expense or income from the related insurance contracts
(e) shall consider whether its reinsurance assets are impaired (see
paragraph 20)
Liability adequacy test
15 An insurer shall assess at the end of each reporting period whether its
recognised insurance liabilities are adequate using current estimates of
future cash flows under its insurance contracts If that assessment shows
that the carrying amount of its insurance liabilities (less related deferred
acquisition costs and related intangible assets such as those discussed in
paragraphs 31 and 32) is inadequate in the light of the estimated future
cash flows the entire deficiency shall be recognised in profit or loss
16 If an insurer applies a liability adequacy test that meets specified minimum
requirements this IFRS imposes no further requirements The minimum
requirements are the following
(a) The test considers current estimates of all contractual cash flows and of
related cash flows such as claims handling costs as well as cash flows
resulting from embedded options and guarantees
(b) If the test shows that the liability is inadequate the entire deficiency is
recognised in profit or loss
17 If an insurer’s accounting policies do not require a liability adequacy test that
meets the minimum requirements of paragraph 16 the insurer shall
(a) determine the carrying amount of the relevant insurance liabilities2 less
the carrying amount of
(i) any related deferred acquisition costs and
(ii) any related intangible assets such as those acquired in a business
combination or portfolio transfer (see paragraphs 31 and 32)
However related reinsurance assets are not considered because
an insurer accounts for them separately (see paragraph 20)
(b) determine whether the amount described in (a) is less than the carrying
amount that would be required if the relevant insurance liabilities were
within the scope of IAS 37 If it is less the insurer shall recognise the
entire difference in profit or loss and decrease the carrying amount of
2 The relevant insurance liabilities are those insurance liabilities (and related deferred acquisition
costs and related intangible assets) for which the insurer’s accounting policies do not require a
liability adequacy test that meets the minimum requirements of paragraph 16
IFRS 4
IFRS Foundation A185the related deferred acquisition costs or related intangible assets or
increase the carrying amount of the relevant insurance liabilities
18 If an insurer’s liability adequacy test meets the minimum requirements of
paragraph 16 the test is applied at the level of aggregation specified in that test
If its liability adequacy test does not meet those minimum requirements the
comparison described in paragraph 17 shall be made at the level of a portfolio of
contracts that are subject to broadly similar risks and managed together as a
single portfolio
19 The amount described in paragraph 17(b) (ie the result of applying IAS 37) shall
reflect future investment margins (see paragraphs 27–29) if and only if the
amount described in paragraph 17(a) also reflects those margins
Impairment of reinsurance assets
20 If a cedant’s reinsurance asset is impaired the cedant shall reduce its carrying
amount accordingly and recognise that impairment loss in profit or loss
A reinsurance asset is impaired if and only if
(a) there is objective evidence as a result of an event that occurred after
initial recognition of the reinsurance asset that the cedant may not
receive all amounts due to it under the terms of the contract and
(b) that event has a reliably measurable impact on the amounts that the
cedant will receive from the reinsurer
Changes in accounting policies
21 Paragraphs 22–30 apply both to changes made by an insurer that already applies
IFRSs and to changes made by an insurer adopting IFRSs for the first time
22 An insurer may change its accounting policies for insurance contracts if
and only if the change makes the financial statements more relevant to
the economic decisionmaking needs of users and no less reliable or
more reliable and no less relevant to those needs An insurer shall judge
relevance and reliability by the criteria in IAS 8
23 To justify changing its accounting policies for insurance contracts an insurer
shall show that the change brings its financial statements closer to meeting the
criteria in IAS 8 but the change need not achieve full compliance with those
criteria The following specific issues are discussed below
(a) current interest rates (paragraph 24)
(b) continuation of existing practices (paragraph 25)
(c) prudence (paragraph 26)
(d) future investment margins (paragraphs 27–29) and
(e) shadow accounting (paragraph 30)
IFRS 4
IFRS FoundationA186Current market interest rates
24 An insurer is permitted but not required to change its accounting policies so
that it remeasures designated insurance liabilities3 to reflect current market
interest rates and recognises changes in those liabilities in profit or loss At that
time it may also introduce accounting policies that require other current
estimates and assumptions for the designated liabilities The election in this
paragraph permits an insurer to change its accounting policies for designated
liabilities without applying those policies consistently to all similar liabilities as
IAS 8 would otherwise require If an insurer designates liabilities for this
election it shall continue to apply current market interest rates (and if
applicable the other current estimates and assumptions) consistently in all
periods to all these liabilities until they are extinguished
Continuation of existing practices
25 An insurer may continue the following practices but the introduction of any of
them does not satisfy paragraph 22
(a) measuring insurance liabilities on an undiscounted basis
(b) measuring contractual rights to future investment management fees at
an amount that exceeds their fair value as implied by a comparison with
current fees charged by other market participants for similar services It
is likely that the fair value at inception of those contractual rights equals
the origination costs paid unless future investment management fees
and related costs are out of line with market comparables
(c) using nonuniform accounting policies for the insurance contracts (and
related deferred acquisition costs and related intangible assets if any) of
subsidiaries except as permitted by paragraph 24 If those accounting
policies are not uniform an insurer may change them if the change does
not make the accounting policies more diverse and also satisfies the
other requirements in this IFRS
Prudence
26 An insurer need not change its accounting policies for insurance contracts to
eliminate excessive prudence However if an insurer already measures its
insurance contracts with sufficient prudence it shall not introduce additional
prudence
Future investment margins
27 An insurer need not change its accounting policies for insurance contracts to
eliminate future investment margins However there is a rebuttable
presumption that an insurer’s financial statements will become less relevant
and reliable if it introduces an accounting policy that reflects future investment
margins in the measurement of insurance contracts unless those margins affect
the contractual payments Two examples of accounting policies that reflect
those margins are
3 In this paragraph insurance liabilities include related deferred acquisition costs and related
intangible assets such as those discussed in paragraphs 31 and 32
IFRS 4
IFRS Foundation A187(a) using a discount rate that reflects the estimated return on the insurer’s
assets or
(b) projecting the returns on those assets at an estimated rate of return
discounting those projected returns at a different rate and including the
result in the measurement of the liability
28 An insurer may overcome the rebuttable presumption described in paragraph 27
if and only if the other components of a change in accounting policies increase
the relevance and reliability of its financial statements sufficiently to outweigh
the decrease in relevance and reliability caused by the inclusion of future
investment margins For example suppose that an insurer’s existing accounting
policies for insurance contracts involve excessively prudent assumptions set at
inception and a discount rate prescribed by a regulator without direct reference
to market conditions and ignore some embedded options and guarantees
The insurer might make its financial statements more relevant and no less
reliable by switching to a comprehensive investororiented basis of accounting
that is widely used and involves
(a) current estimates and assumptions
(b) a reasonable (but not excessively prudent) adjustment to reflect risk and
uncertainty
(c) measurements that reflect both the intrinsic value and time value of
embedded options and guarantees and
(d) a current market discount rate even if that discount rate reflects the
estimated return on the insurer’s assets
29 In some measurement approaches the discount rate is used to determine the
present value of a future profit margin That profit margin is then attributed to
different periods using a formula In those approaches the discount rate affects
the measurement of the liability only indirectly In particular the use of a less
appropriate discount rate has a limited or no effect on the measurement of the
liability at inception However in other approaches the discount rate
determines the measurement of the liability directly In the latter case because
the introduction of an assetbased discount rate has a more significant effect it
is highly unlikely that an insurer could overcome the rebuttable presumption
described in paragraph 27
Shadow accounting
30 In some accounting models realised gains or losses on an insurer’s assets have a
direct effect on the measurement of some or all of (a) its insurance liabilities
(b) related deferred acquisition costs and (c) related intangible assets such as
those described in paragraphs 31 and 32 An insurer is permitted but not
required to change its accounting policies so that a recognised but unrealised
gain or loss on an asset affects those measurements in the same way that a
realised gain or loss does The related adjustment to the insurance liability (or
deferred acquisition costs or intangible assets) shall be recognised in other
comprehensive income if and only if the unrealised gains or losses are
recognised in other comprehensive income This practice is sometimes
described as shadow accounting’
IFRS 4
IFRS FoundationA188Insurance contracts acquired in a business combination
or portfolio transfer
31 To comply with IFRS 3 an insurer shall at the acquisition date measure at fair
value the insurance liabilities assumed and insurance assets acquired in a business
combination However an insurer is permitted but not required to use an
expanded presentation that splits the fair value of acquired insurance contracts
into two components
(a) a liability measured in accordance with the insurer’s accounting policies
for insurance contracts that it issues and
(b) an intangible asset representing the difference between (i) the fair value
of the contractual insurance rights acquired and insurance obligations
assumed and (ii) the amount described in (a) The subsequent
measurement of this asset shall be consistent with the measurement of
the related insurance liability
32 An insurer acquiring a portfolio of insurance contracts may use the expanded
presentation described in paragraph 31
33 The intangible assets described in paragraphs 31 and 32 are excluded from the
scope of IAS 36 Impairment of Assets and IAS 38 However IAS 36 and IAS 38 apply
to customer lists and customer relationships reflecting the expectation of future
contracts that are not part of the contractual insurance rights and contractual
insurance obligations that existed at the date of a business combination or
portfolio transfer
Discretionary participation features
Discretionary participation features in insurance contracts
34 Some insurance contracts contain a discretionary participation feature as well as
a guaranteed element The issuer of such a contract
(a) may but need not recognise the guaranteed element separately from
the discretionary participation feature If the issuer does not recognise
them separately it shall classify the whole contract as a liability If the
issuer classifies them separately it shall classify the guaranteed element
as a liability
(b) shall if it recognises the discretionary participation feature separately
from the guaranteed element classify that feature as either a liability or
a separate component of equity This IFRS does not specify how the
issuer determines whether that feature is a liability or equity The issuer
may split that feature into liability and equity components and shall use
a consistent accounting policy for that split The issuer shall not classify
that feature as an intermediate category that is neither liability nor
equity
(c) may recognise all premiums received as revenue without separating any
portion that relates to the equity component The resulting changes in
the guaranteed element and in the portion of the discretionary
participation feature classified as a liability shall be recognised in profit
IFRS 4
IFRS Foundation A189or loss If part or all of the discretionary participation feature is
classified in equity a portion of profit or loss may be attributable to that
feature (in the same way that a portion may be attributable to
noncontrolling interests) The issuer shall recognise the portion of
profit or loss attributable to any equity component of a discretionary
participation feature as an allocation of profit or loss not as expense or
income (see IAS 1 Presentation of Financial Statements)
(d) shall if the contract contains an embedded derivative within the scope
of IFRS 9 apply IFRS 9 to that embedded derivative
(e) shall in all respects not described in paragraphs 14–20 and 34(a)–(d)
continue its existing accounting policies for such contracts unless it
changes those accounting policies in a way that complies with
paragraphs 21–30
Discretionary participation features in financial instruments
35 The requirements in paragraph 34 also apply to a financial instrument that
contains a discretionary participation feature In addition
(a) if the issuer classifies the entire discretionary participation feature as a
liability it shall apply the liability adequacy test in paragraphs 15–19 to
the whole contract (ie both the guaranteed element and the
discretionary participation feature) The issuer need not determine the
amount that would result from applying IFRS 9 to the guaranteed
element
(b) if the issuer classifies part or all of that feature as a separate component
of equity the liability recognised for the whole contract shall not be less
than the amount that would result from applying IFRS 9 to the
guaranteed element That amount shall include the intrinsic value of an
option to surrender the contract but need not include its time value if
paragraph 9 exempts that option from measurement at fair value The
issuer need not disclose the amount that would result from applying
IFRS 9 to the guaranteed element nor need it present that amount
separately Furthermore the issuer need not determine that amount if
the total liability recognised is clearly higher
(c) although these contracts are financial instruments the issuer may
continue to recognise the premiums for those contracts as revenue and
recognise as an expense the resulting increase in the carrying amount of
the liability
(d) although these contracts are financial instruments an issuer applying
paragraph 20(b) of IFRS 7 to contracts with a discretionary participation
feature shall disclose the total interest expense recognised in profit or
loss but need not calculate such interest expense using the effective
interest method
IFRS 4
IFRS FoundationA190Disclosure
Explanation of recognised amounts
36 An insurer shall disclose information that identifies and explains the
amounts in its financial statements arising from insurance contracts
37 To comply with paragraph 36 an insurer shall disclose
(a) its accounting policies for insurance contracts and related assets
liabilities income and expense
(b) the recognised assets liabilities income and expense (and if it presents
its statement of cash flows using the direct method cash flows) arising
from insurance contracts Furthermore if the insurer is a cedant it shall
disclose
(i) gains and losses recognised in profit or loss on buying
reinsurance and
(ii) if the cedant defers and amortises gains and losses arising on
buying reinsurance the amortisation for the period and the
amounts remaining unamortised at the beginning and end of the
period
(c) the process used to determine the assumptions that have the greatest
effect on the measurement of the recognised amounts described in (b)
When practicable an insurer shall also give quantified disclosure of
those assumptions
(d) the effect of changes in assumptions used to measure insurance assets
and insurance liabilities showing separately the effect of each change
that has a material effect on the financial statements
(e) reconciliations of changes in insurance liabilities reinsurance assets
and if any related deferred acquisition costs
Nature and extent of risks arising from insurance
contracts
38 An insurer shall disclose information that enables users of its financial
statements to evaluate the nature and extent of risks arising from
insurance contracts
39 To comply with paragraph 38 an insurer shall disclose
(a) its objectives policies and processes for managing risks arising from
insurance contracts and the methods used to manage those risks
(b) [deleted]
(c) information about insurance risk (both before and after risk mitigation by
reinsurance) including information about
(i) sensitivity to insurance risk (see paragraph 39A)
IFRS 4
IFRS Foundation A191(ii) concentrations of insurance risk including a description of how
management determines concentrations and a description of the
shared characteristic that identifies each concentration (eg type
of insured event geographical area or currency)
(iii) actual claims compared with previous estimates (ie claims
development) The disclosure about claims development shall go
back to the period when the earliest material claim arose for
which there is still uncertainty about the amount and timing of
the claims payments but need not go back more than ten years
An insurer need not disclose this information for claims for
which uncertainty about the amount and timing of claims
payments is typically resolved within one year
(d) information about credit risk liquidity risk and market risk that
paragraphs 31–42 of IFRS 7 would require if the insurance contracts were
within the scope of IFRS 7 However
(i) an insurer need not provide the maturity analyses required by
paragraph 39(a) and (b) of IFRS 7 if it discloses information about
the estimated timing of the net cash outflows resulting from
recognised insurance liabilities instead This may take the form
of an analysis by estimated timing of the amounts recognised in
the statement of financial position
(ii) if an insurer uses an alternative method to manage sensitivity to
market conditions such as an embedded value analysis it may
use that sensitivity analysis to meet the requirement in
paragraph 40(a) of IFRS 7 Such an insurer shall also provide the
disclosures required by paragraph 41 of IFRS 7
(e) information about exposures to market risk arising from embedded
derivatives contained in a host insurance contract if the insurer is not
required to and does not measure the embedded derivatives at fair
value
39A To comply with paragraph 39(c)(i) an insurer shall disclose either (a) or (b) as
follows
(a) a sensitivity analysis that shows how profit or loss and equity would have
been affected if changes in the relevant risk variable that were
reasonably possible at the end of the reporting period had occurred the
methods and assumptions used in preparing the sensitivity analysis and
any changes from the previous period in the methods and assumptions
used However if an insurer uses an alternative method to manage
sensitivity to market conditions such as an embedded value analysis it
may meet this requirement by disclosing that alternative sensitivity
analysis and the disclosures required by paragraph 41 of IFRS 7
(b) qualitative information about sensitivity and information about those
terms and conditions of insurance contracts that have a material effect
on the amount timing and uncertainty of the insurer’s future cash
flows
IFRS 4
IFRS FoundationA192Effective date and transition
40 The transitional provisions in paragraphs 41–45 apply both to an entity that is
already applying IFRSs when it first applies this IFRS and to an entity that
applies IFRSs for the first time (a firsttime adopter)
41 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005 Earlier application is encouraged If an entity applies this IFRS
for an earlier period it shall disclose that fact
41A Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4) issued in August
2005 amended paragraphs 4(d) B18(g) and B19(f) An entity shall apply those
amendments for annual periods beginning on or after 1 January 2006 Earlier
application is encouraged If an entity applies those amendments for an earlier
period it shall disclose that fact and apply the related amendments to IAS 39
and IAS 324 at the same time
41B IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraph 30 An entity shall apply those amendments for
annual periods beginning on or after 1 January 2009 If an entity applies IAS 1
(revised 2007) for an earlier period the amendments shall be applied for that
earlier period
41C [Deleted]
41D [Deleted]
41E IFRS 13 Fair Value Measurement issued in May 2011 amended the definition of fair
value in Appendix A An entity shall apply that amendment when it applies
IFRS 13
41F [Deleted]
41G IFRS 15 Revenue from Contracts with Customers issued in May 2014 amended
paragraphs 4(a) and (c) B7 B18(h) and B21 An entity shall apply those
amendments when it applies IFRS 15
41H IFRS 9 as issued in July 2014 amended paragraphs 3 4 7 8 12 34 35 45
Appendix A and paragraphs B18–B20 and deleted paragraphs 41C 41D and 41F
An entity shall apply those amendments when it applies IFRS 9
41I IFRS 16 issued in January 2016 amended paragraph 4 An entity shall apply
that amendment when it applies IFRS 16
Disclosure
42 An entity need not apply the disclosure requirements in this IFRS to comparative
information that relates to annual periods beginning before 1 January 2005
except for the disclosures required by paragraph 37(a) and (b) about accounting
policies and recognised assets liabilities income and expense (and cash flows if
the direct method is used)
4 When an entity applies IFRS 7 the reference to IAS 32 is replaced by a reference to IFRS 7
IFRS 4
IFRS Foundation A19343 If it is impracticable to apply a particular requirement of paragraphs 10–35 to
comparative information that relates to annual periods beginning before
1 January 2005 an entity shall disclose that fact Applying the liability adequacy
test (paragraphs 15–19) to such comparative information might sometimes be
impracticable but it is highly unlikely to be impracticable to apply other
requirements of paragraphs 10–35 to such comparative information
IAS 8 explains the term impracticable’
44 In applying paragraph 39(c)(iii) an entity need not disclose information about
claims development that occurred earlier than five years before the end of the
first financial year in which it applies this IFRS Furthermore if it is
impracticable when an entity first applies this IFRS to prepare information
about claims development that occurred before the beginning of the earliest
period for which an entity presents full comparative information that complies
with this IFRS the entity shall disclose that fact
Redesignation of financial assets
45 Notwithstanding paragraph 441 of IFRS 9 when an insurer changes its
accounting policies for insurance liabilities it is permitted but not required to
reclassify some or all of its financial assets so that they are measured at fair value
through profit or loss This reclassification is permitted if an insurer changes
accounting policies when it first applies this IFRS and if it makes a subsequent
policy change permitted by paragraph 22 The reclassification is a change in
accounting policy and IAS 8 applies
IFRS 4
IFRS FoundationA194Appendix A
Defined terms
This appendix is an integral part of the IFRS
cedant The policyholder under a reinsurance contract
deposit component A contractual component that is not accounted for as a derivative
under IFRS 9 and would be within the scope of IFRS 9 if it were a
separate instrument
direct insurance
contract
An insurance contract that is not a reinsurance
contract
discretionary
participation feature
A contractual right to receive as a supplement to guaranteed
benefits additional benefits
(a) that are likely to be a significant portion of the total
contractual benefits
(b) whose amount or timing is contractually at the discretion
of the issuer and
(c) that are contractually based on
(i) the performance of a specified pool of contracts or
a specified type of contract
(ii) realised andor unrealised investment returns on
a specified pool of assets held by the issuer or
(iii) the profit or loss of the company fund or other
entity that issues the contract
fair value Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (See IFRS 13)
financial guarantee
contract
A contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument
financial risk The risk of a possible future change in one or more of a specified
interest rate financial instrument price commodity price
foreign exchange rate index of prices or rates credit rating or
credit index or other variable provided in the case of a
nonfinancial variable that the variable is not specific to a party
to the contract
guaranteed benefits Payments or other benefits to which a particular policyholder or
investor has an unconditional right that is not subject to the
contractual discretion of the issuer
guaranteed element An obligation to pay guaranteed benefits included in a
contract that contains a discretionary participation feature
IFRS 4
IFRS Foundation A195insurance asset An insurer’s net contractual rights under an insurance
contract
insurance contract A contract under which one party (the insurer) accepts
significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder if a
specified uncertain future event (the insured event) adversely
affects the policyholder (See Appendix B for guidance on this
definition)
insurance liability An insurer’s net contractual obligations under an insurance
contract
insurance risk Risk other than financial risk transferred from the holder of a
contract to the issuer
insured event An uncertain future event that is covered by an insurance
contract and creates insurance risk
insurer The party that has an obligation under an insurance contract to
compensate a policyholder if an insured event occurs
liability adequacy test An assessment of whether the carrying amount of an insurance
liability needs to be increased (or the carrying amount of related
deferred acquisition costs or related intangible assets decreased)
based on a review of future cash flows
policyholder A party that has a right to compensation under an insurance
contract if an insured event occurs
reinsurance assets A cedant’s net contractual rights under a reinsurance contract
reinsurance contract An insurance contract issued by one insurer (the reinsurer)to
compensate another insurer (the cedant) for losses on one or
more contracts issued by the cedant
reinsurer The party that has an obligation under a reinsurance contract
to compensate a cedant if an insured event occurs
unbundle Account for the components of a contract as if they were separate
contracts
IFRS 4
IFRS FoundationA196Appendix B
Definition of an insurance contract
This appendix is an integral part of the IFRS
B1 This appendix gives guidance on the definition of an insurance contract in
Appendix A It addresses the following issues
(a) the term uncertain future event’ (paragraphs B2–B4)
(b) payments in kind (paragraphs B5–B7)
(c) insurance risk and other risks (paragraphs B8–B17)
(d) examples of insurance contracts (paragraphs B18–B21)
(e) significant insurance risk (paragraphs B22–B28) and
(f) changes in the level of insurance risk (paragraphs B29 and B30)
Uncertain future event
B2 Uncertainty (or risk) is the essence of an insurance contract Accordingly at
least one of the following is uncertain at the inception of an insurance contract
(a) whether an insured event will occur
(b) when it will occur or
(c) how much the insurer will need to pay if it occurs
B3 In some insurance contracts the insured event is the discovery of a loss during
the term of the contract even if the loss arises from an event that occurred
before the inception of the contract In other insurance contracts the insured
event is an event that occurs during the term of the contract even if the
resulting loss is discovered after the end of the contract term
B4 Some insurance contracts cover events that have already occurred but whose
financial effect is still uncertain An example is a reinsurance contract that
covers the direct insurer against adverse development of claims already reported
by policyholders In such contracts the insured event is the discovery of the
ultimate cost of those claims
Payments in kind
B5 Some insurance contracts require or permit payments to be made in kind
An example is when the insurer replaces a stolen article directly instead of
reimbursing the policyholder Another example is when an insurer uses its own
hospitals and medical staff to provide medical services covered by the contracts
B6 Some fixedfee service contracts in which the level of service depends on an
uncertain event meet the definition of an insurance contract in this IFRS but are
not regulated as insurance contracts in some countries One example is a
maintenance contract in which the service provider agrees to repair specified
equipment after a malfunction The fixed service fee is based on the expected
number of malfunctions but it is uncertain whether a particular machine will
break down The malfunction of the equipment adversely affects its owner and
the contract compensates the owner (in kind rather than cash) Another
IFRS 4
IFRS Foundation A197example is a contract for car breakdown services in which the provider agrees
for a fixed annual fee to provide roadside assistance or tow the car to a nearby
garage The latter contract could meet the definition of an insurance contract
even if the provider does not agree to carry out repairs or replace parts
B7 Applying the IFRS to the contracts described in paragraph B6 is likely to be no
more burdensome than applying the IFRSs that would be applicable if such
contracts were outside the scope of this IFRS
(a) There are unlikely to be material liabilities for malfunctions and
breakdowns that have already occurred
(b) If IFRS 15 applied the service provider would recognise revenue when
(or as) it transfers services to the customer (subject to other specified
criteria) That approach is also acceptable under this IFRS which
permits the service provider (i) to continue its existing accounting
policies for these contracts unless they involve practices prohibited by
paragraph 14 and (ii) to improve its accounting policies if so permitted
by paragraphs 22–30
(c) The service provider considers whether the cost of meeting its
contractual obligation to provide services exceeds the revenue received
in advance To do this it applies the liability adequacy test described in
paragraphs 15–19 of this IFRS If this IFRS did not apply to these
contracts the service provider would apply IAS 37 to determine whether
the contracts are onerous
(d) For these contracts the disclosure requirements in this IFRS are unlikely
to add significantly to disclosures required by other IFRSs
Distinction between insurance risk and other risks
B8 The definition of an insurance contract refers to insurance risk which this IFRS
defines as risk other than financial risk transferred from the holder of a contract
to the issuer A contract that exposes the issuer to financial risk without
significant insurance risk is not an insurance contract
B9 The definition of financial risk in Appendix A includes a list of financial and
nonfinancial variables That list includes nonfinancial variables that are not
specific to a party to the contract such as an index of earthquake losses in a
particular region or an index of temperatures in a particular city It excludes
nonfinancial variables that are specific to a party to the contract such as the
occurrence or nonoccurrence of a fire that damages or destroys an asset of that
party Furthermore the risk of changes in the fair value of a nonfinancial asset
is not a financial risk if the fair value reflects not only changes in market prices
for such assets (a financial variable) but also the condition of a specific
nonfinancial asset held by a party to a contract (a nonfinancial variable) For
example if a guarantee of the residual value of a specific car exposes the
guarantor to the risk of changes in the car’s physical condition that risk is
insurance risk not financial risk
B10 Some contracts expose the issuer to financial risk in addition to significant
insurance risk For example many life insurance contracts both guarantee a
minimum rate of return to policyholders (creating financial risk) and promise
IFRS 4
IFRS FoundationA198death benefits that at some times significantly exceed the policyholder’s account
balance (creating insurance risk in the form of mortality risk) Such contracts
are insurance contracts
B11 Under some contracts an insured event triggers the payment of an amount
linked to a price index Such contracts are insurance contracts provided the
payment that is contingent on the insured event can be significant For
example a lifecontingent annuity linked to a costofliving index transfers
insurance risk because payment is triggered by an uncertain event—the survival
of the annuitant The link to the price index is an embedded derivative but it
also transfers insurance risk If the resulting transfer of insurance risk is
significant the embedded derivative meets the definition of an insurance
contract in which case it need not be separated and measured at fair value (see
paragraph 7 of this IFRS)
B12 The definition of insurance risk refers to risk that the insurer accepts from the
policyholder In other words insurance risk is a preexisting risk transferred
from the policyholder to the insurer Thus a new risk created by the contract is
not insurance risk
B13 The definition of an insurance contract refers to an adverse effect on the
policyholder The definition does not limit the payment by the insurer to an
amount equal to the financial impact of the adverse event For example the
definition does not exclude newforold’ coverage that pays the policyholder
sufficient to permit replacement of a damaged old asset by a new asset
Similarly the definition does not limit payment under a term life insurance
contract to the financial loss suffered by the deceased’s dependants nor does it
preclude the payment of predetermined amounts to quantify the loss caused by
death or an accident
B14 Some contracts require a payment if a specified uncertain event occurs but do
not require an adverse effect on the policyholder as a precondition for payment
Such a contract is not an insurance contract even if the holder uses the contract
to mitigate an underlying risk exposure For example if the holder uses a
derivative to hedge an underlying nonfinancial variable that is correlated with
cash flows from an asset of the entity the derivative is not an insurance contract
because payment is not conditional on whether the holder is adversely affected
by a reduction in the cash flows from the asset Conversely the definition of an
insurance contract refers to an uncertain event for which an adverse effect on
the policyholder is a contractual precondition for payment This contractual
precondition does not require the insurer to investigate whether the event
actually caused an adverse effect but permits the insurer to deny payment if it is
not satisfied that the event caused an adverse effect
B15 Lapse or persistency risk (ie the risk that the counterparty will cancel the
contract earlier or later than the issuer had expected in pricing the contract) is
not insurance risk because the payment to the counterparty is not contingent on
an uncertain future event that adversely affects the counterparty Similarly
expense risk (ie the risk of unexpected increases in the administrative costs
associated with the servicing of a contract rather than in costs associated with
insured events) is not insurance risk because an unexpected increase in expenses
does not adversely affect the counterparty
IFRS 4
IFRS Foundation A199B16 Therefore a contract that exposes the issuer to lapse risk persistency risk or
expense risk is not an insurance contract unless it also exposes the issuer to
insurance risk However if the issuer of that contract mitigates that risk by
using a second contract to transfer part of that risk to another party the second
contract exposes that other party to insurance risk
B17 An insurer can accept significant insurance risk from the policyholder only if
the insurer is an entity separate from the policyholder In the case of a mutual
insurer the mutual accepts risk from each policyholder and pools that risk
Although policyholders bear that pooled risk collectively in their capacity as
owners the mutual has still accepted the risk that is the essence of an insurance
contract
Examples of insurance contracts
B18 The following are examples of contracts that are insurance contracts if the
transfer of insurance risk is significant
(a) insurance against theft or damage to property
(b) insurance against product liability professional liability civil liability or
legal expenses
(c) life insurance and prepaid funeral plans (although death is certain it is
uncertain when death will occur or for some types of life insurance
whether death will occur within the period covered by the insurance)
(d) lifecontingent annuities and pensions (ie contracts that provide
compensation for the uncertain future event—the survival of the
annuitant or pensioner—to assist the annuitant or pensioner in
maintaining a given standard of living which would otherwise be
adversely affected by his or her survival)
(e) disability and medical cover
(f) surety bonds fidelity bonds performance bonds and bid bonds
(ie contracts that provide compensation if another party fails to perform
a contractual obligation for example an obligation to construct a
building)
(g) credit insurance that provides for specified payments to be made to
reimburse the holder for a loss it incurs because a specified debtor fails
to make payment when due under the original or modified terms of a
debt instrument These contracts could have various legal forms such as
that of a guarantee some types of letter of credit a credit derivative
default contract or an insurance contract However although these
contracts meet the definition of an insurance contract they also meet
the definition of a financial guarantee contract in IFRS 9 and are within
the scope of IAS 325 and IFRS 9 not this IFRS (see paragraph 4(d))
Nevertheless if an issuer of financial guarantee contracts has previously
asserted explicitly that it regards such contracts as insurance contracts
5 When an entity applies IFRS 7 the reference to IAS 32 is replaced by a reference to IFRS 7
IFRS 4
IFRS FoundationA200and has used accounting applicable to insurance contracts the issuer
may elect to apply either IAS 326 and IFRS 9 or this IFRS to such financial
guarantee contracts
(h) product warranties Product warranties issued by another party for
goods sold by a manufacturer dealer or retailer are within the scope of
this IFRS However product warranties issued directly by a
manufacturer dealer or retailer are outside its scope because they are
within the scope of IFRS 15 and IAS 37
(i) title insurance (ie insurance against the discovery of defects in title to
land that were not apparent when the insurance contract was written)
In this case the insured event is the discovery of a defect in the title not
the defect itself
(j) travel assistance (ie compensation in cash or in kind to policyholders for
losses suffered while they are travelling) Paragraphs B6 and B7 discuss
some contracts of this kind
(k) catastrophe bonds that provide for reduced payments of principal
interest or both if a specified event adversely affects the issuer of the
bond (unless the specified event does not create significant insurance
risk for example if the event is a change in an interest rate or foreign
exchange rate)
(l) insurance swaps and other contracts that require a payment based on
changes in climatic geological or other physical variables that are
specific to a party to the contract
(m) reinsurance contracts
B19 The following are examples of items that are not insurance contracts
(a) investment contracts that have the legal form of an insurance contract
but do not expose the insurer to significant insurance risk for example
life insurance contracts in which the insurer bears no significant
mortality risk (such contracts are noninsurance financial instruments or
service contracts see paragraphs B20 and B21)
(b) contracts that have the legal form of insurance but pass all significant
insurance risk back to the policyholder through noncancellable and
enforceable mechanisms that adjust future payments by the
policyholder as a direct result of insured losses for example some
financial reinsurance contracts or some group contracts (such contracts
are normally noninsurance financial instruments or service contracts
see paragraphs B20 and B21)
(c) selfinsurance in other words retaining a risk that could have been
covered by insurance (there is no insurance contract because there is no
agreement with another party)
(d) contracts (such as gambling contracts) that require a payment if a
specified uncertain future event occurs but do not require as a
contractual precondition for payment that the event adversely affects
6 When an entity applies IFRS 7 the reference to IAS 32 is replaced by a reference to IFRS 7
IFRS 4
IFRS Foundation A201the policyholder However this does not preclude the specification of a
predetermined payout to quantify the loss caused by a specified event
such as death or an accident (see also paragraph B13)
(e) derivatives that expose one party to financial risk but not insurance risk
because they require that party to make payment based solely on
changes in one or more of a specified interest rate financial instrument
price commodity price foreign exchange rate index of prices or rates
credit rating or credit index or other variable provided in the case of a
nonfinancial variable that the variable is not specific to a party to the
contract (see IFRS 9)
(f) a creditrelated guarantee (or letter of credit credit derivative default
contract or credit insurance contract) that requires payments even if the
holder has not incurred a loss on the failure of the debtor to make
payments when due (see IFRS 9)
(g) contracts that require a payment based on a climatic geological or other
physical variable that is not specific to a party to the contract (commonly
described as weather derivatives)
(h) catastrophe bonds that provide for reduced payments of principal
interest or both based on a climatic geological or other physical variable
that is not specific to a party to the contract
B20 If the contracts described in paragraph B19 create financial assets or financial
liabilities they are within the scope of IFRS 9 Among other things this means
that the parties to the contract use what is sometimes called deposit accounting
which involves the following
(a) one party recognises the consideration received as a financial liability
rather than as revenue
(b) the other party recognises the consideration paid as a financial asset
rather than as an expense
B21 If the contracts described in paragraph B19 do not create financial assets or
financial liabilities IFRS 15 applies Under IFRS 15 revenue is recognised when
(or as) an entity satisfies a performance obligation by transferring a promised
good or service to a customer in an amount that reflects the consideration to
which the entity expects to be entitled
Significant insurance risk
B22 A contract is an insurance contract only if it transfers significant insurance risk
Paragraphs B8–B21 discuss insurance risk The following paragraphs discuss the
assessment of whether insurance risk is significant
B23 Insurance risk is significant if and only if an insured event could cause an
insurer to pay significant additional benefits in any scenario excluding
scenarios that lack commercial substance (ie have no discernible effect on the
economics of the transaction) If significant additional benefits would be
payable in scenarios that have commercial substance the condition in the
previous sentence may be met even if the insured event is extremely unlikely or
IFRS 4
IFRS FoundationA202even if the expected (ie probabilityweighted) present value of contingent cash
flows is a small proportion of the expected present value of all the remaining
contractual cash flows
B24 The additional benefits described in paragraph B23 refer to amounts that exceed
those that would be payable if no insured event occurred (excluding scenarios
that lack commercial substance) Those additional amounts include claims
handling and claims assessment costs but exclude
(a) the loss of the ability to charge the policyholder for future services
For example in an investmentlinked life insurance contract the death
of the policyholder means that the insurer can no longer perform
investment management services and collect a fee for doing so
However this economic loss for the insurer does not reflect insurance
risk just as a mutual fund manager does not take on insurance risk in
relation to the possible death of the client Therefore the potential loss
of future investment management fees is not relevant in assessing how
much insurance risk is transferred by a contract
(b) waiver on death of charges that would be made on cancellation or
surrender Because the contract brought those charges into existence
the waiver of these charges does not compensate the policyholder for a
preexisting risk Hence they are not relevant in assessing how much
insurance risk is transferred by a contract
(c) a payment conditional on an event that does not cause a significant loss
to the holder of the contract For example consider a contract that
requires the issuer to pay one million currency units if an asset suffers
physical damage causing an insignificant economic loss of one currency
unit to the holder In this contract the holder transfers to the insurer
the insignificant risk of losing one currency unit At the same time the
contract creates noninsurance risk that the issuer will need to pay
999999 currency units if the specified event occurs Because the issuer
does not accept significant insurance risk from the holder this contract
is not an insurance contract
(d) possible reinsurance recoveries The insurer accounts for these
separately
B25 An insurer shall assess the significance of insurance risk contract by contract
rather than by reference to materiality to the financial statements7 Thus
insurance risk may be significant even if there is a minimal probability of
material losses for a whole book of contracts This contractbycontract
assessment makes it easier to classify a contract as an insurance contract
However if a relatively homogeneous book of small contracts is known to
consist of contracts that all transfer insurance risk an insurer need not examine
each contract within that book to identify a few nonderivative contracts that
transfer insignificant insurance risk
7 For this purpose contracts entered into simultaneously with a single counterparty (or contracts
that are otherwise interdependent) form a single contract
IFRS 4
IFRS Foundation A203B26 It follows from paragraphs B23–B25 that if a contract pays a death benefit
exceeding the amount payable on survival the contract is an insurance contract
unless the additional death benefit is insignificant (judged by reference to the
contract rather than to an entire book of contracts) As noted in
paragraph B24(b) the waiver on death of cancellation or surrender charges is
not included in this assessment if this waiver does not compensate the
policyholder for a preexisting risk Similarly an annuity contract that pays out
regular sums for the rest of a policyholder’s life is an insurance contract unless
the aggregate lifecontingent payments are insignificant
B27 Paragraph B23 refers to additional benefits These additional benefits could
include a requirement to pay benefits earlier if the insured event occurs earlier
and the payment is not adjusted for the time value of money An example is
whole life insurance for a fixed amount (in other words insurance that provides
a fixed death benefit whenever the policyholder dies with no expiry date for the
cover) It is certain that the policyholder will die but the date of death is
uncertain The insurer will suffer a loss on those individual contracts for which
policyholders die early even if there is no overall loss on the whole book of
contracts
B28 If an insurance contract is unbundled into a deposit component and an
insurance component the significance of insurance risk transfer is assessed by
reference to the insurance component The significance of insurance risk
transferred by an embedded derivative is assessed by reference to the embedded
derivative
Changes in the level of insurance risk
B29 Some contracts do not transfer any insurance risk to the issuer at inception
although they do transfer insurance risk at a later time For example consider a
contract that provides a specified investment return and includes an option for
the policyholder to use the proceeds of the investment on maturity to buy a
lifecontingent annuity at the current annuity rates charged by the insurer to
other new annuitants when the policyholder exercises the option The contract
transfers no insurance risk to the issuer until the option is exercised because
the insurer remains free to price the annuity on a basis that reflects the
insurance risk transferred to the insurer at that time However if the contract
specifies the annuity rates (or a basis for setting the annuity rates) the contract
transfers insurance risk to the issuer at inception
B30 A contract that qualifies as an insurance contract remains an insurance contract
until all rights and obligations are extinguished or expire
IFRS 4
IFRS FoundationA204Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005 If an entity adopts this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume
IFRS 4
IFRS Foundation A205IFRS Standard 5
Noncurrent Assets Held for Sale and
Discontinued Operations
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 35
Discontinuing Operations which had originally been issued by the International Accounting
Standards Committee in June 1998
In March 2004 the Board issued IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations to replace IAS 35
Other Standards have made minor consequential amendments to IFRS 5 They include
Improvement to IFRSs (issued April 2009) IFRS 11 Joint Arrangements (issued May 2011) IFRS 13
Fair Value Measurement (issued May 2011) Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) (issued June 2011) IFRS 9 Financial Instruments (Hedge Accounting and
amendments to IFRS 9 IFRS 7 and IAS 39) (issued November 2013) IFRS 9 Financial
Instruments (issued July 2014) Annual Improvements to IFRSs 2012–2014 Cycle (issued September
2014) and IFRS 16 Leases (issued January 2016)
IFRS 5
IFRS Foundation A207CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 5
NONCURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
OBJECTIVE 1
SCOPE 2
CLASSIFICATION OF NONCURRENT ASSETS (OR DISPOSAL GROUPS) AS
HELD FOR SALE OR AS HELD FOR DISTRIBUTION TO OWNERS 6
Noncurrent assets that are to be abandoned 13
MEASUREMENT OF NONCURRENT ASSETS (OR DISPOSAL GROUPS)
CLASSIFIED AS HELD FOR SALE 15
Measurement of a noncurrent asset (or disposal group) 15
Recognition of impairment losses and reversals 20
Changes to a plan of sale or to a plan of distribution to owners 26
PRESENTATION AND DISCLOSURE 30
Presenting discontinued operations 31
Gains or losses relating to continuing operations 37
Presentation of a noncurrent asset or disposal group classified as held for
sale 38
Additional disclosures 41
TRANSITIONAL PROVISIONS 43
EFFECTIVE DATE 44
WITHDRAWAL OF IAS 35 45
APPENDICES
A Defined terms
B Application supplement
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 5 ISSUED IN MARCH 2004
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
IFRS 5
IFRS FoundationA208International Financial Reporting Standard 5 Noncurrent Assets Held for Sale and
Discontinued Operations (IFRS 5) is set out in paragraphs 1–45 and Appendices A–C All the
paragraphs have equal authority Paragraphs in bold type state the main principles
Terms defined in Appendix A are in italics the first time they appear in the Standard
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards IFRS 5 should be read in the context of its objective and the Basis for
Conclusions the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance
IFRS 5
IFRS Foundation A209Introduction
Reasons for issuing the IFRS
IN1 International Financial Reporting Standard 5 Noncurrent Assets Held for Sale and
Discontinued Operations (IFRS 5) sets out requirements for the classification
measurement and presentation of noncurrent assets held for sale and replaces
IAS 35 Discontinuing Operations
IN2 Achieving convergence of accounting standards around the world is one of the
prime objectives of the International Accounting Standards Board In pursuit of
that objective one of the strategies adopted by the Board has been to enter into
a memorandum of understanding with the Financial Accounting Standards
Board (FASB) in the United States that sets out the two boards’ commitment to
convergence As a result of that understanding the boards have undertaken a
joint shortterm project with the objective of reducing differences between IFRSs
and US GAAP that are capable of resolution in a relatively short time and can be
addressed outside major projects
IN3 One aspect of that project involves the two boards considering each other’s
recent standards with a view to adopting high quality accounting solutions The
IFRS arises from the IASB’s consideration of FASB Statement No 144 Accounting
for the Impairment or Disposal of LongLived Assets (SFAS 144) issued in 2001
IN4 SFAS 144 addresses three areas (i) the impairment of longlived assets to be held
and used (ii) the classification measurement and presentation of assets held for
sale and (iii) the classification and presentation of discontinued operations
The impairment of longlived assets to be held and used is an area in which there
are extensive differences between IFRSs and US GAAP However those
differences were not thought to be capable of resolution in a relatively short
time Convergence on the other two areas was thought to be worth pursuing
within the context of the shortterm project
IN5 The IFRS achieves substantial convergence with the requirements of SFAS 144
relating to assets held for sale the timing of the classification of operations as
discontinued and the presentation of such operations
Main features of the IFRS
IN6 The IFRS
(a) adopts the classification held for sale’
(b) introduces the concept of a disposal group being a group of assets to be
disposed of by sale or otherwise together as a group in a single
transaction and liabilities directly associated with those assets that will
be transferred in the transaction
(c) specifies that assets or disposal groups that are classified as held for sale
are carried at the lower of carrying amount and fair value less costs to
sell
IFRS 5
IFRS FoundationA210(d) specifies that an asset classified as held for sale or included within a
disposal group that is classified as held for sale is not depreciated
(e) specifies that an asset classified as held for sale and the assets and
liabilities included within a disposal group classified as held for sale are
presented separately in the statement of financial position
(f) withdraws IAS 35 Discontinuing Operations and replaces it with
requirements that
(i) change the timing of the classification of an operation as
discontinued IAS 35 classified an operation as discontinuing at
the earlier of (a) the entity entering into a binding sale agreement
and (b) the board of directors approving and announcing a
formal disposal plan The IFRS classifies an operation as
discontinued at the date the operation meets the criteria to be
classified as held for sale or when the entity has disposed of the
operation
(ii) specify that the results of discontinued operations are to be
shown separately in the statement of comprehensive income
(iii) prohibit retroactive classification of an operation as
discontinued when the criteria for that classification are not met
until after the reporting period
IFRS 5
IFRS Foundation A211International Financial Reporting Standard 5
Noncurrent Assets Held for Sale and Discontinued
Operations
Objective
1 The objective of this IFRS is to specify the accounting for assets held for sale and
the presentation and disclosure of discontinued operations In particular the IFRS
requires
(a) assets that meet the criteria to be classified as held for sale to be
measured at the lower of carrying amount and fair value less costs to sell
and depreciation on such assets to cease and
(b) assets that meet the criteria to be classified as held for sale to be
presented separately in the statement of financial position and the
results of discontinued operations to be presented separately in the
statement of comprehensive income
Scope
2 The classification and presentation requirements of this IFRS apply to all
recognised noncurrent assets1 and to all disposal groups of an entity The
measurement requirements of this IFRS apply to all recognised noncurrent
assets and disposal groups (as set out in paragraph 4) except for those assets
listed in paragraph 5 which shall continue to be measured in accordance with
the Standard noted
3 Assets classified as noncurrent in accordance with IAS 1 Presentation of Financial
Statements shall not be reclassified as current assets until they meet the criteria to
be classified as held for sale in accordance with this IFRS Assets of a class that
an entity would normally regard as noncurrent that are acquired exclusively
with a view to resale shall not be classified as current unless they meet the
criteria to be classified as held for sale in accordance with this IFRS
4 Sometimes an entity disposes of a group of assets possibly with some directly
associated liabilities together in a single transaction Such a disposal group
may be a group of cashgenerating units a single cashgenerating unit or part of a
cashgenerating unit2 The group may include any assets and any liabilities of
the entity including current assets current liabilities and assets excluded by
paragraph 5 from the measurement requirements of this IFRS If a noncurrent
asset within the scope of the measurement requirements of this IFRS is part of a
disposal group the measurement requirements of this IFRS apply to the group
1 For assets classified according to a liquidity presentation noncurrent assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period
Paragraph 3 applies to the classification of such assets
2 However once the cash flows from an asset or group of assets are expected to arise principally from
sale rather than continuing use they become less dependent on cash flows arising from other
assets and a disposal group that was part of a cashgenerating unit becomes a separate
cashgenerating unit
IFRS 5
IFRS FoundationA212as a whole so that the group is measured at the lower of its carrying amount
and fair value less costs to sell The requirements for measuring the individual
assets and liabilities within the disposal group are set out in paragraphs 18 19
and 23
5 The measurement provisions of this IFRS3 do not apply to the following assets
which are covered by the IFRSs listed either as individual assets or as part of a
disposal group
(a) deferred tax assets (IAS 12 Income Taxes)
(b) assets arising from employee benefits (IAS 19 Employee Benefits)
(c) financial assets within the scope of IFRS 9 Financial Instruments
(d) noncurrent assets that are accounted for in accordance with the fair
value model in IAS 40 Investment Property
(e) noncurrent assets that are measured at fair value less costs to sell in
accordance with IAS 41 Agriculture
(f) contractual rights under insurance contracts as defined in IFRS 4
Insurance Contracts
5A The classification presentation and measurement requirements in this IFRS
applicable to a noncurrent asset (or disposal group) that is classified as held for
sale apply also to a noncurrent asset (or disposal group) that is classified as held
for distribution to owners acting in their capacity as owners (held for
distribution to owners)
5B This IFRS specifies the disclosures required in respect of noncurrent assets (or
disposal groups) classified as held for sale or discontinued operations
Disclosures in other IFRSs do not apply to such assets (or disposal groups) unless
those IFRSs require
(a) specific disclosures in respect of noncurrent assets (or disposal groups)
classified as held for sale or discontinued operations or
(b) disclosures about measurement of assets and liabilities within a disposal
group that are not within the scope of the measurement requirement of
IFRS 5 and such disclosures are not already provided in the other notes to
the financial statements
Additional disclosures about noncurrent assets (or disposal groups) classified as
held for sale or discontinued operations may be necessary to comply with the
general requirements of IAS 1 in particular paragraphs 15 and 125 of that
Standard
3 Other than paragraphs 18 and 19 which require the assets in question to be measured in
accordance with other applicable IFRSs
IFRS 5
IFRS Foundation A213Classification of noncurrent assets (or disposal groups) as held
for sale or as held for distribution to owners
6 An entity shall classify a noncurrent asset (or disposal group) as held for
sale if its carrying amount will be recovered principally through a sale
transaction rather than through continuing use
7 For this to be the case the asset (or disposal group) must be available for
immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets (or disposal groups) and its sale must be highly
probable
8 For the sale to be highly probable the appropriate level of management must be
committed to a plan to sell the asset (or disposal group) and an active
programme to locate a buyer and complete the plan must have been initiated
Further the asset (or disposal group) must be actively marketed for sale at a
price that is reasonable in relation to its current fair value In addition the sale
should be expected to qualify for recognition as a completed sale within one
year from the date of classification except as permitted by paragraph 9 and
actions required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn
The probability of shareholders’ approval (if required in the jurisdiction) should
be considered as part of the assessment of whether the sale is highly probable
8A An entity that is committed to a sale plan involving loss of control of a
subsidiary shall classify all the assets and liabilities of that subsidiary as held for
sale when the criteria set out in paragraphs 6–8 are met regardless of whether
the entity will retain a noncontrolling interest in its former subsidiary after the
sale
9 Events or circumstances may extend the period to complete the sale beyond one
year An extension of the period required to complete a sale does not preclude
an asset (or disposal group) from being classified as held for sale if the delay is
caused by events or circumstances beyond the entity’s control and there is
sufficient evidence that the entity remains committed to its plan to sell the asset
(or disposal group) This will be the case when the criteria in Appendix B are
met
10 Sale transactions include exchanges of noncurrent assets for other noncurrent
assets when the exchange has commercial substance in accordance with IAS 16
Property Plant and Equipment
11 When an entity acquires a noncurrent asset (or disposal group) exclusively with
a view to its subsequent disposal it shall classify the noncurrent asset (or
disposal group) as held for sale at the acquisition date only if the oneyear
requirement in paragraph 8 is met (except as permitted by paragraph 9) and it is
highly probable that any other criteria in paragraphs 7 and 8 that are not met at
that date will be met within a short period following the acquisition (usually
within three months)
12 If the criteria in paragraphs 7 and 8 are met after the reporting period an entity
shall not classify a noncurrent asset (or disposal group) as held for sale in those
IFRS 5
IFRS FoundationA214financial statements when issued However when those criteria are met after
the reporting period but before the authorisation of the financial statements for
issue the entity shall disclose the information specified in paragraph 41(a) (b)
and (d) in the notes
12A A noncurrent asset (or disposal group) is classified as held for distribution to
owners when the entity is committed to distribute the asset (or disposal group)
to the owners For this to be the case the assets must be available for immediate
distribution in their present condition and the distribution must be highly
probable For the distribution to be highly probable actions to complete the
distribution must have been initiated and should be expected to be completed
within one year from the date of classification Actions required to complete the
distribution should indicate that it is unlikely that significant changes to the
distribution will be made or that the distribution will be withdrawn The
probability of shareholders’ approval (if required in the jurisdiction) should be
considered as part of the assessment of whether the distribution is highly
probable
Noncurrent assets that are to be abandoned
13 An entity shall not classify as held for sale a noncurrent asset (or disposal group)
that is to be abandoned This is because its carrying amount will be recovered
principally through continuing use However if the disposal group to be
abandoned meets the criteria in paragraph 32(a)–(c) the entity shall present the
results and cash flows of the disposal group as discontinued operations in
accordance with paragraphs 33 and 34 at the date on which it ceases to be used
Noncurrent assets (or disposal groups) to be abandoned include noncurrent
assets (or disposal groups) that are to be used to the end of their economic life
and noncurrent assets (or disposal groups) that are to be closed rather than sold
14 An entity shall not account for a noncurrent asset that has been temporarily
taken out of use as if it had been abandoned
Measurement of noncurrent assets (or disposal groups)
classified as held for sale
Measurement of a noncurrent asset (or disposal group)
15 An entity shall measure a noncurrent asset (or disposal group) classified
as held for sale at the lower of its carrying amount and fair value less
costs to sell
15A An entity shall measure a noncurrent asset (or disposal group) classified
as held for distribution to owners at the lower of its carrying amount and
fair value less costs to distribute4
16 If a newly acquired asset (or disposal group) meets the criteria to be classified as
held for sale (see paragraph 11) applying paragraph 15 will result in the asset (or
disposal group) being measured on initial recognition at the lower of its carrying
amount had it not been so classified (for example cost) and fair value less costs
4 Costs to distribute are the incremental costs directly attributable to the distribution excluding
finance costs and income tax expense
IFRS 5
IFRS Foundation A215to sell Hence if the asset (or disposal group) is acquired as part of a business
combination it shall be measured at fair value less costs to sell
17 When the sale is expected to occur beyond one year the entity shall measure the
costs to sell at their present value Any increase in the present value of the costs
to sell that arises from the passage of time shall be presented in profit or loss as
a financing cost
18 Immediately before the initial classification of the asset (or disposal group) as
held for sale the carrying amounts of the asset (or all the assets and liabilities in
the group) shall be measured in accordance with applicable IFRSs
19 On subsequent remeasurement of a disposal group the carrying amounts of any
assets and liabilities that are not within the scope of the measurement
requirements of this IFRS but are included in a disposal group classified as held
for sale shall be remeasured in accordance with applicable IFRSs before the fair
value less costs to sell of the disposal group is remeasured
Recognition of impairment losses and reversals
20 An entity shall recognise an impairment loss for any initial or subsequent
writedown of the asset (or disposal group) to fair value less costs to sell to the
extent that it has not been recognised in accordance with paragraph 19
21 An entity shall recognise a gain for any subsequent increase in fair value less
costs to sell of an asset but not in excess of the cumulative impairment loss that
has been recognised either in accordance with this IFRS or previously in
accordance with IAS 36 Impairment of Assets
22 An entity shall recognise a gain for any subsequent increase in fair value less
costs to sell of a disposal group
(a) to the extent that it has not been recognised in accordance with
paragraph 19 but
(b) not in excess of the cumulative impairment loss that has been
recognised either in accordance with this IFRS or previously in
accordance with IAS 36 on the noncurrent assets that are within the
scope of the measurement requirements of this IFRS
23 The impairment loss (or any subsequent gain) recognised for a disposal group
shall reduce (or increase) the carrying amount of the noncurrent assets in the
group that are within the scope of the measurement requirements of this IFRS
in the order of allocation set out in paragraphs 104(a) and (b) and 122 of IAS 36
(as revised in 2004)
24 A gain or loss not previously recognised by the date of the sale of a noncurrent
asset (or disposal group) shall be recognised at the date of derecognition
Requirements relating to derecognition are set out in
(a) paragraphs 67–72 of IAS 16 (as revised in 2003) for property plant and
equipment and
(b) paragraphs 112–117 of IAS 38 Intangible Assets (as revised in 2004) for
intangible assets
IFRS 5
IFRS FoundationA21625 An entity shall not depreciate (or amortise) a noncurrent asset while it is
classified as held for sale or while it is part of a disposal group classified as held
for sale Interest and other expenses attributable to the liabilities of a disposal
group classified as held for sale shall continue to be recognised
Changes to a plan of sale or to a plan of distribution to
owners
26 If an entity has classified an asset (or disposal group) as held for sale or as held
for distribution to owners but the criteria in paragraphs 7–9 (for held for sale)
or in paragraph 12A (for held for distribution to owners) are no longer met the
entity shall cease to classify the asset (or disposal group) as held for sale or held
for distribution to owners (respectively) In such cases an entity shall follow the
guidance in paragraphs 27–29 to account for this change except when
paragraph 26A applies
26A If an entity reclassifies an asset (or disposal group) directly from being held for
sale to being held for distribution to owners or directly from being held for
distribution to owners to being held for sale then the change in classification is
considered a continuation of the original plan of disposal The entity
(a) shall not follow the guidance in paragraphs 27–29 to account for this
change The entity shall apply the classification presentation and
measurement requirements in this IFRS that are applicable to the new
method of disposal
(b) shall measure the noncurrent asset (or disposal group) by following the
requirements in paragraph 15 (if reclassified as held for sale) or 15A (if
reclassified as held for distribution to owners) and recognise any
reduction or increase in the fair value less costs to sellcosts to distribute
of the noncurrent asset (or disposal group) by following the
requirements in paragraphs 20–25
(c) shall not change the date of classification in accordance with
paragraphs 8 and 12A This does not preclude an extension of the period
required to complete a sale or a distribution to owners if the conditions
in paragraph 9 are met
27 The entity shall measure a noncurrent asset (or disposal group) that ceases to be
classified as held for sale or as held for distribution to owners (or ceases to be
included in a disposal group classified as held for sale or as held for distribution
to owners) at the lower of
(a) its carrying amount before the asset (or disposal group) was classified as
held for sale or as held for distribution to owners adjusted for any
depreciation amortisation or revaluations that would have been
recognised had the asset (or disposal group) not been classified as held
for sale or as held for distribution to owners and
IFRS 5
IFRS Foundation A217(b) its recoverable amount at the date of the subsequent decision not to sell or
distribute5
28 The entity shall include any required adjustment to the carrying amount of a
noncurrent asset that ceases to be classified as held for sale or as held for
distribution to owners in profit or loss6 from continuing operations in the
period in which the criteria in paragraphs 7–9 or 12A respectively are no longer
met Financial statements for the periods since classification as held for sale or
as held for distribution to owners shall be amended accordingly if the disposal
group or noncurrent asset that ceases to be classified as held for sale or as held
for distribution to owners is a subsidiary joint operation joint venture
associate or a portion of an interest in a joint venture or an associate The entity
shall present that adjustment in the same caption in the statement of
comprehensive income used to present a gain or loss if any recognised in
accordance with paragraph 37
29 If an entity removes an individual asset or liability from a disposal group
classified as held for sale the remaining assets and liabilities of the disposal
group to be sold shall continue to be measured as a group only if the group
meets the criteria in paragraphs 7–9 If an entity removes an individual asset or
liability from a disposal group classified as held for distribution to owners the
remaining assets and liabilities of the disposal group to be distributed shall
continue to be measured as a group only if the group meets the criteria in
paragraph 12A Otherwise the remaining noncurrent assets of the group that
individually meet the criteria to be classified as held for sale (or as held for
distribution to owners) shall be measured individually at the lower of their
carrying amounts and fair values less costs to sell (or costs to distribute) at that
date Any noncurrent assets that do not meet the criteria for held for sale shall
cease to be classified as held for sale in accordance with paragraph 26 Any
noncurrent assets that do not meet the criteria for held for distribution to
owners shall cease to be classified as held for distribution to owners in
accordance with paragraph 26
Presentation and disclosure
30 An entity shall present and disclose information that enables users of the
financial statements to evaluate the financial effects of discontinued
operations and disposals of noncurrent assets (or disposal groups)
Presenting discontinued operations
31 A component of an entity comprises operations and cash flows that can be clearly
distinguished operationally and for financial reporting purposes from the rest
5 If the noncurrent asset is part of a cashgenerating unit its recoverable amount is the carrying
amount that would have been recognised after the allocation of any impairment loss arising on that
cashgenerating unit in accordance with IAS 36
6 Unless the asset is property plant and equipment or an intangible asset that had been revalued in
accordance with IAS 16 or IAS 38 before classification as held for sale in which case the adjustment
shall be treated as a revaluation increase or decrease
IFRS 5
IFRS FoundationA218of the entity In other words a component of an entity will have been a
cashgenerating unit or a group of cashgenerating units while being held for
use
32 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 operations or
(c) is a subsidiary acquired exclusively with a view to resale
33 An entity shall disclose
(a) a single amount in the statement of comprehensive income comprising
the total of
(i) the posttax profit or loss of discontinued operations and
(ii) the posttax gain or loss recognised 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 pretax profit or loss of discontinued
operations
(ii) the related income tax expense as required by paragraph 81(h) of
IAS 12
(iii) the gain or loss recognised 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 and
(iv) the related income tax expense as required by paragraph 81(h) of
IAS 12
The analysis may be presented in the notes or in the statement of
comprehensive income If it is presented in the statement of
comprehensive income it shall be presented in a section identified as
relating to discontinued operations ie separately from continuing
operations The analysis is not required for disposal groups that are
newly acquired subsidiaries that meet the criteria to be classified as held
for sale on acquisition (see paragraph 11)
(c) the net cash flows attributable to the operating investing and financing
activities of discontinued operations These disclosures may be
presented either in the notes or in the financial statements These
disclosures are not required for disposal groups that are newly acquired
subsidiaries that meet the criteria to be classified as held for sale on
acquisition (see paragraph 11)
IFRS 5
IFRS Foundation A219(d) the amount of income from continuing operations and from
discontinued operations attributable to owners of the parent These
disclosures may be presented either in the notes or in the statement of
comprehensive income
33A If an entity presents the items of profit or loss in a separate statement as
described in paragraph 10A of IAS 1 (as amended in 2011) a section identified as
relating to discontinued operations is presented in that statement
34 An entity shall represent the disclosures in paragraph 33 for prior periods
presented in the financial statements so that the disclosures relate to all
operations that have been discontinued by the end of the reporting period for
the latest period presented
35 Adjustments in the current period to amounts previously presented in
discontinued operations that are directly related to the disposal of a
discontinued operation in a prior period shall be classified separately in
discontinued operations The nature and amount of such adjustments shall be
disclosed Examples of circumstances in which these adjustments may arise
include the following
(a) the resolution of uncertainties that arise from the terms of the disposal
transaction such as the resolution of purchase price adjustments and
indemnification issues with the purchaser
(b) the resolution of uncertainties that arise from and are directly related to
the operations of the component before its disposal such as
environmental and product warranty obligations retained by the seller
(c) the settlement of employee benefit plan obligations provided that the
settlement is directly related to the disposal transaction
36 If an entity ceases to classify a component of an entity as held for sale the results
of operations of the component previously presented in discontinued operations
in accordance with paragraphs 33–35 shall be reclassified and included in
income from continuing operations for all periods presented The amounts for
prior periods shall be described as having been represented
36A An entity that is committed to a sale plan involving loss of control of a
subsidiary shall disclose the information required in paragraphs 33–36 when
the subsidiary is a disposal group that meets the definition of a discontinued
operation in accordance with paragraph 32
Gains or losses relating to continuing operations
37 Any gain or loss on the remeasurement of a noncurrent asset (or disposal group)
classified as held for sale that does not meet the definition of a discontinued
operation shall be included in profit or loss from continuing operations
Presentation of a noncurrent asset or disposal group
classified as held for sale
38 An entity shall present a noncurrent 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 The liabilities of a disposal group
IFRS 5
IFRS FoundationA220classified as held for sale shall be presented separately from other liabilities in
the statement of financial position Those assets and liabilities shall not be
offset and presented as a single amount The major classes of assets and
liabilities classified as held for sale shall be separately disclosed either in the
statement of financial position or in the notes except as permitted by
paragraph 39 An entity shall present separately any cumulative income or
expense recognised in other comprehensive income relating to a noncurrent
asset (or disposal group) classified as held for sale
39 If the disposal group is a newly acquired subsidiary that meets the criteria to be
classified as held for sale on acquisition (see paragraph 11) disclosure of the
major classes of assets and liabilities is not required
40 An entity shall not reclassify or represent amounts presented for noncurrent
assets or for the assets and liabilities of disposal groups classified as held for sale
in the statements of financial position for prior periods to reflect the
classification in the statement of financial position for the latest period
presented
Additional disclosures
41 An entity shall disclose the following information in the notes in the period in
which a noncurrent asset (or disposal group) has been either classified as held
for sale or sold
(a) a description of the noncurrent asset (or disposal group)
(b) a description of the facts and circumstances of the sale or leading to the
expected disposal and the expected manner and timing of that disposal
(c) the gain or loss recognised in accordance with paragraphs 20–22 and if
not separately presented in the statement of comprehensive income the
caption in the statement of comprehensive income that includes that
gain or loss
(d) if applicable the reportable segment in which the noncurrent asset
(or disposal group) is presented in accordance with IFRS 8 Operating
Segments
42 If either paragraph 26 or paragraph 29 applies an entity shall disclose in the
period of the decision to change the plan to sell the noncurrent asset (or
disposal group) a description of the facts and circumstances leading to the
decision and the effect of the decision on the results of operations for the period
and any prior periods presented
Transitional provisions
43 The IFRS shall be applied prospectively to noncurrent assets (or disposal groups)
that meet the criteria to be classified as held for sale and operations that meet
the criteria to be classified as discontinued after the effective date of the IFRS
An entity may apply the requirements of the IFRS to all noncurrent assets (or
disposal groups) that meet the criteria to be classified as held for sale and
operations that meet the criteria to be classified as discontinued after any date
IFRS 5
IFRS Foundation A221before the effective date of the IFRS provided the valuations and other
information needed to apply the IFRS were obtained at the time those criteria
were originally met
Effective date
44 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005 Earlier application is encouraged If an entity applies the IFRS
for a period beginning before 1 January 2005 it shall disclose that fact
44A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraphs 3 and 38 and added paragraph 33A An entity
shall apply those amendments for annual periods beginning on or after
1 January 2009 If an entity applies IAS 1 (revised 2007) for an earlier period the
amendments shall be applied for that earlier period
44B IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) added
paragraph 33(d) An entity shall apply that amendment for annual periods
beginning on or after 1 July 2009 If an entity applies IAS 27 (amended 2008) for
an earlier period the amendment shall be applied for that earlier period The
amendment shall be applied retrospectively
44C Paragraphs 8A and 36A were added by Improvements to IFRSs issued in May 2008
An entity shall apply those amendments for annual periods beginning on or
after 1 July 2009 Earlier application is permitted However an entity shall not
apply the amendments for annual periods beginning before 1 July 2009 unless it
also applies IAS 27 (as amended in January 2008) If an entity applies the
amendments before 1 July 2009 it shall disclose that fact An entity shall apply
the amendments prospectively from the date at which it first applied IFRS 5
subject to the transitional provisions in paragraph 45 of IAS 27 (amended
January 2008)
44D Paragraphs 5A 12A and 15A were added and paragraph 8 was amended by
IFRIC 17 Distributions of Noncash Assets to Owners in November 2008 Those
amendments shall be applied prospectively to noncurrent assets (or disposal
groups) that are classified as held for distribution to owners in annual periods
beginning on or after 1 July 2009 Retrospective application is not permitted
Earlier application is permitted If an entity applies the amendments for a
period beginning before 1 July 2009 it shall disclose that fact and also apply
IFRS 3 Business Combinations (as revised in 2008) IAS 27 (as amended in January
2008) and IFRIC 17
44E Paragraph 5B was added by Improvements to IFRSs issued in April 2009 An entity
shall apply that amendment prospectively for annual periods beginning on or
after 1 January 2010 Earlier application is permitted If an entity applies the
amendment for an earlier period it shall disclose that fact
44F [Deleted]
44G IFRS 11 Joint Arrangements issued in May 2011 amended paragraph 28 An entity
shall apply that amendment when it applies IFRS 11
IFRS 5
IFRS FoundationA22244H IFRS 13 Fair Value Measurement issued in May 2011 amended the definition of fair
value in Appendix A An entity shall apply that amendment when it applies
IFRS 13
44I Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) issued in
June 2011 amended paragraph 33A An entity shall apply that amendment
when it applies IAS 1 as amended in June 2011
44J [Deleted]
44K IFRS 9 as issued in July 2014 amended paragraph 5 and deleted paragraphs 44F
and 44J An entity shall apply those amendments when it applies IFRS 9
44L Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014 amended
paragraphs 26–29 and added paragraph 26A An entity shall apply those
amendments prospectively in accordance with IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors to changes in a method of disposal that occur in
annual periods beginning on or after 1 January 2016 Earlier application is
permitted If an entity applies those amendments for an earlier period it shall
disclose that fact
Withdrawal of IAS 35
45 This IFRS supersedes IAS 35 Discontinuing Operations
IFRS 5
IFRS Foundation A223Appendix A
Defined terms
This appendix is an integral part of the IFRS
cashgenerating unit The smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from
other assets or groups of assets
component of an
entity
Operations and cash flows that can be clearly distinguished
operationally and for financial reporting purposes from the rest
of the entity
costs to sell The incremental costs directly attributable to the disposal of an
asset (or disposal group) excluding finance costs and income
tax expense
current asset An entity shall classify an asset as current when
(a) it expects to realise the asset or intends to sell or
consume it in its normal operating cycle
(b) it holds the asset primarily for the purpose of trading
(c) it expects to realise the asset within twelve months after
the reporting period or
(d) the asset is cash or a cash equivalent (as defined in IAS 7)
unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after
the reporting period
discontinued
operation
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
operations or
(c) is a subsidiary acquired exclusively with a view to resale
disposal group A group of assets to be disposed of by sale or otherwise together
as a group in a single transaction and liabilities directly
associated with those assets that will be transferred in the
transaction The group includes goodwill acquired in a business
combination if the group is a cashgenerating unit to which
goodwill has been allocated in accordance with the requirements
of paragraphs 80–87 of IAS 36 Impairment of Assets (as revised in
2004) or if it is an operation within such a cashgenerating unit
fair value Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (See IFRS 13)
IFRS 5
IFRS FoundationA224firm purchase
commitment
An agreement with an unrelated party binding on both parties
and usually legally enforceable that (a) specifies all significant
terms including the price and timing of the transactions and (b)
includes a disincentive for nonperformance that is sufficiently
large to make performance highly probable
highly probable Significantly more likely than probable
noncurrent asset An asset that does not meet the definition of a current asset
probable More likely than not
recoverable amount The higher of an asset’s fair value less costs to sell and its value
in use
value in use The present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the
end of its useful life
IFRS 5
IFRS Foundation A225Appendix B
Application supplement
This appendix is an integral part of the IFRS
Extension of the period required to complete a sale
B1 As noted in paragraph 9 an extension of the period required to complete a sale
does not preclude an asset (or disposal group) from being classified as held for
sale if the delay is caused by events or circumstances beyond the entity’s control
and there is sufficient evidence that the entity remains committed to its plan to
sell the asset (or disposal group) An exception to the oneyear requirement in
paragraph 8 shall therefore apply in the following situations in which such
events or circumstances arise
(a) at the date an entity commits itself to a plan to sell a noncurrent asset
(or disposal group) it reasonably expects that others (not a buyer) will
impose conditions on the transfer of the asset (or disposal group) that
will extend the period required to complete the sale and
(i) actions necessary to respond to those conditions cannot be
initiated until after a firm purchase commitment is obtained and
(ii) a firm purchase commitment is highly probable within one year
(b) an entity obtains a firm purchase commitment and as a result a buyer
or others unexpectedly impose conditions on the transfer of a
noncurrent asset (or disposal group) previously classified as held for sale
that will extend the period required to complete the sale and
(i) timely actions necessary to respond to the conditions have been
taken and
(ii) a favourable resolution of the delaying factors is expected
(c) during the initial oneyear period circumstances arise that were
previously considered unlikely and as a result a noncurrent asset (or
disposal group) previously classified as held for sale is not sold by the end
of that period and
(i) during the initial oneyear period the entity took action necessary
to respond to the change in circumstances
(ii) the noncurrent asset (or disposal group) is being actively
marketed at a price that is reasonable given the change in
circumstances and
(iii) the criteria in paragraphs 7 and 8 are met
IFRS 5
IFRS FoundationA226Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005 If an entity adopts this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume
IFRS 5
IFRS Foundation A227IFRS Standard 6
Exploration for and Evaluation of
Mineral Resources
In December 2004 the International Accounting Standards Board issued IFRS 6 Exploration
for and Evaluation of Mineral Resources
IFRS 6
IFRS Foundation A229CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 6
EXPLORATION FOR AND EVALUATION OF
MINERAL RESOURCES
OBJECTIVE 1
SCOPE 3
RECOGNITION OF EXPLORATION AND EVALUATION ASSETS 6
Temporary exemption from IAS 8 paragraphs 11 and 12 6
MEASUREMENT OF EXPLORATION AND EVALUATION ASSETS 8
Measurement at recognition 8
Elements of cost of exploration and evaluation assets 9
Measurement after recognition 12
Changes in accounting policies 13
PRESENTATION 15
Classification of exploration and evaluation assets 15
Reclassification of exploration and evaluation assets 17
IMPAIRMENT 18
Recognition and measurement 18
Specifying the level at which exploration and evaluation assets are assessed
for impairment 21
DISCLOSURE 23
EFFECTIVE DATE 26
TRANSITIONAL PROVISIONS 27
APPENDICES
A Defined terms
B Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 6 ISSUED IN DECEMBER 2004
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 1 AND IFRS 6
ISSUED IN JUNE 2005
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IFRS 6
IFRS FoundationA230International Financial Reporting Standard 6 Exploration for and Evaluation of Mineral
Resources (IFRS 6) is set out in paragraphs 1–27 and Appendices A and B All the
paragraphs have equal authority Paragraphs in bold type state the main principles
Terms defined in Appendix A are in italics the first time they appear in the Standard
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards IFRS 6 should be read in the context of its objective and the Basis for
Conclusions the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance
IFRS 6
IFRS Foundation A231Introduction
Reasons for issuing the IFRS
IN1 The International Accounting Standards Board decided to develop an
International Financial Reporting Standard (IFRS) on exploration for and
evaluation of mineral resources because
(a) until now there has been no IFRS that specifically addresses the
accounting for those activities and they are excluded from the scope of
IAS 38 Intangible Assets In addition mineral rights and mineral
resources such as oil natural gas and similar nonregenerative resources’
are excluded from the scope of IAS 16 Property Plant and Equipment
Consequently an entity was required to determine its accounting policy
for the exploration for and evaluation of mineral resources in
accordance with paragraphs 10–12 of IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors
(b) there are different views on how exploration and evaluation
expenditures should be accounted for in accordance with IFRSs
(c) accounting practices for exploration and evaluation assets under the
requirements of other standardsetting bodies are diverse and often
differ from practices in other sectors for expenditures that may be
considered analogous (eg accounting practices for research and
development costs in accordance with IAS 38)
(d) exploration and evaluation expenditures are significant to entities
engaged in extractive activities
(e) an increasing number of entities incurring exploration and evaluation
expenditures present their financial statements in accordance with
IFRSs and many more are expected to do so from 2005
IN2 The Board’s predecessor organisation the International Accounting Standards
Committee established a Steering Committee in 1998 to carry out initial work
on accounting and financial reporting by entities engaged in extractive
activities In November 2000 the Steering Committee published an Issues Paper
Extractive Industries
IN3 In July 2001 the Board announced that it would restart the project only when
agenda time permitted Although the Board recognised the importance of
accounting for extractive activities generally it decided in September 2002 that
it was not feasible to complete the detailed analysis required for this project
obtain appropriate input from constituents and undertake the Board’s normal
due process in time to implement changes before many entities adopted IFRSs in
2005
IN4 The Board’s objectives for this phase of its extractive activities project are
IFRS 6
IFRS FoundationA232(a) to make limited improvements to accounting practices for exploration
and evaluation expenditures without requiring major changes that
might be reversed when the Board undertakes a comprehensive review of
accounting practices used by entities engaged in the exploration for and
evaluation of mineral resources
(b) to specify the circumstances in which entities that recognise exploration
and evaluation assets should test such assets for impairment in
accordance with IAS 36 Impairment of Assets
(c) to require entities engaged in the exploration for and evaluation of
mineral resources to disclose information about exploration and
evaluation assets the level at which such assets are assessed for
impairment and any impairment losses recognised
Main features of the IFRS
IN5 The IFRS
(a) permits an entity to develop an accounting policy for exploration and
evaluation assets without specifically considering the requirements of
paragraphs 11 and 12 of IAS 8 Thus an entity adopting IFRS 6 may
continue to use the accounting policies applied immediately before
adopting the IFRS This includes continuing to use recognition and
measurement practices that are part of those accounting policies
(b) requires entities recognising exploration and evaluation assets to
perform an impairment test on those assets when facts and
circumstances suggest that the carrying amount of the assets may exceed
their recoverable amount
(c) varies the recognition of impairment from that in IAS 36 but measures
the impairment in accordance with that Standard once the impairment
is identified
IFRS 6
IFRS Foundation A233International Financial Reporting Standard 6
Exploration for and Evaluation of Mineral Resources
Objective
1 The objective of this IFRS is to specify the financial reporting for the exploration
for and evaluation of mineral resources
2 In particular the IFRS requires
(a) limited improvements to existing accounting practices for exploration and
evaluation expenditures
(b) entities that recognise exploration and evaluation assets to assess such assets
for impairment in accordance with this IFRS and measure any
impairment in accordance with IAS 36 Impairment of Assets
(c) disclosures that identify and explain the amounts in the entity’s
financial statements arising from the exploration for and evaluation of
mineral resources and help users of those financial statements
understand the amount timing and certainty of future cash flows from
any exploration and evaluation assets recognised
Scope
3 An entity shall apply the IFRS to exploration and evaluation expenditures that it
incurs
4 The IFRS does not address other aspects of accounting by entities engaged in the
exploration for and evaluation of mineral resources
5 An entity shall not apply the IFRS to expenditures incurred
(a) before the exploration for and evaluation of mineral resources such as
expenditures incurred before the entity has obtained the legal rights to
explore a specific area
(b) after the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable
Recognition of exploration and evaluation assets
Temporary exemption from IAS 8 paragraphs 11 and 12
6 When developing its accounting policies an entity recognising exploration and
evaluation assets shall apply paragraph 10 of IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors
7 Paragraphs 11 and 12 of IAS 8 specify sources of authoritative requirements and
guidance that management is required to consider in developing an accounting
policy for an item if no IFRS applies specifically to that item Subject to
IFRS 6
IFRS FoundationA234paragraphs 9 and 10 below this IFRS exempts an entity from applying those
paragraphs to its accounting policies for the recognition and measurement of
exploration and evaluation assets
Measurement of exploration and evaluation assets
Measurement at recognition
8 Exploration and evaluation assets shall be measured at cost
Elements of cost of exploration and evaluation assets
9 An entity shall determine an accounting policy specifying which expenditures
are recognised as exploration and evaluation assets and apply the policy
consistently In making this determination an entity considers the degree to
which the expenditure can be associated with finding specific mineral resources
The following are examples of expenditures that might be included in the initial
measurement of exploration and evaluation assets (the list is not exhaustive)
(a) acquisition of rights to explore
(b) topographical geological geochemical and geophysical studies
(c) exploratory drilling
(d) trenching
(e) sampling and
(f) activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource
10 Expenditures related to the development of mineral resources shall not be
recognised as exploration and evaluation assets The Framework1 and IAS 38
Intangible Assets provide guidance on the recognition of assets arising from
development
11 In accordance with IAS 37 Provisions Contingent Liabilities and Contingent Assets an
entity recognises any obligations for removal and restoration that are incurred
during a particular period as a consequence of having undertaken the
exploration for and evaluation of mineral resources
Measurement after recognition
12 After recognition an entity shall apply either the cost model or the revaluation
model to the exploration and evaluation assets If the revaluation model is
applied (either the model in IAS 16 Property Plant and Equipment or the model in
IAS 38) it shall be consistent with the classification of the assets (see
paragraph 15)
1 The reference to the Framework is to IASC’s Framework for the Preparation and Presentation of Financial
Statements adopted by the IASB in 2001 In September 2010 the IASB replaced the Framework with
the Conceptual Framework for Financial Reporting
IFRS 6
IFRS Foundation A235Changes in accounting policies
13 An entity may change its accounting policies for exploration and
evaluation expenditures if the change makes the financial statements
more relevant to the economic decisionmaking needs of users and no
less reliable or more reliable and no less relevant to those needs An
entity shall judge relevance and reliability using the criteria in IAS 8
14 To justify changing its accounting policies for exploration and evaluation
expenditures an entity shall demonstrate that the change brings its financial
statements closer to meeting the criteria in IAS 8 but the change need not
achieve full compliance with those criteria
Presentation
Classification of exploration and evaluation assets
15 An entity shall classify exploration and evaluation assets as tangible or
intangible according to the nature of the assets acquired and apply the
classification consistently
16 Some exploration and evaluation assets are treated as intangible (eg drilling
rights) whereas others are tangible (eg vehicles and drilling rigs) To the extent
that a tangible asset is consumed in developing an intangible asset the amount
reflecting that consumption is part of the cost of the intangible asset However
using a tangible asset to develop an intangible asset does not change a tangible
asset into an intangible asset
Reclassification of exploration and evaluation assets
17 An exploration and evaluation asset shall no longer be classified as such when
the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable Exploration and evaluation assets shall be assessed
for impairment and any impairment loss recognised before reclassification
Impairment
Recognition and measurement
18 Exploration and evaluation assets shall be assessed for impairment when
facts and circumstances suggest that the carrying amount of an
exploration and evaluation asset may exceed its recoverable amount
When facts and circumstances suggest that the carrying amount exceeds
the recoverable amount an entity shall measure present and disclose any
resulting impairment loss in accordance with IAS 36 except as provided
by paragraph 21 below
19 For the purposes of exploration and evaluation assets only paragraph 20 of this
IFRS shall be applied rather than paragraphs 8–17 of IAS 36 when identifying an
exploration and evaluation asset that may be impaired Paragraph 20 uses the
term assets’ but applies equally to separate exploration and evaluation assets or
a cashgenerating unit
IFRS 6
IFRS FoundationA23620 One or more of the following facts and circumstances indicate that an entity
should test exploration and evaluation assets for impairment (the list is not
exhaustive)
(a) the period for which the entity has the right to explore in the specific
area has expired during the period or will expire in the near future and
is not expected to be renewed
(b) substantive expenditure on further exploration for and evaluation of
mineral resources in the specific area is neither budgeted nor planned
(c) exploration for and evaluation of mineral resources in the specific area
have not led to the discovery of commercially viable quantities of
mineral resources and the entity has decided to discontinue such
activities in the specific area
(d) sufficient data exist to indicate that although a development in the
specific area is likely to proceed the carrying amount of the exploration
and evaluation asset is unlikely to be recovered in full from successful
development or by sale
In any such case or similar cases the entity shall perform an impairment test in
accordance with IAS 36 Any impairment loss is recognised as an expense in
accordance with IAS 36
Specifying the level at which exploration and evaluation
assets are assessed for impairment
21 An entity shall determine an accounting policy for allocating exploration
and evaluation assets to cashgenerating units or groups of
cashgenerating units for the purpose of assessing such assets for
impairment Each cashgenerating unit or group of units to which an
exploration and evaluation asset is allocated shall not be larger than an
operating segment determined in accordance with IFRS 8 Operating
Segments
22 The level identified by the entity for the purposes of testing exploration and
evaluation assets for impairment may comprise one or more cashgenerating
units
Disclosure
23 An entity shall disclose information that identifies and explains the
amounts recognised in its financial statements arising from the
exploration for and evaluation of mineral resources
24 To comply with paragraph 23 an entity shall disclose
(a) its accounting policies for exploration and evaluation expenditures
including the recognition of exploration and evaluation assets
(b) the amounts of assets liabilities income and expense and operating and
investing cash flows arising from the exploration for and evaluation of
mineral resources
IFRS 6
IFRS Foundation A23725 An entity shall treat exploration and evaluation assets as a separate class of
assets and make the disclosures required by either IAS 16 or IAS 38 consistent
with how the assets are classified
Effective date
26 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2006 Earlier application is encouraged If an entity applies the IFRS
for a period beginning before 1 January 2006 it shall disclose that fact
Transitional provisions
27 If it is impracticable to apply a particular requirement of paragraph 18 to
comparative information that relates to annual periods beginning before
1 January 2006 an entity shall disclose that fact IAS 8 explains the term
impracticable’
IFRS 6
IFRS FoundationA238Appendix A
Defined terms
This appendix is an integral part of the IFRS
exploration and
evaluation assets
Exploration and evaluation expenditures recognised as assets
in accordance with the entity’s accounting policy
exploration and
evaluation
expenditures
Expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before
the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable
exploration for and
evaluation of mineral
resources
The search for mineral resources including minerals oil natural
gas and similar nonregenerative resources after the entity has
obtained legal rights to explore in a specific area as well as the
determination of the technical feasibility and commercial
viability of extracting the mineral resource
IFRS 6
IFRS Foundation A239Appendix B
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2006 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume
IFRS 6
IFRS FoundationA240IFRS Standard 7
Financial Instruments Disclosures
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 30
Disclosures in the Financial Statements of Banks and Similar Financial Institutions which had
originally been issued by the International Accounting Standards Committee in August
1990
In August 2005 the Board issued IFRS 7 Financial Instruments which replaced IAS 30 and
carried forward the disclosure requirements in IAS 32 Financial Instruments Disclosure and
Presentation IAS 32 was subsequently renamed as IAS 32 Financial Instruments Presentation
IAS 1 Presentation of Financial Statements (as revised in 2007) amended the terminology used
throughout IFRS including IFRS 7 In March 2009 the IASB enhanced the disclosures about
fair value and liquidity risks in IFRS 7
The Board also amended IFRS 7 to reflect that a new financial instruments Standard was
issued—IFRS 9 Financial Instruments which related to the classification of financial assets and
financial liabilities
IFRS 7 was also amended in October 2010 to require entities to supplement disclosures for
all transferred financial assets that are not derecognised where there has been some
continuing involvement in a transferred asset The Board amended IFRS 7 in December
2011 to improve disclosures in netting arrangements associated with financial assets and
financial liabilities
Other Standards have made minor consequential amendments to IFRS 7 They include
Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime Adopters (Amendments to
IFRS 1) (issued January 2010) Improvements to IFRSs (issued May 2010) IFRS 10 Consolidated
Financial Statements (issued May 2011) IFRS 11 Joint Arrangements (issued May 2011) IFRS 13
Fair Value Measurement (issued May 2011) Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) (issued June 2011) Mandatory Effective Date and Transition Disclosures
(Amendments to IFRS 9 (2009) IFRS 9 (2010) and IFRS 7) (issued December 2011) Investment
Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) (issued October 2012) IFRS 9 Financial
Instruments (Hedge Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued
November 2013) Annual Improvements to IFRSs 2012–2014 Cycle (issued September 2014)
Disclosure Initiative (Amendments to IAS 1) (issued December 2014) and IFRS 16 Leases (issued
January 2016)
IFRS 7
IFRS Foundation A241CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 7
FINANCIAL INSTRUMENTS DISCLOSURES
OBJECTIVE 1
SCOPE 3
CLASSES OF FINANCIAL INSTRUMENTS AND LEVEL OF DISCLOSURE 6
SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION
AND PERFORMANCE 7
Statement of financial position 8
Statement of comprehensive income 20
Other disclosures 21
NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS 31
Qualitative disclosures 33
Quantitative disclosures 34
TRANSFERS OF FINANCIAL ASSETS 42A
Transferred financial assets that are not derecognised in their entirety 42D
Transferred financial assets that are derecognised in their entirety 42E
Supplementary information 42H
INITIAL APPLICATION OF IFRS 9 42I
EFFECTIVE DATE AND TRANSITION 43
WITHDRAWAL OF IAS 30 45
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 7 ISSUED IN AUGUST 2005 APPROVAL
BY THE BOARD OF AMENDMENTS TO IFRS 7
Improving Disclosures about Financial Instruments issued in March 2009
Disclosures—Transfers of Financial Assets issued in October 2010
Mandatory Effective Date of IFRS 9 and Transition Disclosures (Amendments
to IFRS 9 (2009) IFRS 9 (2010) and IFRS 7) issued in December 2011
Disclosures—Offsetting Financial Assets and Financial Liabilities
(Amendments to IFRS 7) issued in December 2011
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9
IFRS 7 and IAS 39) issued in November 2013
IFRS 7
IFRS FoundationA242BASIS FOR CONCLUSIONS
APPENDIX
Amendments to Basis for Conclusions on other IFRSs
IMPLEMENTATION GUIDANCE
APPENDIX
Amendments to guidance on other IFRSs
IFRS 7
IFRS Foundation A243International Financial Reporting Standard 7 Financial Instruments Disclosures (IFRS 7) is set
out in paragraphs 1–45 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 7 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 7
IFRS FoundationA244Introduction
Reasons for issuing the IFRS
IN1 In recent years the techniques used by entities for measuring and managing
exposure to risks arising from financial instruments have evolved and new risk
management concepts and approaches have gained acceptance In addition
many public and private sector initiatives have proposed improvements to the
disclosure framework for risks arising from financial instruments
IN2 The International Accounting Standards Board believes that users of financial
statements need information about an entity’s exposure to risks and how those
risks are managed Such information can influence a user’s assessment of the
financial position and financial performance of an entity or of the amount
timing and uncertainty of its future cash flows Greater transparency regarding
those risks allows users to make more informed judgements about risk and
return
IN3 Consequently the Board concluded that there was a need to revise and enhance
the disclosures in IAS 30 Disclosures in the Financial Statements of Banks and Similar
Financial Institutions and IAS 32 Financial Instruments Disclosure and PresentationAs
part of this revision the Board removed duplicative disclosures and simplified
the disclosures about concentrations of risk credit risk liquidity risk and
market risk in IAS 32
Main features of the IFRS
IN4 IFRS 7 applies to all risks arising from all financial instruments except those
instruments listed in paragraph 3 The IFRS applies to all entities including
entities that have few financial instruments (eg a manufacturer whose only
financial instruments are accounts receivable and accounts payable) and those
that have many financial instruments (eg a financial institution most of whose
assets and liabilities are financial instruments) However the extent of
disclosure required depends on the extent of the entity’s use of financial
instruments and of its exposure to risk
IN5 The IFRS requires disclosure of
(a) the significance of financial instruments for an entity’s financial
position and performance These disclosures incorporate many of the
requirements previously in IAS 32
(b) qualitative and quantitative information about exposure to risks arising
from financial instruments including specified minimum disclosures
about credit risk liquidity risk and market risk The qualitative
disclosures describe management’s objectives policies and processes for
managing those risks The quantitative disclosures provide information
about the extent to which the entity is exposed to risk based on
information provided internally to the entity’s key management
IFRS 7
IFRS Foundation A245personnel Together these disclosures provide an overview of the
entity’s use of financial instruments and the exposures to risks they
create
IN5A Amendments to the IFRS issued in March 2009 require enhanced disclosures
about fair value measurements and liquidity risk These have been made to
address application issues and provide useful information to users
IN5B Disclosures—Transfers of Financial Assets (Amendments to IFRS 7) issued in October
2010 amended the required disclosures to help users of financial statements
evaluate the risk exposures relating to transfers of financial assets and the effect
of those risks on an entity’s financial position
IN5C In May 2011 the Board relocated the disclosures about fair value measurements
to IFRS 13 Fair Value Measurement
IN6 The IFRS includes in Appendix B mandatory application guidance that explains
how to apply the requirements in the IFRS The IFRS is accompanied by
nonmandatory Implementation Guidance that describes how an entity might
provide the disclosures required by the IFRS
IN7 The IFRS supersedes IAS 30 and the disclosure requirements of IAS 32 The
presentation requirements of IAS 32 remain unchanged
IN8 The IFRS is effective for annual periods beginning on or after 1 January 2007
Earlier application is encouraged
IN9 Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)
issued in December 2011 amended the required disclosures to include
information that will enable users of an entity’s financial statements to evaluate
the effect or potential effect of netting arrangements including rights of setoff
associated with the entity’s recognised financial assets and recognised financial
liabilities on the entity’s financial position
IFRS 7
IFRS FoundationA246International Financial Reporting Standard 7
Financial Instruments Disclosures
Objective
1 The objective of this IFRS is to require entities to provide disclosures in their
financial statements that enable users to evaluate
(a) the significance of financial instruments for the entity’s financial
position and performance and
(b) the nature and extent of risks arising from financial instruments to
which the entity is exposed during the period and at the end of the
reporting period and how the entity manages those risks
2 The principles in this IFRS complement the principles for recognising
measuring and presenting financial assets and financial liabilities in IAS 32
Financial Instruments Presentation and IFRS 9 Financial Instruments
Scope
3 This IFRS shall be applied by all entities to all types of financial instruments
except
(a) those interests in subsidiaries associates or joint ventures that are
accounted for in accordance with IFRS 10 Consolidated Financial Statements
IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and
Joint Ventures However in some cases IFRS 10 IAS 27 or IAS 28 require or
permit an entity to account for an interest in a subsidiary associate or
joint venture using IFRS 9 in those cases entities shall apply the
requirements of this IFRS and for those measured at fair value the
requirements of IFRS 13 Fair Value Measurement Entities shall also apply
this IFRS to all derivatives linked to interests in subsidiaries associates or
joint ventures unless the derivative meets the definition of an equity
instrument in IAS 32
(b) employers’ rights and obligations arising from employee benefit plans
to which IAS 19 Employee Benefits applies
(c) [deleted]
(d) insurance contracts as defined in IFRS 4 Insurance Contracts However this
IFRS applies to derivatives that are embedded in insurance contracts if
IFRS 9 requires the entity to account for them separately Moreover an
issuer shall apply this IFRS to financial guarantee contracts if the issuer
applies IFRS 9 in recognising and measuring the contracts but shall
apply IFRS 4 if the issuer elects in accordance with paragraph 4(d) of
IFRS 4 to apply IFRS 4 in recognising and measuring them
(e) financial instruments contracts and obligations under sharebased
payment transactions to which IFRS 2 Sharebased Payment applies except
that this IFRS applies to contracts within the scope of IFRS 9
IFRS 7
IFRS Foundation A247(f) instruments that are required to be classified as equity instruments in
accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of
IAS 32
4 This IFRS applies to recognised and unrecognised financial instruments
Recognised financial instruments include financial assets and financial
liabilities that are within the scope of IFRS 9 Unrecognised financial
instruments include some financial instruments that although outside the
scope of IFRS 9 are within the scope of this IFRS
5 This IFRS applies to contracts to buy or sell a nonfinancial item that are within
the scope of IFRS 9
5A The credit risk disclosure requirements in paragraphs 35A–35N apply to those
rights that IFRS 15 Revenue from Contracts with Customers specifies are accounted for
in accordance with IFRS 9 for the purposes of recognising impairment gains or
losses Any reference to financial assets or financial instruments in these
paragraphs shall include those rights unless otherwise specified
Classes of financial instruments and level of disclosure
6 When this IFRS requires disclosures by class of financial instrument an entity
shall group financial instruments into classes that are appropriate to the nature
of the information disclosed and that take into account the characteristics of
those financial instruments An entity shall provide sufficient information to
permit reconciliation to the line items presented in the statement of financial
position
Significance of financial instruments for financial position and
performance
7 An entity shall disclose information that enables users of its financial
statements to evaluate the significance of financial instruments for its
financial position and performance
Statement of financial position
Categories of financial assets and financial liabilities
8 The carrying amounts of each of the following categories as specified in IFRS 9
shall be disclosed either in the statement of financial position or in the notes
(a) financial assets measured at fair value through profit or loss showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 671 of IFRS 9 and (ii) those
mandatorily measured at fair value through profit or loss in accordance
with IFRS 9
(b)–(d) [deleted]
IFRS 7
IFRS FoundationA248(e) financial liabilities at fair value through profit or loss showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 671 of IFRS 9 and (ii) those
that meet the definition of held for trading in IFRS 9
(f) financial assets measured at amortised cost
(g) financial liabilities measured at amortised cost
(h) financial assets measured at fair value through other comprehensive
income showing separately (i) financial assets that are measured at fair
value through other comprehensive income in accordance with
paragraph 412A of IFRS 9 and (ii) investments in equity instruments
designated as such upon initial recognition in accordance with
paragraph 575 of IFRS 9
Financial assets or financial liabilities at fair value through profit
or loss
9 If the entity has designated as measured at fair value through profit or loss a
financial asset (or group of financial assets) that would otherwise be measured at
fair value through other comprehensive income or amortised cost it shall
disclose
(a) the maximum exposure to credit risk (see paragraph 36(a)) of the financial
asset (or group of financial assets) at the end of the reporting period
(b) the amount by which any related credit derivatives or similar
instruments mitigate that maximum exposure to credit risk (see
paragraph 36(b))
(c) the amount of change during the period and cumulatively in the fair
value of the financial asset (or group of financial assets) that is
attributable to changes in the credit risk of the financial asset
determined either
(i) as the amount of change in its fair value that is not attributable
to changes in market conditions that give rise to market riskor
(ii) using an alternative method the entity believes more faithfully
represents the amount of change in its fair value that is
attributable to changes in the credit risk of the asset
Changes in market conditions that give rise to market risk include
changes in an observed (benchmark) interest rate commodity price
foreign exchange rate or index of prices or rates
(d) the amount of the change in the fair value of any related credit
derivatives or similar instruments that has occurred during the period
and cumulatively since the financial asset was designated
10 If the entity has designated a financial liability as at fair value through profit or
loss in accordance with paragraph 422 of IFRS 9 and is required to present the
effects of changes in that liability’s credit risk in other comprehensive income
(see paragraph 577 of IFRS 9) it shall disclose
IFRS 7
IFRS Foundation A249(a) the amount of change cumulatively in the fair value of the financial
liability that is attributable to changes in the credit risk of that liability
(see paragraphs B5713–B5720 of IFRS 9 for guidance on determining
the effects of changes in a liability’s credit risk)
(b) the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to
the holder of the obligation
(c) any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers
(d) if a liability is derecognised during the period the amount (if any)
presented in other comprehensive income that was realised at
derecognition
10A If an entity has designated a financial liability as at fair value through profit or
loss in accordance with paragraph 422 of IFRS 9 and is required to present all
changes in the fair value of that liability (including the effects of changes in the
credit risk of the liability) in profit or loss (see paragraphs 577 and 578 of
IFRS 9) it shall disclose
(a) the amount of change during the period and cumulatively in the fair
value of the financial liability that is attributable to changes in the credit
risk of that liability (see paragraphs B5713–B5720 of IFRS 9 for
guidance on determining the effects of changes in a liability’s credit
risk) and
(b) the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to
the holder of the obligation
11 The entity shall also disclose
(a) a detailed description of the methods used to comply with the
requirements in paragraphs 9(c) 10(a) and 10A(a) and paragraph 577(a)
of IFRS 9 including an explanation of why the method is appropriate
(b) if the entity believes that the disclosure it has given either in the
statement of financial position or in the notes to comply with the
requirements in paragraph 9(c) 10(a) or 10A(a) or paragraph 577(a) of
IFRS 9 does not faithfully represent the change in the fair value of the
financial asset or financial liability attributable to changes in its credit
risk the reasons for reaching this conclusion and the factors it believes
are relevant
(c) a detailed description of the methodology or methodologies used to
determine whether presenting the effects of changes in a liability’s credit
risk in other comprehensive income would create or enlarge an
accounting mismatch in profit or loss (see paragraphs 577 and 578 of
IFRS 9) If an entity is required to present the effects of changes in a
liability’s credit risk in profit or loss (see paragraph 578 of IFRS 9) the
disclosure must include a detailed description of the economic
relationship described in paragraph B576 of IFRS 9
IFRS 7
IFRS FoundationA250Investments in equity instruments designated at fair value
through other comprehensive income
11A If an entity has designated investments in equity instruments to be measured at
fair value through other comprehensive income as permitted by
paragraph 575 of IFRS 9 it shall disclose
(a) which investments in equity instruments have been designated to be
measured at fair value through other comprehensive income
(b) the reasons for using this presentation alternative
(c) the fair value of each such investment at the end of the reporting period
(d) dividends recognised during the period showing separately those
related to investments derecognised during the reporting period and
those related to investments held at the end of the reporting period
(e) any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers
11B If an entity derecognised investments in equity instruments measured at fair
value through other comprehensive income during the reporting period it shall
disclose
(a) the reasons for disposing of the investments
(b) the fair value of the investments at the date of derecognition
(c) the cumulative gain or loss on disposal
Reclassification
12–
12A
[Deleted]
12B An entity shall disclose if in the current or previous reporting periods it has
reclassified any financial assets in accordance with paragraph 441 of IFRS 9
For each such event an entity shall disclose
(a) the date of reclassification
(b) a detailed explanation of the change in business model and a qualitative
description of its effect on the entity’s financial statements
(c) the amount reclassified into and out of each category
12C For each reporting period following reclassification until derecognition an
entity shall disclose for assets reclassified out of the fair value through profit or
loss category so that they are measured at amortised cost or fair value through
other comprehensive income in accordance with paragraph 441 of IFRS 9
(a) the effective interest rate determined on the date of reclassification and
(b) the interest revenue recognised
12D If since its last annual reporting date an entity has reclassified financial assets
out of the fair value through other comprehensive income category so that they
are measured at amortised cost or out of the fair value through profit or loss
category so that they are measured at amortised cost or fair value through other
comprehensive income it shall disclose
IFRS 7
IFRS Foundation A251(a) the fair value of the financial assets at the end of the reporting period
and
(b) the fair value gain or loss that would have been recognised in profit or
loss or other comprehensive income during the reporting period if the
financial assets had not been reclassified
13 [Deleted]
Offsetting financial assets and financial liabilities
13A The disclosures in paragraphs 13B–13E supplement the other disclosure
requirements of this IFRS and are required for all recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32 These
disclosures also apply to recognised financial instruments that are subject to an
enforceable master netting arrangement or similar agreement irrespective of
whether they are set off in accordance with paragraph 42 of IAS 32
13B An entity shall disclose information to enable users of its financial statements to
evaluate the effect or potential effect of netting arrangements on the entity’s
financial position This includes the effect or potential effect of rights of setoff
associated with the entity’s recognised financial assets and recognised financial
liabilities that are within the scope of paragraph 13A
13C To meet the objective in paragraph 13B an entity shall disclose at the end of the
reporting period the following quantitative information separately for
recognised financial assets and recognised financial liabilities that are within
the scope of paragraph 13A
(a) the gross amounts of those recognised financial assets and recognised
financial liabilities
(b) the amounts that are set off in accordance with the criteria in
paragraph 42 of IAS 32 when determining the net amounts presented in
the statement of financial position
(c) the net amounts presented in the statement of financial position
(d) the amounts subject to an enforceable master netting arrangement or
similar agreement that are not otherwise included in paragraph 13C(b)
including
(i) amounts related to recognised financial instruments that do not
meet some or all of the offsetting criteria in paragraph 42 of
IAS 32 and
(ii) amounts related to financial collateral (including cash collateral)
and
(e) the net amount after deducting the amounts in (d) from the amounts in
(c) above
The information required by this paragraph shall be presented in a tabular
format separately for financial assets and financial liabilities unless another
format is more appropriate
IFRS 7
IFRS FoundationA25213D The total amount disclosed in accordance with paragraph 13C(d) for an
instrument shall be limited to the amount in paragraph 13C(c) for that
instrument
13E An entity shall include a description in the disclosures of the rights of setoff
associated with the entity’s recognised financial assets and recognised financial
liabilities subject to enforceable master netting arrangements and similar
agreements that are disclosed in accordance with paragraph 13C(d) including
the nature of those rights
13F If the information required by paragraphs 13B–13E is disclosed in more than
one note to the financial statements an entity shall crossrefer between those
notes
Collateral
14 An entity shall disclose
(a) the carrying amount of financial assets it has pledged as collateral for
liabilities or contingent liabilities including amounts that have been
reclassified in accordance with paragraph 3223(a) of IFRS 9 and
(b) the terms and conditions relating to its pledge
15 When an entity holds collateral (of financial or nonfinancial assets) and is
permitted to sell or repledge the collateral in the absence of default by the
owner of the collateral it shall disclose
(a) the fair value of the collateral held
(b) the fair value of any such collateral sold or repledged and whether the
entity has an obligation to return it and
(c) the terms and conditions associated with its use of the collateral
Allowance account for credit losses
16 [Deleted]
16A The carrying amount of financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A of IFRS 9 is not
reduced by a loss allowance and an entity shall not present the loss allowance
separately in the statement of financial position as a reduction of the carrying
amount of the financial asset However an entity shall disclose the loss
allowance in the notes to the financial statements
Compound financial instruments with multiple embedded
derivatives
17 If an entity has issued an instrument that contains both a liability and an equity
component (see paragraph 28 of IAS 32) and the instrument has multiple
embedded derivatives whose values are interdependent (such as a callable
convertible debt instrument) it shall disclose the existence of those features
IFRS 7
IFRS Foundation A253Defaults and breaches
18 For loans payable recognised at the end of the reporting period an entity shall
disclose
(a) details of any defaults during the period of principal interest sinking
fund or redemption terms of those loans payable
(b) the carrying amount of the loans payable in default at the end of the
reporting period and
(c) whether the default was remedied or the terms of the loans payable
were renegotiated before the financial statements were authorised for
issue
19 If during the period there were breaches of loan agreement terms other than
those described in paragraph 18 an entity shall disclose the same information
as required by paragraph 18 if those breaches permitted the lender to demand
accelerated repayment (unless the breaches were remedied or the terms of the
loan were renegotiated on or before the end of the reporting period)
Statement of comprehensive income
Items of income expense gains or losses
20 An entity shall disclose the following items of income expense gains or losses
either in the statement of comprehensive income or in the notes
(a) net gains or net losses on
(i) financial assets or financial liabilities measured at fair value
through profit or loss showing separately those on financial
assets or financial liabilities designated as such upon initial
recognition or subsequently in accordance with paragraph 671
of IFRS 9 and those on financial assets or financial liabilities that
are mandatorily measured at fair value through profit or loss in
accordance with IFRS 9 (eg financial liabilities that meet the
definition of held for trading in IFRS 9) For financial liabilities
designated as at fair value through profit or loss an entity shall
show separately the amount of gain or loss recognised in other
comprehensive income and the amount recognised in profit or
loss
(ii)–(iv) [deleted]
(v) financial liabilities measured at amortised cost
(vi) financial assets measured at amortised cost
(vii) investments in equity instruments designated at fair value
through other comprehensive income in accordance with
paragraph 575 of IFRS 9
(viii) financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A of
IFRS 9 showing separately the amount of gain or loss recognised
in other comprehensive income during the period and the
IFRS 7
IFRS FoundationA254amount reclassified upon derecognition from accumulated other
comprehensive income to profit or loss for the period
(b) total interest revenue and total interest expense (calculated using the
effective interest method) for financial assets that are measured at
amortised cost or that are measured at fair value through other
comprehensive income in accordance with paragraph 412A of IFRS 9
(showing these amounts separately) or financial liabilities that are not
measured at fair value through profit or loss
(c) fee income and expense (other than amounts included in determining
the effective interest rate) arising from
(i) financial assets and financial liabilities that are not at fair value
through profit or loss and
(ii) trust and other fiduciary activities that result in the holding or
investing of assets on behalf of individuals trusts retirement
benefit plans and other institutions
(d) [deleted]
(e) [deleted]
20A An entity shall disclose an analysis of the gain or loss recognised in the
statement of comprehensive income arising from the derecognition of financial
assets measured at amortised cost showing separately gains and losses arising
from derecognition of those financial assets This disclosure shall include the
reasons for derecognising those financial assets
Other disclosures
Accounting policies
21 In accordance with paragraph 117 of IAS 1 Presentation of Financial Statements (as
revised in 2007) an entity discloses its significant accounting policies
comprising the measurement basis (or bases) used in preparing the financial
statements and the other accounting policies used that are relevant to an
understanding of the financial statements
Hedge accounting
21A An entity shall apply the disclosure requirements in paragraphs 21B–24F for
those risk exposures that an entity hedges and for which it elects to apply hedge
accounting Hedge accounting disclosures shall provide information about
(a) an entity’s risk management strategy and how it is applied to manage
risk
(b) how the entity’s hedging activities may affect the amount timing and
uncertainty of its future cash flows and
(c) the effect that hedge accounting has had on the entity’s statement of
financial position statement of comprehensive income and statement of
changes in equity
IFRS 7
IFRS Foundation A25521B An entity shall present the required disclosures in a single note or separate
section in its financial statements However an entity need not duplicate
information that is already presented elsewhere provided that the information
is incorporated by crossreference from the financial statements to some other
statement such as a management commentary or risk report that is available to
users of the financial statements on the same terms as the financial statements
and at the same time Without the information incorporated by crossreference
the financial statements are incomplete
21C When paragraphs 22A–24F require the entity to separate by risk category the
information disclosed the entity shall determine each risk category on the basis
of the risk exposures an entity decides to hedge and for which hedge accounting
is applied An entity shall determine risk categories consistently for all hedge
accounting disclosures
21D To meet the objectives in paragraph 21A an entity shall (except as otherwise
specified below) determine how much detail to disclose how much emphasis to
place on different aspects of the disclosure requirements the appropriate level
of aggregation or disaggregation and whether users of financial statements
need additional explanations to evaluate the quantitative information disclosed
However an entity shall use the same level of aggregation or disaggregation it
uses for disclosure requirements of related information in this IFRS and IFRS 13
Fair Value Measurement
The risk management strategy
22 [Deleted]
22A An entity shall explain its risk management strategy for each risk category of
risk exposures that it decides to hedge and for which hedge accounting is
applied This explanation should enable users of financial statements to
evaluate (for example)
(a) how each risk arises
(b) how the entity manages each risk this includes whether the entity
hedges an item in its entirety for all risks or hedges a risk component (or
components) of an item and why
(c) the extent of risk exposures that the entity manages
22B To meet the requirements in paragraph 22A the information should include
(but is not limited to) a description of
(a) the hedging instruments that are used (and how they are used) to hedge
risk exposures
(b) how the entity determines the economic relationship between the
hedged item and the hedging instrument for the purpose of assessing
hedge effectiveness and
(c) how the entity establishes the hedge ratio and what the sources of hedge
ineffectiveness are
IFRS 7
IFRS FoundationA25622C When an entity designates a specific risk component as a hedged item (see
paragraph 637 of IFRS 9) it shall provide in addition to the disclosures required
by paragraphs 22A and 22B qualitative or quantitative information about
(a) how the entity determined the risk component that is designated as the
hedged item (including a description of the nature of the relationship
between the risk component and the item as a whole) and
(b) how the risk component relates to the item in its entirety (for example
the designated risk component historically covered on average 80 per
cent of the changes in fair value of the item as a whole)
The amount timing and uncertainty of future cash flows
23 [Deleted]
23A Unless exempted by paragraph 23C an entity shall disclose by risk category
quantitative information to allow users of its financial statements to evaluate
the terms and conditions of hedging instruments and how they affect the
amount timing and uncertainty of future cash flows of the entity
23B To meet the requirement in paragraph 23A an entity shall provide a breakdown
that discloses
(a) a profile of the timing of the nominal amount of the hedging
instrument and
(b) if applicable the average price or rate (for example strike or forward
prices etc) of the hedging instrument
23C In situations in which an entity frequently resets (ie discontinues and restarts)
hedging relationships because both the hedging instrument and the hedged
item frequently change (ie the entity uses a dynamic process in which both the
exposure and the hedging instruments used to manage that exposure do not
remain the same for long—such as in the example in paragraph B6524(b) of
IFRS 9) the entity
(a) is exempt from providing the disclosures required by paragraphs 23A
and 23B
(b) shall disclose
(i) information about what the ultimate risk management strategy
is in relation to those hedging relationships
(ii) a description of how it reflects its risk management strategy by
using hedge accounting and designating those particular
hedging relationships and
(iii) an indication of how frequently the hedging relationships are
discontinued and restarted as part of the entity’s process in
relation to those hedging relationships
23D An entity shall disclose by risk category a description of the sources of hedge
ineffectiveness that are expected to affect the hedging relationship during its
term
IFRS 7
IFRS Foundation A25723E If other sources of hedge ineffectiveness emerge in a hedging relationship an
entity shall disclose those sources by risk category and explain the resulting
hedge ineffectiveness
23F For cash flow hedges an entity shall disclose a description of any forecast
transaction for which hedge accounting had been used in the previous period
but which is no longer expected to occur
The effects of hedge accounting on financial position and performance
24 [Deleted]
24A An entity shall disclose in a tabular format the following amounts related to
items designated as hedging instruments separately by risk category for each
type of hedge (fair value hedge cash flow hedge or hedge of a net investment in
a foreign operation)
(a) the carrying amount of the hedging instruments (financial assets
separately from financial liabilities)
(b) the line item in the statement of financial position that includes the
hedging instrument
(c) the change in fair value of the hedging instrument used as the basis for
recognising hedge ineffectiveness for the period and
(d) the nominal amounts (including quantities such as tonnes or cubic
metres) of the hedging instruments
24B An entity shall disclose in a tabular format the following amounts related to
hedged items separately by risk category for the types of hedges as follows
(a) for fair value hedges
(i) the carrying amount of the hedged item recognised in the
statement of financial position (presenting assets separately from
liabilities)
(ii) the accumulated amount of fair value hedge adjustments on the
hedged item included in the carrying amount of the hedged item
recognised in the statement of financial position (presenting
assets separately from liabilities)
(iii) the line item in the statement of financial position that includes
the hedged item
(iv) the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period and
(v) the accumulated amount of fair value hedge adjustments
remaining in the statement of financial position for any hedged
items that have ceased to be adjusted for hedging gains and
losses in accordance with paragraph 6510 of IFRS 9
(b) for cash flow hedges and hedges of a net investment in a foreign
operation
IFRS 7
IFRS FoundationA258(i) the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period (ie for cash flow
hedges the change in value used to determine the recognised
hedge ineffectiveness in accordance with paragraph 6511(c) of
IFRS 9)
(ii) the balances in the cash flow hedge reserve and the foreign
currency translation reserve for continuing hedges that are
accounted for in accordance with paragraphs 6511 and 6513(a)
of IFRS 9 and
(iii) the balances remaining in the cash flow hedge reserve and the
foreign currency translation reserve from any hedging
relationships for which hedge accounting is no longer applied
24C An entity shall disclose in a tabular format the following amounts separately by
risk category for the types of hedges as follows
(a) for fair value hedges
(i) hedge ineffectiveness—ie the difference between the hedging
gains or losses of the hedging instrument and the hedged
item—recognised in profit or loss (or other comprehensive
income for hedges of an equity instrument for which an entity
has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 575 of
IFRS 9) and
(ii) the line item in the statement of comprehensive income that
includes the recognised hedge ineffectiveness
(b) for cash flow hedges and hedges of a net investment in a foreign
operation
(i) hedging gains or losses of the reporting period that were
recognised in other comprehensive income
(ii) hedge ineffectiveness recognised in profit or loss
(iii) the line item in the statement of comprehensive income that
includes the recognised hedge ineffectiveness
(iv) the amount reclassified from the cash flow hedge reserve or the
foreign currency translation reserve into profit or loss as a
reclassification adjustment (see IAS 1) (differentiating between
amounts for which hedge accounting had previously been used
but for which the hedged future cash flows are no longer
expected to occur and amounts that have been transferred
because the hedged item has affected profit or loss)
(v) the line item in the statement of comprehensive income that
includes the reclassification adjustment (see IAS 1) and
(vi) for hedges of net positions the hedging gains or losses
recognised in a separate line item in the statement of
comprehensive income (see paragraph 664 of IFRS 9)
IFRS 7
IFRS Foundation A25924D When the volume of hedging relationships to which the exemption in
paragraph 23C applies is unrepresentative of normal volumes during the period
(ie the volume at the reporting date does not reflect the volumes during the
period) an entity shall disclose that fact and the reason it believes the volumes
are unrepresentative
24E An entity shall provide a reconciliation of each component of equity and an
analysis of other comprehensive income in accordance with IAS 1 that taken
together
(a) differentiates at a minimum between the amounts that relate to the
disclosures in paragraph 24C(b)(i) and (b)(iv) as well as the amounts
accounted for in accordance with paragraph 6511(d)(i) and (d)(iii) of
IFRS 9
(b) differentiates between the amounts associated with the time value of
options that hedge transaction related hedged items and the amounts
associated with the time value of options that hedge timeperiod related
hedged items when an entity accounts for the time value of an option in
accordance with paragraph 6515 of IFRS 9 and
(c) differentiates between the amounts associated with forward elements of
forward contracts and the foreign currency basis spreads of financial
instruments that hedge transaction related hedged items and the
amounts associated with forward elements of forward contracts and the
foreign currency basis spreads of financial instruments that hedge
timeperiod related hedged items when an entity accounts for those
amounts in accordance with paragraph 6516 of IFRS 9
24F An entity shall disclose the information required in paragraph 24E separately by
risk category This disaggregation by risk may be provided in the notes to the
financial statements
Option to designate a credit exposure as measured at fair value
through profit or loss
24G If an entity designated a financial instrument or a proportion of it as measured
at fair value through profit or loss because it uses a credit derivative to manage
the credit risk of that financial instrument it shall disclose
(a) for credit derivatives that have been used to manage the credit risk of
financial instruments designated as measured at fair value through
profit or loss in accordance with paragraph 671 of IFRS 9 a
reconciliation of each of the nominal amount and the fair value at the
beginning and at the end of the period
(b) the gain or loss recognised in profit or loss on designation of a financial
instrument or a proportion of it as measured at fair value through
profit or loss in accordance with paragraph 671 of IFRS 9 and
(c) on discontinuation of measuring a financial instrument or a proportion
of it at fair value through profit or loss that financial instrument’s fair
value that has become the new carrying amount in accordance with
paragraph 674 of IFRS 9 and the related nominal or principal amount
IFRS 7
IFRS FoundationA260(except for providing comparative information in accordance with IAS 1
an entity does not need to continue this disclosure in subsequent
periods)
Fair value
25 Except as set out in paragraph 29 for each class of financial assets and financial
liabilities (see paragraph 6) an entity shall disclose the fair value of that class of
assets and liabilities in a way that permits it to be compared with its carrying
amount
26 In disclosing fair values an entity shall group financial assets and financial
liabilities into classes but shall offset them only to the extent that their carrying
amounts are offset in the statement of financial position
27–
27B
[Deleted]
28 In some cases an entity does not recognise a gain or loss on initial recognition of
a financial asset or financial liability because the fair value is neither evidenced
by a quoted price in an active market for an identical asset or liability (ie a
Level 1 input) nor based on a valuation technique that uses only data from
observable markets (see paragraph B512A of IFRS 9) In such cases the entity
shall disclose by class of financial asset or financial liability
(a) its accounting policy for recognising in profit or loss the difference
between the fair value at initial recognition and the transaction price to
reflect a change in factors (including time) that market participants
would take into account when pricing the asset or liability (see
paragraph B512A(b) of IFRS 9)
(b) the aggregate difference yet to be recognised in profit or loss at the
beginning and end of the period and a reconciliation of changes in the
balance of this difference
(c) why the entity concluded that the transaction price was not the best
evidence of fair value including a description of the evidence that
supports the fair value
29 Disclosures of fair value are not required
(a) when the carrying amount is a reasonable approximation of fair value
for example for financial instruments such as shortterm trade
receivables and payables
(b) [deleted]
(c) for a contract containing a discretionary participation feature (as
described in IFRS 4) if the fair value of that feature cannot be measured
reliably or
(d) for lease liabilities
30 In the case described in paragraph 29(c) an entity shall disclose information to
help users of the financial statements make their own judgements about the
extent of possible differences between the carrying amount of those contracts
and their fair value including
IFRS 7
IFRS Foundation A261(a) the fact that fair value information has not been disclosed for these
instruments because their fair value cannot be measured reliably
(b) a description of the financial instruments their carrying amount and an
explanation of why fair value cannot be measured reliably
(c) information about the market for the instruments
(d) information about whether and how the entity intends to dispose of the
financial instruments and
(e) if financial instruments whose fair value previously could not be reliably
measured are derecognised that fact their carrying amount at the time
of derecognition and the amount of gain or loss recognised
Nature and extent of risks arising from financial instruments
31 An entity shall disclose information that enables users of its financial
statements to evaluate the nature and extent of risks arising from
financial instruments to which the entity is exposed at the end of the
reporting period
32 The disclosures required by paragraphs 33–42 focus on the risks that arise from
financial instruments and how they have been managed These risks typically
include but are not limited to credit risk liquidity risk and market risk
32A Providing qualitative disclosures in the context of quantitative disclosures
enables users to link related disclosures and hence form an overall picture of the
nature and extent of risks arising from financial instruments The interaction
between qualitative and quantitative disclosures contributes to disclosure of
information in a way that better enables users to evaluate an entity’s exposure to
risks
Qualitative disclosures
33 For each type of risk arising from financial instruments an entity shall disclose
(a) the exposures to risk and how they arise
(b) its objectives policies and processes for managing the risk and the
methods used to measure the risk and
(c) any changes in (a) or (b) from the previous period
Quantitative disclosures
34 For each type of risk arising from financial instruments an entity shall disclose
(a) summary quantitative data about its exposure to that risk at the end of
the reporting period This disclosure shall be based on the information
provided internally to key management personnel of the entity (as
defined in IAS 24 Related Party Disclosures) for example the entity’s board
of directors or chief executive officer
(b) the disclosures required by paragraphs 35A–42 to the extent not
provided in accordance with (a)
IFRS 7
IFRS FoundationA262(c) concentrations of risk if not apparent from the disclosures made in
accordance with (a) and (b)
35 If the quantitative data disclosed as at the end of the reporting period are
unrepresentative of an entity’s exposure to risk during the period an entity
shall provide further information that is representative
Credit risk
Scope and objectives
35A An entity shall apply the disclosure requirements in paragraphs 35F–35N to
financial instruments to which the impairment requirements in IFRS 9 are
applied However
(a) for trade receivables contract assets and lease receivables
paragraph 35J(a) applies to those trade receivables contract assets or
lease receivables on which lifetime expected credit losses are recognised
in accordance with paragraph 5515 of IFRS 9 if those financial assets
are modified while more than 30 days past due and
(b) paragraph 35K(b) does not apply to lease receivables
35B The credit risk disclosures made in accordance with paragraphs 35F–35N shall
enable users of financial statements to understand the effect of credit risk on the
amount timing and uncertainty of future cash flows To achieve this objective
credit risk disclosures shall provide
(a) information about an entity’s credit risk management practices and how
they relate to the recognition and measurement of expected credit losses
including the methods assumptions and information used to measure
expected credit losses
(b) quantitative and qualitative information that allows users of financial
statements to evaluate the amounts in the financial statements arising
from expected credit losses including changes in the amount of
expected credit losses and the reasons for those changes and
(c) information about an entity’s credit risk exposure (ie the credit risk
inherent in an entity’s financial assets and commitments to extend
credit) including significant credit risk concentrations
35C An entity need not duplicate information that is already presented elsewhere
provided that the information is incorporated by crossreference from the
financial statements to other statements such as a management commentary or
risk report that is available to users of the financial statements on the same
terms as the financial statements and at the same time Without the
information incorporated by crossreference the financial statements are
incomplete
35D To meet the objectives in paragraph 35B an entity shall (except as otherwise
specified) consider how much detail to disclose how much emphasis to place on
different aspects of the disclosure requirements the appropriate level of
aggregation or disaggregation and whether users of financial statements need
additional explanations to evaluate the quantitative information disclosed
IFRS 7
IFRS Foundation A26335E If the disclosures provided in accordance with paragraphs 35F–35N are
insufficient to meet the objectives in paragraph 35B an entity shall disclose
additional information that is necessary to meet those objectives
The credit risk management practices
35F An entity shall explain its credit risk management practices and how they relate
to the recognition and measurement of expected credit losses To meet this
objective an entity shall disclose information that enables users of financial
statements to understand and evaluate
(a) how an entity determined whether the credit risk of financial
instruments has increased significantly since initial recognition
including if and how
(i) financial instruments are considered to have low credit risk in
accordance with paragraph 5510 of IFRS 9 including the classes
of financial instruments to which it applies and
(ii) the presumption in paragraph 5511 of IFRS 9 that there have
been significant increases in credit risk since initial recognition
when financial assets are more than 30 days past due has been
rebutted
(b) an entity’s definitions of default including the reasons for selecting
those definitions
(c) how the instruments were grouped if expected credit losses were
measured on a collective basis
(d) how an entity determined that financial assets are creditimpaired
financial assets
(e) an entity’s writeoff policy including the indicators that there is no
reasonable expectation of recovery and information about the policy for
financial assets that are writtenoff but are still subject to enforcement
activity and
(f) how the requirements in paragraph 5512 of IFRS 9 for the modification
of contractual cash flows of financial assets have been applied including
how an entity
(i) determines whether the credit risk on a financial asset that has
been modified while the loss allowance was measured at an
amount equal to lifetime expected credit losses has improved to
the extent that the loss allowance reverts to being measured at an
amount equal to 12month expected credit losses in accordance
with paragraph 555 of IFRS 9 and
(ii) monitors the extent to which the loss allowance on financial
assets meeting the criteria in (i) is subsequently remeasured at an
amount equal to lifetime expected credit losses in accordance
with paragraph 553 of IFRS 9
IFRS 7
IFRS FoundationA26435G An entity shall explain the inputs assumptions and estimation techniques used
to apply the requirements in Section 55 of IFRS 9 For this purpose an entity
shall disclose
(a) the basis of inputs and assumptions and the estimation techniques used
to
(i) measure the 12month and lifetime expected credit losses
(ii) determine whether the credit risk of financial instruments has
increased significantly since initial recognition and
(iii) determine whether a financial asset is a creditimpaired financial
asset
(b) how forwardlooking information has been incorporated into the
determination of expected credit losses including the use of
macroeconomic information and
(c) changes in the estimation techniques or significant assumptions made
during the reporting period and the reasons for those changes
Quantitative and qualitative information about amounts arising from
expected credit losses
35H To explain the changes in the loss allowance and the reasons for those changes
an entity shall provide by class of financial instrument a reconciliation from
the opening balance to the closing balance of the loss allowance in a table
showing separately the changes during the period for
(a) the loss allowance measured at an amount equal to 12month expected
credit losses
(b) the loss allowance measured at an amount equal to lifetime expected
credit losses for
(i) financial instruments for which credit risk has increased
significantly since initial recognition but that are not
creditimpaired financial assets
(ii) financial assets that are creditimpaired at the reporting date (but
that are not purchased or originated creditimpaired) and
(iii) trade receivables contract assets or lease receivables for which
the loss allowances are measured in accordance with
paragraph 5515 of IFRS 9
(c) financial assets that are purchased or originated creditimpaired In
addition to the reconciliation an entity shall disclose the total amount
of undiscounted expected credit losses at initial recognition on financial
assets initially recognised during the reporting period
35I To enable users of financial statements to understand the changes in the loss
allowance disclosed in accordance with paragraph 35H an entity shall provide
an explanation of how significant changes in the gross carrying amount of
financial instruments during the period contributed to changes in the loss
allowance The information shall be provided separately for financial
instruments that represent the loss allowance as listed in paragraph 35H(a)–(c)
IFRS 7
IFRS Foundation A265and shall include relevant qualitative and quantitative information Examples
of changes in the gross carrying amount of financial instruments that
contributed to the changes in the loss allowance may include
(a) changes because of financial instruments originated or acquired during
the reporting period
(b) the modification of contractual cash flows on financial assets that do not
result in a derecognition of those financial assets in accordance with
IFRS 9
(c) changes because of financial instruments that were derecognised
(including those that were writtenoff) during the reporting period and
(d) changes arising from whether the loss allowance is measured at an
amount equal to 12month or lifetime expected credit losses
35J To enable users of financial statements to understand the nature and effect of
modifications of contractual cash flows on financial assets that have not
resulted in derecognition and the effect of such modifications on the
measurement of expected credit losses an entity shall disclose
(a) the amortised cost before the modification and the net modification gain
or loss recognised for financial assets for which the contractual cash
flows have been modified during the reporting period while they had a
loss allowance measured at an amount equal to lifetime expected credit
losses and
(b) the gross carrying amount at the end of the reporting period of financial
assets that have been modified since initial recognition at a time when
the loss allowance was measured at an amount equal to lifetime
expected credit losses and for which the loss allowance has changed
during the reporting period to an amount equal to 12month expected
credit losses
35K To enable users of financial statements to understand the effect of collateral and
other credit enhancements on the amounts arising from expected credit losses
an entity shall disclose by class of financial instrument
(a) the amount that best represents its maximum exposure to credit risk at
the end of the reporting period without taking account of any collateral
held or other credit enhancements (eg netting agreements that do not
qualify for offset in accordance with IAS 32)
(b) a narrative description of collateral held as security and other credit
enhancements including
(i) a description of the nature and quality of the collateral held
(ii) an explanation of any significant changes in the quality of that
collateral or credit enhancements as a result of deterioration or
changes in the collateral policies of the entity during the
reporting period and
(iii) information about financial instruments for which an entity has
not recognised a loss allowance because of the collateral
IFRS 7
IFRS FoundationA266(c) quantitative information about the collateral held as security and other
credit enhancements (for example quantification of the extent to which
collateral and other credit enhancements mitigate credit risk) for
financial assets that are creditimpaired at the reporting date
35L An entity shall disclose the contractual amount outstanding on financial assets
that were written off during the reporting period and are still subject to
enforcement activity
Credit risk exposure
35M To enable users of financial statements to assess an entity’s credit risk exposure
and understand its significant credit risk concentrations an entity shall
disclose by credit risk rating grades the gross carrying amount of financial assets
and the exposure to credit risk on loan commitments and financial guarantee
contracts This information shall be provided separately for financial
instruments
(a) for which the loss allowance is measured at an amount equal to
12month expected credit losses
(b) for which the loss allowance is measured at an amount equal to lifetime
expected credit losses and that are
(i) financial instruments for which credit risk has increased
significantly since initial recognition but that are not
creditimpaired financial assets
(ii) financial assets that are creditimpaired at the reporting date (but
that are not purchased or originated creditimpaired) and
(iii) trade receivables contract assets or lease receivables for which
the loss allowances are measured in accordance with
paragraph 5515 of IFRS 9
(c) that are purchased or originated creditimpaired financial assets
35N For trade receivables contract assets and lease receivables to which an entity
applies paragraph 5515 of IFRS 9 the information provided in accordance with
paragraph 35M may be based on a provision matrix (see paragraph B5535 of
IFRS 9)
36 For all financial instruments within the scope of this IFRS but to which the
impairment requirements in IFRS 9 are not applied an entity shall disclose by
class of financial instrument
(a) the amount that best represents its maximum exposure to credit risk at
the end of the reporting period without taking account of any collateral
held or other credit enhancements (eg netting agreements that do not
quality for offset in accordance with IAS 32) this disclosure is not
required for financial instruments whose carrying amount best
represents the maximum exposure to credit risk
(b) a description of collateral held as security and other credit
enhancements and their financial effect (eg quantification of the extent
to which collateral and other credit enhancements mitigate credit risk)
IFRS 7
IFRS Foundation A267in respect of the amount that best represents the maximum exposure to
credit risk (whether disclosed in accordance with (a) or represented by
the carrying amount of a financial instrument)
(c) [deleted]
(d) [deleted]
37 [Deleted]
Collateral and other credit enhancements obtained
38 When an entity obtains financial or nonfinancial assets during the period by
taking possession of collateral it holds as security or calling on other credit
enhancements (eg guarantees) and such assets meet the recognition criteria in
other IFRSs an entity shall disclose for such assets held at the reporting date
(a) the nature and carrying amount of the assets and
(b) when the assets are not readily convertible into cash its policies for
disposing of such assets or for using them in its operations
Liquidity risk
39 An entity shall disclose
(a) a maturity analysis for nonderivative financial liabilities (including
issued financial guarantee contracts) that shows the remaining
contractual maturities
(b) a maturity analysis for derivative financial liabilities The maturity
analysis shall include the remaining contractual maturities for those
derivative financial liabilities for which contractual maturities are
essential for an understanding of the timing of the cash flows (see
paragraph B11B)
(c) a description of how it manages the liquidity risk inherent in (a) and (b)
Market risk
Sensitivity analysis
40 Unless an entity complies with paragraph 41 it shall disclose
(a) a sensitivity analysis for each type of market risk to which the entity is
exposed at the end of the reporting period showing how profit or loss
and equity would have been affected by changes in the relevant risk
variable that were reasonably possible at that date
(b) the methods and assumptions used in preparing the sensitivity analysis
and
(c) changes from the previous period in the methods and assumptions used
and the reasons for such changes
41 If an entity prepares a sensitivity analysis such as valueatrisk that reflects
interdependencies between risk variables (eg interest rates and exchange rates)
and uses it to manage financial risks it may use that sensitivity analysis in place
of the analysis specified in paragraph 40 The entity shall also disclose
IFRS 7
IFRS FoundationA268(a) an explanation of the method used in preparing such a sensitivity
analysis and of the main parameters and assumptions underlying the
data provided and
(b) an explanation of the objective of the method used and of limitations
that may result in the information not fully reflecting the fair value of
the assets and liabilities involved
Other market risk disclosures
42 When the sensitivity analyses disclosed in accordance with paragraph 40 or 41
are unrepresentative of a risk inherent in a financial instrument (for example
because the yearend exposure does not reflect the exposure during the year) the
entity shall disclose that fact and the reason it believes the sensitivity analyses
are unrepresentative
Transfers of financial assets
42A The disclosure requirements in paragraphs 42B–42H relating to transfers of
financial assets supplement the other disclosure requirements of this IFRS An
entity shall present the disclosures required by paragraphs 42B–42H in a single
note in its financial statements An entity shall provide the required disclosures
for all transferred financial assets that are not derecognised and for any
continuing involvement in a transferred asset existing at the reporting date
irrespective of when the related transfer transaction occurred For the purposes
of applying the disclosure requirements in those paragraphs an entity transfers
all or a part of a financial asset (the transferred financial asset) if and only if it
either
(a) transfers the contractual rights to receive the cash flows of that financial
asset or
(b) retains the contractual rights to receive the cash flows of that financial
asset but assumes a contractual obligation to pay the cash flows to one
or more recipients in an arrangement
42B An entity shall disclose information that enables users of its financial
statements
(a) to understand the relationship between transferred financial assets that
are not derecognised in their entirety and the associated liabilities and
(b) to evaluate the nature of and risks associated with the entity’s
continuing involvement in derecognised financial assets
42C For the purposes of applying the disclosure requirements in paragraphs
42E–42H an entity has continuing involvement in a transferred financial asset
if as part of the transfer the entity retains any of the contractual rights or
obligations inherent in the transferred financial asset or obtains any new
contractual rights or obligations relating to the transferred financial asset For
the purposes of applying the disclosure requirements in paragraphs 42E–42H
the following do not constitute continuing involvement
IFRS 7
IFRS Foundation A269(a) normal representations and warranties relating to fraudulent transfer
and concepts of reasonableness good faith and fair dealings that could
invalidate a transfer as a result of legal action
(b) forward option and other contracts to reacquire the transferred
financial asset for which the contract price (or exercise price) is the fair
value of the transferred financial asset or
(c) an arrangement whereby an entity retains the contractual rights to
receive the cash flows of a financial asset but assumes a contractual
obligation to pay the cash flows to one or more entities and the
conditions in paragraph 325(a)–(c) of IFRS 9 are met
Transferred financial assets that are not derecognised in
their entirety
42D An entity may have transferred financial assets in such a way that part or all of
the transferred financial assets do not qualify for derecognition To meet the
objectives set out in paragraph 42B(a) the entity shall disclose at each reporting
date for each class of transferred financial assets that are not derecognised in
their entirety
(a) the nature of the transferred assets
(b) the nature of the risks and rewards of ownership to which the entity is
exposed
(c) a description of the nature of the relationship between the transferred
assets and the associated liabilities including restrictions arising from
the transfer on the reporting entity’s use of the transferred assets
(d) when the counterparty (counterparties) to the associated liabilities has
(have) recourse only to the transferred assets a schedule that sets out the
fair value of the transferred assets the fair value of the associated
liabilities and the net position (the difference between the fair value of
the transferred assets and the associated liabilities)
(e) when the entity continues to recognise all of the transferred assets the
carrying amounts of the transferred assets and the associated liabilities
(f) when the entity continues to recognise the assets to the extent of its
continuing involvement (see paragraphs 326(c)(ii) and 3216 of IFRS 9)
the total carrying amount of the original assets before the transfer the
carrying amount of the assets that the entity continues to recognise and
the carrying amount of the associated liabilities
Transferred financial assets that are derecognised in
their entirety
42E To meet the objectives set out in paragraph 42B(b) when an entity derecognises
transferred financial assets in their entirety (see paragraph 326(a) and (c)(i) of
IFRS 9) but has continuing involvement in them the entity shall disclose as a
minimum for each type of continuing involvement at each reporting date
IFRS 7
IFRS FoundationA270(a) the carrying amount of the assets and liabilities that are recognised in
the entity’s statement of financial position and represent the entity’s
continuing involvement in the derecognised financial assets and the
line items in which the carrying amount of those assets and liabilities
are recognised
(b) the fair value of the assets and liabilities that represent the entity’s
continuing involvement in the derecognised financial assets
(c) the amount that best represents the entity’s maximum exposure to loss
from its continuing involvement in the derecognised financial assets
and information showing how the maximum exposure to loss is
determined
(d) the undiscounted cash outflows that would or may be required to
repurchase derecognised financial assets (eg the strike price in an option
agreement) or other amounts payable to the transferee in respect of the
transferred assets If the cash outflow is variable then the amount
disclosed should be based on the conditions that exist at each reporting
date
(e) a maturity analysis of the undiscounted cash outflows that would or may
be required to repurchase the derecognised financial assets or other
amounts payable to the transferee in respect of the transferred assets
showing the remaining contractual maturities of the entity’s continuing
involvement
(f) qualitative information that explains and supports the quantitative
disclosures required in (a)–(e)
42F An entity may aggregate the information required by paragraph 42E in respect
of a particular asset if the entity has more than one type of continuing
involvement in that derecognised financial asset and report it under one type of
continuing involvement
42G In addition an entity shall disclose for each type of continuing involvement
(a) the gain or loss recognised at the date of transfer of the assets
(b) income and expenses recognised both in the reporting period and
cumulatively from the entity’s continuing involvement in the
derecognised financial assets (eg fair value changes in derivative
instruments)
(c) if the total amount of proceeds from transfer activity (that qualifies for
derecognition) in a reporting period is not evenly distributed throughout
the reporting period (eg if a substantial proportion of the total amount
of transfer activity takes place in the closing days of a reporting period)
(i) when the greatest transfer activity took place within that
reporting period (eg the last five days before the end of the
reporting period)
(ii) the amount (eg related gains or losses) recognised from transfer
activity in that part of the reporting period and
IFRS 7
IFRS Foundation A271(iii) the total amount of proceeds from transfer activity in that part of
the reporting period
An entity shall provide this information for each period for which a statement of
comprehensive income is presented
Supplementary information
42H An entity shall disclose any additional information that it considers necessary to
meet the disclosure objectives in paragraph 42B
Initial application of IFRS 9
42I In the reporting period that includes the date of initial application of IFRS 9 the
entity shall disclose the following information for each class of financial assets
and financial liabilities as at the date of initial application
(a) the original measurement category and carrying amount determined in
accordance with IAS 39 or in accordance with a previous version of
IFRS 9 (if the entity’s chosen approach to applying IFRS 9 involves more
than one date of initial application for different requirements)
(b) the new measurement category and carrying amount determined in
accordance with IFRS 9
(c) the amount of any financial assets and financial liabilities in the
statement of financial position that were previously designated as
measured at fair value through profit or loss but are no longer so
designated distinguishing between those that IFRS 9 requires an entity
to reclassify and those that an entity elects to reclassify at the date of
initial application
In accordance with paragraph 722 of IFRS 9 depending on the entity’s chosen
approach to applying IFRS 9 the transition can involve more than one date of
initial application Therefore this paragraph may result in disclosure on more
than one date of initial application An entity shall present these quantitative
disclosures in a table unless another format is more appropriate
42J In the reporting period that includes the date of initial application of IFRS 9 an
entity shall disclose qualitative information to enable users to understand
(a) how it applied the classification requirements in IFRS 9 to those
financial assets whose classification has changed as a result of applying
IFRS 9
(b) the reasons for any designation or dedesignation of financial assets or
financial liabilities as measured at fair value through profit or loss at the
date of initial application
In accordance with paragraph 722 of IFRS 9 depending on the entity’s chosen
approach to applying IFRS 9 the transition can involve more than one date of
initial application Therefore this paragraph may result in disclosure on more
than one date of initial application
42K In the reporting period that an entity first applies the classification and
measurement requirements for financial assets in IFRS 9 (ie when the entity
IFRS 7
IFRS FoundationA272transitions from IAS 39 to IFRS 9 for financial assets) it shall present the
disclosures set out in paragraphs 42L–42O of this IFRS as required by
paragraph 7215 of IFRS 9
42L When required by paragraph 42K an entity shall disclose the changes in the
classifications of financial assets and financial liabilities as at the date of initial
application of IFRS 9 showing separately
(a) the changes in the carrying amounts on the basis of their measurement
categories in accordance with IAS 39 (ie not resulting from a change in
measurement attribute on transition to IFRS 9) and
(b) the changes in the carrying amounts arising from a change in
measurement attribute on transition to IFRS 9
The disclosures in this paragraph need not be made after the annual reporting
period in which the entity initially applies the classification and measurement
requirements for financial assets in IFRS 9
42M When required by paragraph 42K an entity shall disclose the following for
financial assets and financial liabilities that have been reclassified so that they
are measured at amortised cost and in the case of financial assets that have
been reclassified out of fair value through profit or loss so that they are
measured at fair value through other comprehensive income as a result of the
transition to IFRS 9
(a) the fair value of the financial assets or financial liabilities at the end of
the reporting period and
(b) the fair value gain or loss that would have been recognised in profit or
loss or other comprehensive income during the reporting period if the
financial assets or financial liabilities had not been reclassified
The disclosures in this paragraph need not be made after the annual reporting
period in which the entity initially applies the classification and measurement
requirements for financial assets in IFRS 9
42N When required by paragraph 42K an entity shall disclose the following for
financial assets and financial liabilities that have been reclassified out of the fair
value through profit or loss category as a result of the transition to IFRS 9
(a) the effective interest rate determined on the date of initial application
and
(b) the interest revenue or expense recognised
If an entity treats the fair value of a financial asset or a financial liability as the
new gross carrying amount at the date of initial application (see
paragraph 7211 of IFRS 9) the disclosures in this paragraph shall be made for
each reporting period until derecognition Otherwise the disclosures in this
paragraph need not be made after the annual reporting period in which the
entity initially applies the classification and measurement requirements for
financial assets in IFRS 9
IFRS 7
IFRS Foundation A27342O When an entity presents the disclosures set out in paragraphs 42K–42N those
disclosures and the disclosures in paragraph 25 of this IFRS must permit
reconciliation between
(a) the measurement categories presented in accordance with IAS 39 and
IFRS 9 and
(b) the class of financial instrument
as at the date of initial application
42P On the date of initial application of Section 55 of IFRS 9 an entity is required to
disclose information that would permit the reconciliation of the ending
impairment allowances in accordance with IAS 39 and the provisions in
accordance with IAS 37 to the opening loss allowances determined in
accordance with IFRS 9 For financial assets this disclosure shall be provided by
the related financial assets’ measurement categories in accordance with IAS 39
and IFRS 9 and shall show separately the effect of the changes in the
measurement category on the loss allowance at that date
42Q In the reporting period that includes the date of initial application of IFRS 9 an
entity is not required to disclose the line item amounts that would have been
reported in accordance with the classification and measurement requirements
(which includes the requirements related to amortised cost measurement of
financial assets and impairment in Sections 54 and 55 of IFRS 9) of
(a) IFRS 9 for prior periods and
(b) IAS 39 for the current period
42R In accordance with paragraph 724 of IFRS 9 if it is impracticable (as defined in
IAS 8) at the date of initial application of IFRS 9 for an entity to assess a modified
time value of money element in accordance with paragraphs B419B–B419D of
IFRS 9 based on the facts and circumstances that existed at the initial
recognition of the financial asset an entity shall assess the contractual cash flow
characteristics of that financial asset based on the facts and circumstances that
existed at the initial recognition of the financial asset without taking into
account the requirements related to the modification of the time value of money
element in paragraphs B419B–B419D of IFRS 9 An entity shall disclose the
carrying amount at the reporting date of the financial assets whose contractual
cash flow characteristics have been assessed based on the facts and
circumstances that existed at the initial recognition of the financial asset
without taking into account the requirements related to the modification of the
time value of money element in paragraphs B419B–B419D of IFRS 9 until those
financial assets are derecognised
42S In accordance with paragraph 725 of IFRS 9 if it is impracticable (as defined in
IAS 8) at the date of initial application for an entity to assess whether the fair
value of a prepayment feature was insignificant in accordance with
paragraphs B4112(c) of IFRS 9 based on the facts and circumstances that existed
at the initial recognition of the financial asset an entity shall assess the
contractual cash flow characteristics of that financial asset based on the facts
and circumstances that existed at the initial recognition of the financial asset
without taking into account the exception for prepayment features in
IFRS 7
IFRS FoundationA274paragraph B4112 of IFRS 9 An entity shall disclose the carrying amount at the
reporting date of the financial assets whose contractual cash flow characteristics
have been assessed based on the facts and circumstances that existed at the
initial recognition of the financial asset without taking into account the
exception for prepayment features in paragraph B4112 of IFRS 9 until those
financial assets are derecognised
Effective date and transition
43 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2007 Earlier application is encouraged If an entity applies this IFRS
for an earlier period it shall disclose that fact
44 If an entity applies this IFRS for annual periods beginning before 1 January 2006
it need not present comparative information for the disclosures required by
paragraphs 31–42 about the nature and extent of risks arising from financial
instruments
44A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraphs 20 21 23(c) and (d) 27(c) and B5 of Appendix B
An entity shall apply those amendments for annual periods beginning on or
after 1 January 2009 If an entity applies IAS 1 (revised 2007) for an earlier
period the amendments shall be applied for that earlier period
44B IFRS 3 (as revised in 2008) deleted paragraph 3(c) An entity shall apply that
amendment for annual periods beginning on or after 1 July 2009 If an entity
applies IFRS 3 (revised 2008) for an earlier period the amendment shall also be
applied for that earlier period However the amendment does not apply to
contingent consideration that arose from a business combination for which the
acquisition date preceded the application of IFRS 3 (revised 2008) Instead an
entity shall account for such consideration in accordance with paragraphs
65A–65E of IFRS 3 (as amended in 2010)
44C An entity shall apply the amendment in paragraph 3 for annual periods
beginning on or after 1 January 2009 If an entity applies Puttable Financial
Instruments and Obligations Arising on Liquidation (Amendments to IAS 32 and IAS 1)
issued in February 2008 for an earlier period the amendment in paragraph 3
shall be applied for that earlier period
44D Paragraph 3(a) was amended by Improvements to IFRSs issued in May 2008 An
entity shall apply that amendment for annual periods beginning on or after
1 January 2009 Earlier application is permitted If an entity applies the
amendment for an earlier period it shall disclose that fact and apply for that
earlier period the amendments to paragraph 1 of IAS 28 paragraph 1 of IAS 31
and paragraph 4 of IAS 32 issued in May 2008 An entity is permitted to apply
the amendment prospectively
44E [Deleted]
44F [Deleted]
44G Improving Disclosures about Financial Instruments (Amendments to IFRS 7) issued in
March 2009 amended paragraphs 27 39 and B11 and added paragraphs 27A
IFRS 7
IFRS Foundation A27527B B10A and B11A–B11F An entity shall apply those amendments for annual
periods beginning on or after 1 January 2009 An entity need not provide the
disclosures required by the amendments for
(a) any annual or interim period including any statement of financial
position presented within an annual comparative period ending before
31 December 2009 or
(b) any statement of financial position as at the beginning of the earliest
comparative period as at a date before 31 December 2009
Earlier application is permitted If an entity applies the amendments for an
earlier period it shall disclose that fact1
44H–
44J
[Deleted]
44K Paragraph 44B was amended by Improvements to IFRSs issued in May 2010 An
entity shall apply that amendment for annual periods beginning on or after
1 July 2010 Earlier application is permitted
44L Improvements to IFRSs issued in May 2010 added paragraph 32A and amended
paragraphs 34 and 36–38 An entity shall apply those amendments for annual
periods beginning on or after 1 January 2011 Earlier application is permitted
If an entity applies the amendments for an earlier period it shall disclose that
fact
44M Disclosures—Transfers of Financial Assets (Amendments to IFRS 7) issued in October
2010 deleted paragraph 13 and added paragraphs 42A–42H and B29–B39 An
entity shall apply those amendments for annual periods beginning on or after
1 July 2011 Earlier application is permitted If an entity applies the
amendments from an earlier date it shall disclose that fact An entity need not
provide the disclosures required by those amendments for any period presented
that begins before the date of initial application of the amendments
44N [Deleted]
44O IFRS 10 and IFRS 11 Joint Arrangements issued in May 2011 amended
paragraph 3 An entity shall apply that amendment when it applies IFRS 10 and
IFRS 11
44P IFRS 13 issued in May 2011 amended paragraphs 3 28 and 29 and Appendix A
and deleted paragraphs 27–27B An entity shall apply those amendments when
it applies IFRS 13
44Q Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) issued in
June 2011 amended paragraph 27B An entity shall apply that amendment
when it applies IAS 1 as amended in June 2011
44R Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)
issued in December 2011 added paragraphs 13A–13F and B40–B53 An entity
1 Paragraph 44G was amended as a consequence of Limited Exemption from Comparative IFRS 7 Disclosures
for Firsttime Adopters (Amendment to IFRS 1) issued in January 2010 The Board amended
paragraph 44G to clarify its conclusions and intended transition for Improving Disclosures about
Financial Instruments (Amendments to IFRS 7)
IFRS 7
IFRS FoundationA276shall apply those amendments for annual periods beginning on or after
1 January 2013 An entity shall provide the disclosures required by those
amendments retrospectively
44S–
44W
[Deleted]
44X Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraph 3 An entity shall apply that amendment for annual
periods beginning on or after 1 January 2014 Earlier application of Investment
Entities is permitted If an entity applies that amendment earlier it shall also
apply all amendments included in Investment Entities at the same time
44Y [Deleted]
44Z IFRS 9 as issued in July 2014 amended paragraphs 2–5 8–11 14 20 28–30 36
42C–42E Appendix A and paragraphs B1 B5 B9 B10 B22 and B27 deleted
paragraphs 12 12A 16 22–24 37 44E 44F 44H–44J 44N 44S–44W 44Y B4
and Appendix D and added paragraphs 5A 10A 11A 11B 12B–12D 16A 20A
21A–21D 22A–22C 23A–23F 24A–24G 35A–35N 42I–42S 44ZA and B8A–B8J
An entity shall apply those amendments when it applies IFRS 9 Those
amendments need not be applied to comparative information provided for
periods before the date of initial application of IFRS 9
44ZA In accordance with paragraph 712 of IFRS 9 for annual reporting periods prior
to 1 January 2018 an entity may elect to early apply only the requirements for
the presentation of gains and losses on financial liabilities designated as at fair
value through profit or loss in paragraphs 571(c) 577–579 7214 and
B575–B5720 of IFRS 9 without applying the other requirements in IFRS 9 If an
entity elects to apply only those paragraphs of IFRS 9 it shall disclose that fact
and provide on an ongoing basis the related disclosures set out in paragraphs
10–11 of this IFRS (as amended by IFRS 9 (2010))
44AA Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014 amended
paragraphs 44R and B30 and added paragraph B30A An entity shall apply those
amendments retrospectively in accordance with IAS 8 Accounting Policies Changes
in Accounting Estimates and Errors for annual periods beginning on or after
1 January 2016 except that an entity need not apply the amendments to
paragraphs B30 and B30A for any period presented that begins before the annual
period for which the entity first applies those amendments Earlier application
of the amendments to paragraphs 44R B30 and B30A is permitted If an entity
applies those amendments for an earlier period it shall disclose that fact
44BB Disclosure Initiative (Amendments to IAS 1) issued in December 2014 amended
paragraphs 21 and B5 An entity shall apply those amendments for annual
periods beginning on or after 1 January 2016 Earlier application of those
amendments is permitted
44CC IFRS 16 Leases issued in January 2016 amended paragraphs 29 and B11D An
entity shall apply those amendments when it applies IFRS 16
IFRS 7
IFRS Foundation A277Withdrawal of IAS 30
45 This IFRS supersedes IAS 30 Disclosures in the Financial Statements of Banks and Similar
Financial Institutions
IFRS 7
IFRS FoundationA278Appendix A
Defined terms
This appendix is an integral part of the IFRS
credit risk The risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an
obligation
credit risk rating
grades
Rating of credit risk based on the risk of a default occurring on
the financial instrument
currency risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange
rates
interest rate risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market interest
rates
liquidity risk The risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset
loans payable Loans payable are financial liabilities other than shortterm
trade payables on normal credit terms
market risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices
Market risk comprises three types of risk currency risk
interest rate risk and other price risk
other price risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices
(other than those arising from interest rate risk or currency
risk) whether those changes are caused by factors specific to the
individual financial instrument or its issuer or by factors
affecting all similar financial instruments traded in the market
The following terms are defined in paragraph 11 of IAS 32 paragraph 9 of IAS 39
Appendix A of IFRS 9 or Appendix A of IFRS 13 and are used in this IFRS with the meaning
specified in IAS 32 IAS 39 IFRS 9 and IFRS 13
● amortised cost of a financial asset or financial liability
● contract asset
● creditimpaired financial assets
● derecognition
● derivative
● dividends
● effective interest method
● equity instrument
● expected credit losses
IFRS 7
IFRS Foundation A279● fair value
● financial asset
● financial guarantee contract
● financial instrument
● financial liability
● financial liability at fair value through profit or loss
● forecast transaction
● gross carrying amount of a financial asset
● hedging instrument
● held for trading
● impairment gains or losses
● loss allowance
● past due
● purchased or originated creditimpaired financial assets
● reclassification date
● regular way purchase or sale
IFRS 7
IFRS FoundationA280Appendix B
Application guidance
This appendix is an integral part of the IFRS
Classes of financial instruments and level of disclosure
(paragraph 6)
B1 Paragraph 6 requires an entity to group financial instruments into classes that
are appropriate to the nature of the information disclosed and that take into
account the characteristics of those financial instruments The classes described
in paragraph 6 are determined by the entity and are thus distinct from the
categories of financial instruments specified in IFRS 9 (which determine how
financial instruments are measured and where changes in fair value are
recognised)
B2 In determining classes of financial instrument an entity shall at a minimum
(a) distinguish instruments measured at amortised cost from those
measured at fair value
(b) treat as a separate class or classes those financial instruments outside the
scope of this IFRS
B3 An entity decides in the light of its circumstances how much detail it provides
to satisfy the requirements of this IFRS how much emphasis it places on
different aspects of the requirements and how it aggregates information to
display the overall picture without combining information with different
characteristics It is necessary to strike a balance between overburdening
financial statements with excessive detail that may not assist users of financial
statements and obscuring important information as a result of too much
aggregation For example an entity shall not obscure important information by
including it among a large amount of insignificant detail Similarly an entity
shall not disclose information that is so aggregated that it obscures important
differences between individual transactions or associated risks
B4 [Deleted]
Other disclosure – accounting policies (paragraph 21)
B5 Paragraph 21 requires disclosure of the measurement basis (or bases) used in
preparing the financial statements and the other accounting policies used that
are relevant to an understanding of the financial statements For financial
instruments such disclosure may include
(a) for financial liabilities designated as at fair value through profit or loss
(i) the nature of the financial liabilities the entity has designated as
at fair value through profit or loss
(ii) the criteria for so designating such financial liabilities on initial
recognition and
(iii) how the entity has satisfied the conditions in paragraph 422 of
IFRS 9 for such designation
IFRS 7
IFRS Foundation A281(aa) for financial assets designated as measured at fair value through profit
or loss
(i) the nature of the financial assets the entity has designated as
measured at fair value through profit or loss and
(ii) how the entity has satisfied the criteria in paragraph 415 of
IFRS 9 for such designation
(b) [deleted]
(c) whether regular way purchases and sales of financial assets are
accounted for at trade date or at settlement date (see paragraph 312 of
IFRS 9)
(d) [deleted]
(e) how net gains or net losses on each category of financial instrument are
determined (see paragraph 20(a)) for example whether the net gains or
net losses on items at fair value through profit or loss include interest or
dividend income
(f) [deleted]
(g) [deleted]
Paragraph 122 of IAS 1 (as revised in 2007) also requires entities to disclose
along with its significant accounting policies or other notes the judgements
apart from those involving estimations that management has made in the
process of applying the entity’s accounting policies and that have the most
significant effect on the amounts recognised in the financial statements
Nature and extent of risks arising from financial instruments
(paragraphs 31–42)
B6 The disclosures required by paragraphs 31–42 shall be either given in the
financial statements or incorporated by crossreference from the financial
statements to some other statement such as a management commentary or risk
report that is available to users of the financial statements on the same terms as
the financial statements and at the same time Without the information
incorporated by crossreference the financial statements are incomplete
Quantitative disclosures (paragraph 34)
B7 Paragraph 34(a) requires disclosures of summary quantitative data about an
entity’s exposure to risks based on the information provided internally to key
management personnel of the entity When an entity uses several methods to
manage a risk exposure the entity shall disclose information using the method
or methods that provide the most relevant and reliable information IAS 8
Accounting Policies Changes in Accounting Estimates and Errors discusses relevance and
reliability
B8 Paragraph 34(c) requires disclosures about concentrations of risk
Concentrations of risk arise from financial instruments that have similar
characteristics and are affected similarly by changes in economic or other
IFRS 7
IFRS FoundationA282conditions The identification of concentrations of risk requires judgement
taking into account the circumstances of the entity Disclosure of
concentrations of risk shall include
(a) a description of how management determines concentrations
(b) a description of the shared characteristic that identifies each
concentration (eg counterparty geographical area currency or market)
and
(c) the amount of the risk exposure associated with all financial
instruments sharing that characteristic
Credit risk management practices (paragraphs 35F–35G)
B8A Paragraph 35F(b) requires the disclosure of information about how an entity has
defined default for different financial instruments and the reasons for selecting
those definitions In accordance with paragraph 559 of IFRS 9 the
determination of whether lifetime expected credit losses should be recognised is
based on the increase in the risk of a default occurring since initial recognition
Information about an entity’s definitions of default that will assist users of
financial statements in understanding how an entity has applied the expected
credit loss requirements in IFRS 9 may include
(a) the qualitative and quantitative factors considered in defining default
(b) whether different definitions have been applied to different types of
financial instruments and
(c) assumptions about the cure rate (ie the number of financial assets that
return to a performing status) after a default occurred on the financial
asset
B8B To assist users of financial statements in evaluating an entity’s restructuring and
modification policies paragraph 35F(f)(ii) requires the disclosure of information
about how an entity monitors the extent to which the loss allowance on
financial assets previously disclosed in accordance with paragraph 35F(f)(i) are
subsequently measured at an amount equal to lifetime expected credit losses in
accordance with paragraph 553 of IFRS 9 Quantitative information that will
assist users in understanding the subsequent increase in credit risk of modified
financial assets may include information about modified financial assets
meeting the criteria in paragraph 35F(f)(i) for which the loss allowance has
reverted to being measured at an amount equal to lifetime expected credit losses
(ie a deterioration rate)
B8C Paragraph 35G(a) requires the disclosure of information about the basis of
inputs and assumptions and the estimation techniques used to apply the
impairment requirements in IFRS 9 An entity’s assumptions and inputs used to
measure expected credit losses or determine the extent of increases in credit risk
since initial recognition may include information obtained from internal
historical information or rating reports and assumptions about the expected life
of financial instruments and the timing of the sale of collateral
IFRS 7
IFRS Foundation A283Changes in the loss allowance (paragraph 35H)
B8D In accordance with paragraph 35H an entity is required to explain the reasons
for the changes in the loss allowance during the period In addition to the
reconciliation from the opening balance to the closing balance of the loss
allowance it may be necessary to provide a narrative explanation of the changes
This narrative explanation may include an analysis of the reasons for changes in
the loss allowance during the period including
(a) the portfolio composition
(b) the volume of financial instruments purchased or originated and
(c) the severity of the expected credit losses
B8E For loan commitments and financial guarantee contracts the loss allowance is
recognised as a provision An entity should disclose information about the
changes in the loss allowance for financial assets separately from those for loan
commitments and financial guarantee contracts However if a financial
instrument includes both a loan (ie financial asset) and an undrawn
commitment (ie loan commitment) component and the entity cannot separately
identify the expected credit losses on the loan commitment component from
those on the financial asset component the expected credit losses on the loan
commitment should be recognised together with the loss allowance for the
financial asset To the extent that the combined expected credit losses exceed
the gross carrying amount of the financial asset the expected credit losses
should be recognised as a provision
Collateral (paragraph 35K)
B8F Paragraph 35K requires the disclosure of information that will enable users of
financial statements to understand the effect of collateral and other credit
enhancements on the amount of expected credit losses An entity is neither
required to disclose information about the fair value of collateral and other
credit enhancements nor is it required to quantify the exact value of the
collateral that was included in the calculation of expected credit losses (ie the
loss given default)
B8G A narrative description of collateral and its effect on amounts of expected credit
losses might include information about
(a) the main types of collateral held as security and other credit
enhancements (examples of the latter being guarantees credit
derivatives and netting agreements that do not qualify for offset in
accordance with IAS 32)
(b) the volume of collateral held and other credit enhancements and its
significance in terms of the loss allowance
(c) the policies and processes for valuing and managing collateral and other
credit enhancements
(d) the main types of counterparties to collateral and other credit
enhancements and their creditworthiness and
IFRS 7
IFRS FoundationA284(e) information about risk concentrations within the collateral and other
credit enhancements
Credit risk exposure (paragraphs 35M–35N)
B8H Paragraph 35M requires the disclosure of information about an entity’s credit
risk exposure and significant concentrations of credit risk at the reporting date
A concentration of credit risk exists when a number of counterparties are
located in a geographical region or are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions An entity should provide information that enables users of financial
statements to understand whether there are groups or portfolios of financial
instruments with particular features that could affect a large portion of that
group of financial instruments such as concentration to particular risks This
could include for example loantovalue groupings geographical industry or
issuertype concentrations
B8I The number of credit risk rating grades used to disclose the information in
accordance with paragraph 35M shall be consistent with the number that the
entity reports to key management personnel for credit risk management
purposes If past due information is the only borrowerspecific information
available and an entity uses past due information to assess whether credit risk
has increased significantly since initial recognition in accordance with
paragraph 5511 of IFRS 9 an entity shall provide an analysis by past due status
for those financial assets
B8J When an entity has measured expected credit losses on a collective basis the
entity may not be able to allocate the gross carrying amount of individual
financial assets or the exposure to credit risk on loan commitments and
financial guarantee contracts to the credit risk rating grades for which lifetime
expected credit losses are recognised In that case an entity should apply the
requirement in paragraph 35M to those financial instruments that can be
directly allocated to a credit risk rating grade and disclose separately the gross
carrying amount of financial instruments for which lifetime expected credit
losses have been measured on a collective basis
Maximum credit risk exposure (paragraph 36(a))
B9 Paragraphs 35K(a) and 36(a) require disclosure of the amount that best
represents the entity’s maximum exposure to credit risk For a financial asset
this is typically the gross carrying amount net of
(a) any amounts offset in accordance with IAS 32 and
(b) any loss allowance recognised in accordance with IFRS 9
B10 Activities that give rise to credit risk and the associated maximum exposure to
credit risk include but are not limited to
(a) granting loans to customers and placing deposits with other entities In
these cases the maximum exposure to credit risk is the carrying amount
of the related financial assets
IFRS 7
IFRS Foundation A285(b) entering into derivative contracts eg foreign exchange contracts
interest rate swaps and credit derivatives When the resulting asset is
measured at fair value the maximum exposure to credit risk at the end
of the reporting period will equal the carrying amount
(c) granting financial guarantees In this case the maximum exposure to
credit risk is the maximum amount the entity could have to pay if the
guarantee is called on which may be significantly greater than the
amount recognised as a liability
(d) making a loan commitment that is irrevocable over the life of the facility
or is revocable only in response to a material adverse change If the
issuer cannot settle the loan commitment net in cash or another
financial instrument the maximum credit exposure is the full amount
of the commitment This is because it is uncertain whether the amount
of any undrawn portion may be drawn upon in the future This may be
significantly greater than the amount recognised as a liability
Quantitative liquidity risk disclosures (paragraphs 34(a)
and 39(a) and (b))
B10A In accordance with paragraph 34(a) an entity discloses summary quantitative
data about its exposure to liquidity risk on the basis of the information provided
internally to key management personnel An entity shall explain how those
data are determined If the outflows of cash (or another financial asset) included
in those data could either
(a) occur significantly earlier than indicated in the data or
(b) be for significantly different amounts from those indicated in the data
(eg for a derivative that is included in the data on a net settlement basis
but for which the counterparty has the option to require gross
settlement)
the entity shall state that fact and provide quantitative information that enables
users of its financial statements to evaluate the extent of this risk unless that
information is included in the contractual maturity analyses required by
paragraph 39(a) or (b)
B11 In preparing the maturity analyses required by paragraph 39(a) and (b) an entity
uses its judgement to determine an appropriate number of time bands For
example an entity might determine that the following time bands are
appropriate
(a) not later than one month
(b) later than one month and not later than three months
(c) later than three months and not later than one year and
(d) later than one year and not later than five years
B11A In complying with paragraph 39(a) and (b) an entity shall not separate an
embedded derivative from a hybrid (combined) financial instrument For such
an instrument an entity shall apply paragraph 39(a)
IFRS 7
IFRS FoundationA286B11B Paragraph 39(b) requires an entity to disclose a quantitative maturity analysis
for derivative financial liabilities that shows remaining contractual maturities if
the contractual maturities are essential for an understanding of the timing of
the cash flows For example this would be the case for
(a) an interest rate swap with a remaining maturity of five years in a cash
flow hedge of a variable rate financial asset or liability
(b) all loan commitments
B11C Paragraph 39(a) and (b) requires an entity to disclose maturity analyses for
financial liabilities that show the remaining contractual maturities for some
financial liabilities In this disclosure
(a) when a counterparty has a choice of when an amount is paid the
liability is allocated to the earliest period in which the entity can be
required to pay For example financial liabilities that an entity can be
required to repay on demand (eg demand deposits) are included in the
earliest time band
(b) when an entity is committed to make amounts available in instalments
each instalment is allocated to the earliest period in which the entity can
be required to pay For example an undrawn loan commitment is
included in the time band containing the earliest date it can be drawn
down
(c) for issued financial guarantee contracts the maximum amount of the
guarantee is allocated to the earliest period in which the guarantee
could be called
B11D The contractual amounts disclosed in the maturity analyses as required by
paragraph 39(a) and (b) are the contractual undiscounted cash flows for
example
(a) gross lease liabilities (before deducting finance charges)
(b) prices specified in forward agreements to purchase financial assets for
cash
(c) net amounts for payfloatingreceivefixed interest rate swaps for which
net cash flows are exchanged
(d) contractual amounts to be exchanged in a derivative financial
instrument (eg a currency swap) for which gross cash flows are
exchanged and
(e) gross loan commitments
Such undiscounted cash flows differ from the amount included in the statement
of financial position because the amount in that statement is based on
discounted cash flows When the amount payable is not fixed the amount
disclosed is determined by reference to the conditions existing at the end of the
reporting period For example when the amount payable varies with changes in
an index the amount disclosed may be based on the level of the index at the end
of the period
IFRS 7
IFRS Foundation A287B11E Paragraph 39(c) requires an entity to describe how it manages the liquidity risk
inherent in the items disclosed in the quantitative disclosures required in
paragraph 39(a) and (b) An entity shall disclose a maturity analysis of financial
assets it holds for managing liquidity risk (eg financial assets that are readily
saleable or expected to generate cash inflows to meet cash outflows on financial
liabilities) if that information is necessary to enable users of its financial
statements to evaluate the nature and extent of liquidity risk
B11F Other factors that an entity might consider in providing the disclosure required
in paragraph 39(c) include but are not limited to whether the entity
(a) has committed borrowing facilities (eg commercial paper facilities) or
other lines of credit (eg standby credit facilities) that it can access to
meet liquidity needs
(b) holds deposits at central banks to meet liquidity needs
(c) has very diverse funding sources
(d) has significant concentrations of liquidity risk in either its assets or its
funding sources
(e) has internal control processes and contingency plans for managing
liquidity risk
(f) has instruments that include accelerated repayment terms (eg on the
downgrade of the entity’s credit rating)
(g) has instruments that could require the posting of collateral (eg margin
calls for derivatives)
(h) has instruments that allow the entity to choose whether it settles its
financial liabilities by delivering cash (or another financial asset) or by
delivering its own shares or
(i) has instruments that are subject to master netting agreements
B12–
B16
[Deleted]
Market risk – sensitivity analysis (paragraphs 40 and 41)
B17 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to
which the entity is exposed In accordance with paragraph B3 an entity decides
how it aggregates information to display the overall picture without combining
information with different characteristics about exposures to risks from
significantly different economic environments For example
(a) an entity that trades financial instruments might disclose this
information separately for financial instruments held for trading and
those not held for trading
(b) an entity would not aggregate its exposure to market risks from areas of
hyperinflation with its exposure to the same market risks from areas of
very low inflation
If an entity has exposure to only one type of market risk in only one economic
environment it would not show disaggregated information
IFRS 7
IFRS FoundationA288B18 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or
loss and equity of reasonably possible changes in the relevant risk variable
(eg prevailing market interest rates currency rates equity prices or commodity
prices) For this purpose
(a) entities are not required to determine what the profit or loss for the
period would have been if relevant risk variables had been different
Instead entities disclose the effect on profit or loss and equity at the end
of the reporting period assuming that a reasonably possible change in
the relevant risk variable had occurred at the end of the reporting period
and had been applied to the risk exposures in existence at that date For
example if an entity has a floating rate liability at the end of the year
the entity would disclose the effect on profit or loss (ie interest expense)
for the current year if interest rates had varied by reasonably possible
amounts
(b) entities are not required to disclose the effect on profit or loss and equity
for each change within a range of reasonably possible changes of the
relevant risk variable Disclosure of the effects of the changes at the
limits of the reasonably possible range would be sufficient
B19 In determining what a reasonably possible change in the relevant risk variable
is an entity should consider
(a) the economic environments in which it operates A reasonably possible
change should not include remote or worst case’ scenarios or stress
tests’ Moreover if the rate of change in the underlying risk variable is
stable the entity need not alter the chosen reasonably possible change in
the risk variable For example assume that interest rates are 5 per cent
and an entity determines that a fluctuation in interest rates of ±50 basis
points is reasonably possible It would disclose the effect on profit or loss
and equity if interest rates were to change to 45 per cent or 55 per cent
In the next period interest rates have increased to 55 per cent The
entity continues to believe that interest rates may fluctuate by ±50 basis
points (ie that the rate of change in interest rates is stable) The entity
would disclose the effect on profit or loss and equity if interest rates were
to change to 5 per cent or 6 per cent The entity would not be required to
revise its assessment that interest rates might reasonably fluctuate by
±50 basis points unless there is evidence that interest rates have become
significantly more volatile
(b) the time frame over which it is making the assessment The sensitivity
analysis shall show the effects of changes that are considered to be
reasonably possible over the period until the entity will next present
these disclosures which is usually its next annual reporting period
B20 Paragraph 41 permits an entity to use a sensitivity analysis that reflects
interdependencies between risk variables such as a valueatrisk methodology if
it uses this analysis to manage its exposure to financial risks This applies even if
such a methodology measures only the potential for loss and does not measure
the potential for gain Such an entity might comply with paragraph 41(a) by
disclosing the type of valueatrisk model used (eg whether the model relies on
Monte Carlo simulations) an explanation about how the model works and the
IFRS 7
IFRS Foundation A289main assumptions (eg the holding period and confidence level) Entities might
also disclose the historical observation period and weightings applied to
observations within that period an explanation of how options are dealt with in
the calculations and which volatilities and correlations (or alternatively Monte
Carlo probability distribution simulations) are used
B21 An entity shall provide sensitivity analyses for the whole of its business but may
provide different types of sensitivity analysis for different classes of financial
instruments
Interest rate risk
B22 Interest rate risk arises on interestbearing financial instruments recognised in the
statement of financial position (eg debt instruments acquired or issued) and on
some financial instruments not recognised in the statement of financial position
(eg some loan commitments)
Currency risk
B23 Currency risk (or foreign exchange risk) arises on financial instruments that are
denominated in a foreign currency ie in a currency other than the functional
currency in which they are measured For the purpose of this IFRS currency risk
does not arise from financial instruments that are nonmonetary items or from
financial instruments denominated in the functional currency
B24 A sensitivity analysis is disclosed for each currency to which an entity has
significant exposure
Other price risk
B25 Other price risk arises on financial instruments because of changes in for
example commodity prices or equity prices To comply with paragraph 40 an
entity might disclose the effect of a decrease in a specified stock market index
commodity price or other risk variable For example if an entity gives residual
value guarantees that are financial instruments the entity discloses an increase
or decrease in the value of the assets to which the guarantee applies
B26 Two examples of financial instruments that give rise to equity price risk are (a) a
holding of equities in another entity and (b) an investment in a trust that in turn
holds investments in equity instruments Other examples include forward
contracts and options to buy or sell specified quantities of an equity instrument
and swaps that are indexed to equity prices The fair values of such financial
instruments are affected by changes in the market price of the underlying equity
instruments
B27 In accordance with paragraph 40(a) the sensitivity of profit or loss (that arises
for example from instruments measured at fair value through profit or loss) is
disclosed separately from the sensitivity of other comprehensive income (that
arises for example from investments in equity instruments whose changes in
fair value are presented in other comprehensive income)
B28 Financial instruments that an entity classifies as equity instruments are not
remeasured Neither profit or loss nor equity will be affected by the equity price
risk of those instruments Accordingly no sensitivity analysis is required
IFRS 7
IFRS FoundationA290Derecognition (paragraphs 42C–42H)
Continuing involvement (paragraph 42C)
B29 The assessment of continuing involvement in a transferred financial asset for
the purposes of the disclosure requirements in paragraphs 42E–42H is made at
the level of the reporting entity For example if a subsidiary transfers to an
unrelated third party a financial asset in which the parent of the subsidiary has
continuing involvement the subsidiary does not include the parent’s
involvement in the assessment of whether it has continuing involvement in the
transferred asset in its separate or individual financial statements (ie when the
subsidiary is the reporting entity) However a parent would include its
continuing involvement (or that of another member of the group) in a financial
asset transferred by its subsidiary in determining whether it has continuing
involvement in the transferred asset in its consolidated financial statements
(ie when the reporting entity is the group)
B30 An entity does not have a continuing involvement in a transferred financial
asset if as part of the transfer it neither retains any of the contractual rights or
obligations inherent in the transferred financial asset nor acquires any new
contractual rights or obligations relating to the transferred financial asset An
entity does not have continuing involvement in a transferred financial asset if it
has neither an interest in the future performance of the transferred financial
asset nor a responsibility under any circumstances to make payments in respect
of the transferred financial asset in the future The term payment’ in this
context does not include cash flows of the transferred financial asset that an
entity collects and is required to remit to the transferee
B30A When an entity transfers a financial asset the entity may retain the right to
service that financial asset for a fee that is included in for example a servicing
contract The entity assesses the servicing contract in accordance with the
guidance in paragraphs 42C and B30 to decide whether the entity has
continuing involvement as a result of the servicing contract for the purposes of
the disclosure requirements For example a servicer will have continuing
involvement in the transferred financial asset for the purposes of the disclosure
requirements if the servicing fee is dependent on the amount or timing of the
cash flows collected from the transferred financial asset Similarly a servicer
has continuing involvement for the purposes of the disclosure requirements if a
fixed fee would not be paid in full because of nonperformance of the transferred
financial asset In these examples the servicer has an interest in the future
performance of the transferred financial asset This assessment is independent
of whether the fee to be received is expected to compensate the entity
adequately for performing the servicing
B31 Continuing involvement in a transferred financial asset may result from
contractual provisions in the transfer agreement or in a separate agreement
with the transferee or a third party entered into in connection with the transfer
IFRS 7
IFRS Foundation A291Transferred financial assets that are not derecognised in
their entirety (paragraph 42D)
B32 Paragraph 42D requires disclosures when part or all of the transferred financial
assets do not qualify for derecognition Those disclosures are required at each
reporting date at which the entity continues to recognise the transferred
financial assets regardless of when the transfers occurred
Types of continuing involvement (paragraphs 42E–42H)
B33 Paragraphs 42E–42H require qualitative and quantitative disclosures for each
type of continuing involvement in derecognised financial assets An entity shall
aggregate its continuing involvement into types that are representative of the
entity’s exposure to risks For example an entity may aggregate its continuing
involvement by type of financial instrument (eg guarantees or call options) or by
type of transfer (eg factoring of receivables securitisations and securities
lending)
Maturity analysis for undiscounted cash outflows to
repurchase transferred assets (paragraph 42E(e))
B34 Paragraph 42E(e) requires an entity to disclose a maturity analysis of the
undiscounted cash outflows to repurchase derecognised financial assets or other
amounts payable to the transferee in respect of the derecognised financial
assets showing the remaining contractual maturities of the entity’s continuing
involvement This analysis distinguishes cash flows that are required to be paid
(eg forward contracts) cash flows that the entity may be required to pay
(eg written put options) and cash flows that the entity might choose to pay
(eg purchased call options)
B35 An entity shall use its judgement to determine an appropriate number of time
bands in preparing the maturity analysis required by paragraph 42E(e) For
example an entity might determine that the following maturity time bands are
appropriate
(a) not later than one month
(b) later than one month and not later than three months
(c) later than three months and not later than six months
(d) later than six months and not later than one year
(e) later than one year and not later than three years
(f) later than three years and not later than five years and
(g) more than five years
B36 If there is a range of possible maturities the cash flows are included on the basis
of the earliest date on which the entity can be required or is permitted to pay
Qualitative information (paragraph 42E(f))
B37 The qualitative information required by paragraph 42E(f) includes a description
of the derecognised financial assets and the nature and purpose of the
IFRS 7
IFRS FoundationA292continuing involvement retained after transferring those assets It also includes
a description of the risks to which an entity is exposed including
(a) a description of how the entity manages the risk inherent in its
continuing involvement in the derecognised financial assets
(b) whether the entity is required to bear losses before other parties and the
ranking and amounts of losses borne by parties whose interests rank
lower than the entity’s interest in the asset (ie its continuing
involvement in the asset)
(c) a description of any triggers associated with obligations to provide
financial support or to repurchase a transferred financial asset
Gain or loss on derecognition (paragraph 42G(a))
B38 Paragraph 42G(a) requires an entity to disclose the gain or loss on derecognition
relating to financial assets in which the entity has continuing involvement The
entity shall disclose if a gain or loss on derecognition arose because the fair
values of the components of the previously recognised asset (ie the interest in
the asset derecognised and the interest retained by the entity) were different
from the fair value of the previously recognised asset as a whole In that
situation the entity shall also disclose whether the fair value measurements
included significant inputs that were not based on observable market data as
described in paragraph 27A
Supplementary information (paragraph 42H)
B39 The disclosures required in paragraphs 42D–42G may not be sufficient to meet
the disclosure objectives in paragraph 42B If this is the case the entity shall
disclose whatever additional information is necessary to meet the disclosure
objectives The entity shall decide in the light of its circumstances how much
additional information it needs to provide to satisfy the information needs of
users and how much emphasis it places on different aspects of the additional
information It is necessary to strike a balance between burdening financial
statements with excessive detail that may not assist users of financial statements
and obscuring information as a result of too much aggregation
Offsetting financial assets and financial liabilities
(paragraphs 13A–13F)
Scope (paragraph 13A)
B40 The disclosures in paragraphs 13B–13E are required for all recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32 In
addition financial instruments are within the scope of the disclosure
requirements in paragraphs 13B–13E if they are subject to an enforceable master
netting arrangement or similar agreement that covers similar financial
instruments and transactions irrespective of whether the financial instruments
are set off in accordance with paragraph 42 of IAS 32
B41 The similar agreements referred to in paragraphs 13A and B40 include
derivative clearing agreements global master repurchase agreements global
master securities lending agreements and any related rights to financial
IFRS 7
IFRS Foundation A293collateral The similar financial instruments and transactions referred to in
paragraph B40 include derivatives sale and repurchase agreements reverse sale
and repurchase agreements securities borrowing and securities lending
agreements Examples of financial instruments that are not within the scope of
paragraph 13A are loans and customer deposits at the same institution (unless
they are set off in the statement of financial position) and financial instruments
that are subject only to a collateral agreement
Disclosure of quantitative information for recognised financial
assets and recognised financial liabilities within the scope of
paragraph 13A (paragraph 13C)
B42 Financial instruments disclosed in accordance with paragraph 13C may be
subject to different measurement requirements (for example a payable related
to a repurchase agreement may be measured at amortised cost while a
derivative will be measured at fair value) An entity shall include instruments at
their recognised amounts and describe any resulting measurement differences
in the related disclosures
Disclosure of the gross amounts of recognised financial assets
and recognised financial liabilities within the scope of
paragraph 13A (paragraph 13C(a))
B43 The amounts required by paragraph 13C(a) relate to recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32 The
amounts required by paragraph 13C(a) also relate to recognised financial
instruments that are subject to an enforceable master netting arrangement or
similar agreement irrespective of whether they meet the offsetting criteria
However the disclosures required by paragraph 13C(a) do not relate to any
amounts recognised as a result of collateral agreements that do not meet the
offsetting criteria in paragraph 42 of IAS 32 Instead such amounts are required
to be disclosed in accordance with paragraph 13C(d)
Disclosure of the amounts that are set off in accordance with the
criteria in paragraph 42 of IAS 32 (paragraph 13C(b))
B44 Paragraph 13C(b) requires that entities disclose the amounts set off in
accordance with paragraph 42 of IAS 32 when determining the net amounts
presented in the statement of financial position The amounts of both the
recognised financial assets and the recognised financial liabilities that are
subject to setoff under the same arrangement will be disclosed in both the
financial asset and financial liability disclosures However the amounts
disclosed (in for example a table) are limited to the amounts that are subject to
setoff For example an entity may have a recognised derivative asset and a
recognised derivative liability that meet the offsetting criteria in paragraph 42
of IAS 32 If the gross amount of the derivative asset is larger than the gross
amount of the derivative liability the financial asset disclosure table will
include the entire amount of the derivative asset (in accordance with
paragraph 13C(a)) and the entire amount of the derivative liability (in
accordance with paragraph 13C(b)) However while the financial liability
disclosure table will include the entire amount of the derivative liability (in
IFRS 7
IFRS FoundationA294accordance with paragraph 13C(a)) it will only include the amount of the
derivative asset (in accordance with paragraph 13C(b)) that is equal to the
amount of the derivative liability
Disclosure of the net amounts presented in the statement of
financial position (paragraph 13C(c))
B45 If an entity has instruments that meet the scope of these disclosures (as specified
in paragraph 13A) but that do not meet the offsetting criteria in paragraph 42
of IAS 32 the amounts required to be disclosed by paragraph 13C(c) would equal
the amounts required to be disclosed by paragraph 13C(a)
B46 The amounts required to be disclosed by paragraph 13C(c) must be reconciled to
the individual line item amounts presented in the statement of financial
position For example if an entity determines that the aggregation or
disaggregation of individual financial statement line item amounts provides
more relevant information it must reconcile the aggregated or disaggregated
amounts disclosed in paragraph 13C(c) back to the individual line item amounts
presented in the statement of financial position
Disclosure of the amounts subject to an enforceable master
netting arrangement or similar agreement that are not otherwise
included in paragraph 13C(b) (paragraph 13C(d))
B47 Paragraph 13C(d) requires that entities disclose amounts that are subject to an
enforceable master netting arrangement or similar agreement that are not
otherwise included in paragraph 13C(b) Paragraph 13C(d)(i) refers to amounts
related to recognised financial instruments that do not meet some or all of the
offsetting criteria in paragraph 42 of IAS 32 (for example current rights of setoff
that do not meet the criterion in paragraph 42(b) of IAS 32 or conditional rights
of setoff that are enforceable and exercisable only in the event of default or
only in the event of insolvency or bankruptcy of any of the counterparties)
B48 Paragraph 13C(d)(ii) refers to amounts related to financial collateral including
cash collateral both received and pledged An entity shall disclose the fair value
of those financial instruments that have been pledged or received as collateral
The amounts disclosed in accordance with paragraph 13C(d)(ii) should relate to
the actual collateral received or pledged and not to any resulting payables or
receivables recognised to return or receive back such collateral
Limits on the amounts disclosed in paragraph 13C(d)
(paragraph 13D)
B49 When disclosing amounts in accordance with paragraph 13C(d) an entity must
take into account the effects of overcollateralisation by financial instrument To
do so the entity must first deduct the amounts disclosed in accordance with
paragraph 13C(d)(i) from the amount disclosed in accordance with
paragraph 13C(c) The entity shall then limit the amounts disclosed in
accordance with paragraph 13C(d)(ii) to the remaining amount in
paragraph 13C(c) for the related financial instrument However if rights to
collateral can be enforced across financial instruments such rights can be
included in the disclosure provided in accordance with paragraph 13D
IFRS 7
IFRS Foundation A295Description of the rights of setoff subject to enforceable master
netting arrangements and similar agreements (paragraph 13E)
B50 An entity shall describe the types of rights of setoff and similar arrangements
disclosed in accordance with paragraph 13C(d) including the nature of those
rights For example an entity shall describe its conditional rights For
instruments subject to rights of setoff that are not contingent on a future event
but that do not meet the remaining criteria in paragraph 42 of IAS 32 the entity
shall describe the reason(s) why the criteria are not met For any financial
collateral received or pledged the entity shall describe the terms of the
collateral agreement (for example when the collateral is restricted)
Disclosure by type of financial instrument or by counterparty
B51 The quantitative disclosures required by paragraph 13C(a)–(e) may be grouped by
type of financial instrument or transaction (for example derivatives repurchase
and reverse repurchase agreements or securities borrowing and securities
lending agreements)
B52 Alternatively an entity may group the quantitative disclosures required by
paragraph 13C(a)–(c) by type of financial instrument and the quantitative
disclosures required by paragraph 13C(c)–(e) by counterparty If an entity
provides the required information by counterparty the entity is not required to
identify the counterparties by name However designation of counterparties
(Counterparty A Counterparty B Counterparty C etc) shall remain consistent
from year to year for the years presented to maintain comparability Qualitative
disclosures shall be considered so that further information can be given about
the types of counterparties When disclosure of the amounts in paragraph
13C(c)–(e) is provided by counterparty amounts that are individually significant
in terms of total counterparty amounts shall be separately disclosed and the
remaining individually insignificant counterparty amounts shall be aggregated
into one line item
Other
B53 The specific disclosures required by paragraphs 13C–13E are minimum
requirements To meet the objective in paragraph 13B an entity may need to
supplement them with additional (qualitative) disclosures depending on the
terms of the enforceable master netting arrangements and related agreements
including the nature of the rights of setoff and their effect or potential effect on
the entity’s financial position
IFRS 7
IFRS FoundationA296Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2007 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2005 have been incorporated
into the text of the relevant IFRSs included in this volume
IFRS 7
IFRS Foundation A297IFRS Standard 8
Operating Segments
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 14
Segment Reporting which had originally been issued by the International Accounting
Standards Committee in August 1997 IAS 14 Segment Reporting replaced IAS 14 Reporting
Financial Information by Segment issued in August 1981
In November 2006 the Board issued IFRS 8 Operating Segments to replace IAS 14 IAS 1
Presentation of Financial Statements (as revised in 2007) amended the terminology used
throughout the Standards including IFRS 8
Other Standards have made minor consequential amendments to IFRS 8 They include
IAS 19 Employee Benefits (issued June 2011) and Annual Improvements to IFRSs 2010–2012 Cycle
(issued December 2013)
IFRS 8
IFRS Foundation A299CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 8
OPERATING SEGMENTS
CORE PRINCIPLE 1
SCOPE 2
OPERATING SEGMENTS 5
REPORTABLE SEGMENTS 11
Aggregation criteria 12
Quantitative thresholds 13
DISCLOSURE 20
General information 22
Information about profit or loss assets and liabilities 23
MEASUREMENT 25
Reconciliations 28
Restatement of previously reported information 29
ENTITYWIDE DISCLOSURES 31
Information about products and services 32
Information about geographical areas 33
Information about major customers 34
TRANSITION AND EFFECTIVE DATE 35
WITHDRAWAL OF IAS 14 37
APPENDICES
A Defined term
B Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 8 ISSUED IN NOVEMBER 2006
BASIS FOR CONCLUSIONS
APPENDICES
A Background information and basis for conclusions of the US Financial
Accounting Standards Board on SFAS 131
B Amendments to the Basis for Conclusions on other IFRSs
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
APPENDIX
Amendments to other Implementation Guidance
IFRS 8
IFRS FoundationA300International Financial Reporting Standard 8 Operating Segments (IFRS 8) is set out in
paragraphs 1–37 and Appendices A and B All the paragraphs have equal authority
Paragraphs in bold type state the main principles Definitions of terms are given in the
Glossary for International Financial Reporting Standards IFRS 8 should be read in the
context of its core principle and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 8
IFRS Foundation A301Introduction
Reasons for issuing the IFRS
IN1 International Financial Reporting Standard 8 Operating Segments sets out
requirements for disclosure of information about an entity’s operating segments
and also about the entity’s products and services the geographical areas in
which it operates and its major customers
IN2 Achieving convergence of accounting standards around the world is one of the
prime objectives of the International Accounting Standards Board In pursuit of
that objective the Board and the Financial Accounting Standards Board (FASB)
in the United States have undertaken a joint shortterm project with the
objective of reducing differences between International Financial Reporting
Standards (IFRSs) and US generally accepted accounting principles (US GAAP)
that are capable of resolution in a relatively short time and can be addressed
outside major projects One aspect of that project involves the two boards
considering each other’s recent standards with a view to adopting high quality
financial reporting solutions The IFRS arises from the IASB’s consideration of
FASB Statement No 131 Disclosures about Segments of an Enterprise and Related
Information (SFAS 131) issued in 1997 compared with IAS 14 Segment Reporting
which was issued in substantially its present form by the IASB’s predecessor
body the International Accounting Standards Committee in 1997
IN3 The IFRS achieves convergence with the requirements of SFAS 131 except for
minor differences listed in paragraph BC60 of the Basis for Conclusions The
wording of the IFRS is the same as that of SFAS 131 except for changes necessary
to make the terminology consistent with that in other IFRSs
Main features of the IFRS
IN4 The IFRS specifies how an entity should report information about its operating
segments in annual financial statements and as a consequential amendment to
IAS 34 Interim Financial Reporting requires an entity to report selected
information about its operating segments in interim financial reports It also
sets out requirements for related disclosures about products and services
geographical areas and major customers
IN5 The IFRS requires an entity to report financial and descriptive information about
its reportable segments Reportable segments are operating segments or
aggregations of operating segments that meet specified criteria Operating
segments are components of an entity about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance Generally financial information is required to be reported on the
same basis as is used internally for evaluating operating segment performance
and deciding how to allocate resources to operating segments
IN6 The IFRS requires an entity to report a measure of operating segment profit or
loss and of segment assets It also requires an entity to report a measure of
IFRS 8
IFRS FoundationA302segment liabilities and particular income and expense items if such measures
are regularly provided to the chief operating decision maker It requires
reconciliations of total reportable segment revenues total profit or loss total
assets liabilities and other amounts disclosed for reportable segments to
corresponding amounts in the entity’s financial statements
IN7 The IFRS requires an entity to report information about the revenues derived
from its products or services (or groups of similar products and services) about
the countries in which it earns revenues and holds assets and about major
customers regardless of whether that information is used by management in
making operating decisions However the IFRS does not require an entity to
report information that is not prepared for internal use if the necessary
information is not available and the cost to develop it would be excessive
IN8 The IFRS also requires an entity to give descriptive information about the way
the operating segments were determined the products and services provided by
the segments differences between the measurements used in reporting segment
information and those used in the entity’s financial statements and changes in
the measurement of segment amounts from period to period
IN9 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2009 Earlier application is permitted If an entity applies this IFRS
for an earlier period it shall disclose that fact
Changes from previous requirements
IN10 The IFRS replaces IAS 14 Segment Reporting The main changes from IAS 14 are
described below
Identification of segments
IN11 The requirements of the IFRS are based on the information about the
components of the entity that management uses to make decisions about
operating matters The IFRS requires identification of operating segments on
the basis of internal reports that are regularly reviewed by the entity’s chief
operating decision maker in order to allocate resources to the segment and
assess its performance IAS 14 required identification of two sets of
segments—one based on related products and services and the other on
geographical areas IAS 14 regarded one set as primary segments and the other
as secondary segments
IN12 A component of an entity that sells primarily or exclusively to other operating
segments of the entity is included in the IFRS’s definition of an operating
segment if the entity is managed that way IAS 14 limited reportable segments
to those that earn a majority of their revenue from sales to external customers
and therefore did not require the different stages of vertically integrated
operations to be identified as separate segments
Measurement of segment information
IN13 The IFRS requires the amount reported for each operating segment item to be
the measure reported to the chief operating decision maker for the purposes of
allocating resources to the segment and assessing its performance IAS 14
IFRS 8
IFRS Foundation A303required segment information to be prepared in conformity with the accounting
policies adopted for preparing and presenting the financial statements of the
consolidated group or entity
IN14 IAS 14 defined segment revenue segment expense segment result segment
assets and segment liabilities The IFRS does not define these terms but requires
an explanation of how segment profit or loss segment assets and segment
liabilities are measured for each reportable segment
Disclosure
IN15 The IFRS requires an entity to disclose the following information
(a) factors used to identify the entity’s operating segments including the
basis of organisation (for example whether management organises the
entity around differences in products and services geographical areas
regulatory environments or a combination of factors and whether
segments have been aggregated) and
(b) types of products and services from which each reportable segment
derives its revenues
IN16 IAS 14 required the entity to disclose specified items of information about its
primary segments The IFRS requires an entity to disclose specified amounts
about each reportable segment if the specified amounts are included in the
measure of segment profit or loss and are reviewed by or otherwise regularly
provided to the chief operating decision maker
IN17 The IFRS requires an entity to report interest revenue separately from interest
expense for each reportable segment unless a majority of the segment’s revenues
are from interest and the chief operating decision maker relies primarily on net
interest revenue to assess the performance of the segment and to make decisions
about resources to be allocated to the segment IAS 14 did not require disclosure
of interest income and expense
IN18 The IFRS requires an entity including an entity with a single reportable
segment to disclose information for the entity as a whole about its products and
services geographical areas and major customers This requirement applies
regardless of the entity’s organisation if the information is not included as part
of the disclosures about segments IAS 14 required the disclosure of secondary
segment information for either industry or geographical segments to
supplement the information given for the primary segments
IFRS 8
IFRS FoundationA304International Financial Reporting Standard 8
Operating Segments
Core principle
1 An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates
Scope
2 This IFRS shall apply to
(a) the separate or individual financial statements of an entity
(i) whose debt or equity instruments are traded in a public market
(a domestic or foreign stock exchange or an overthecounter
market including local and regional markets) or
(ii) that files or is in the process of filing its financial statements
with a securities commission or other regulatory organisation for
the purpose of issuing any class of instruments in a public
market and
(b) the consolidated financial statements of a group with a parent
(i) whose debt or equity instruments are traded in a public market
(a domestic or foreign stock exchange or an overthecounter
market including local and regional markets) or
(ii) that files or is in the process of filing the consolidated financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments
in a public market
3 If an entity that is not required to apply this IFRS chooses to disclose
information about segments that does not comply with this IFRS it shall not
describe the information as segment information
4 If a financial report contains both the consolidated financial statements of a
parent that is within the scope of this IFRS as well as the parent’s separate
financial statements segment information is required only in the consolidated
financial statements
Operating segments
5 An operating segment is a component of an entity
(a) that engages in business activities from which it may earn revenues and
incur expenses (including revenues and expenses relating to transactions
with other components of the same entity)
IFRS 8
IFRS Foundation A305(b) whose operating results are regularly reviewed by the entity’s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance and
(c) for which discrete financial information is available
An operating segment may engage in business activities for which it has yet to
earn revenues for example startup operations may be operating segments
before earning revenues
6 Not every part of an entity is necessarily an operating segment or part of an
operating segment For example a corporate headquarters or some functional
departments may not earn revenues or may earn revenues that are only
incidental to the activities of the entity and would not be operating segments
For the purposes of this IFRS an entity’s postemployment benefit plans are not
operating segments
7 The term chief operating decision maker’ identifies a function not necessarily a
manager with a specific title That function is to allocate resources to and assess
the performance of the operating segments of an entity Often the chief
operating decision maker of an entity is its chief executive officer or chief
operating officer but for example it may be a group of executive directors or
others
8 For many entities the three characteristics of operating segments described in
paragraph 5 clearly identify its operating segments However an entity may
produce reports in which its business activities are presented in a variety of
ways If the chief operating decision maker uses more than one set of segment
information other factors may identify a single set of components as
constituting an entity’s operating segments including the nature of the
business activities of each component the existence of managers responsible for
them and information presented to the board of directors
9 Generally an operating segment has a segment manager who is directly
accountable to and maintains regular contact with the chief operating decision
maker to discuss operating activities financial results forecasts or plans for the
segment The term segment manager’ identifies a function not necessarily a
manager with a specific title The chief operating decision maker also may be
the segment manager for some operating segments A single manager may be
the segment manager for more than one operating segment If the
characteristics in paragraph 5 apply to more than one set of components of an
organisation but there is only one set for which segment managers are held
responsible that set of components constitutes the operating segments
10 The characteristics in paragraph 5 may apply to two or more overlapping sets of
components for which managers are held responsible That structure is
sometimes referred to as a matrix form of organisation For example in some
entities some managers are responsible for different product and service lines
worldwide whereas other managers are responsible for specific geographical
areas The chief operating decision maker regularly reviews the operating
results of both sets of components and financial information is available for
both In that situation the entity shall determine which set of components
constitutes the operating segments by reference to the core principle
IFRS 8
IFRS FoundationA306Reportable segments
11 An entity shall report separately information about each operating segment
that
(a) has been identified in accordance with paragraphs 5–10 or results from
aggregating two or more of those segments in accordance with
paragraph 12 and
(b) exceeds the quantitative thresholds in paragraph 13
Paragraphs 14–19 specify other situations in which separate information about
an operating segment shall be reported
Aggregation criteria
12 Operating segments often exhibit similar longterm financial performance if
they have similar economic characteristics For example similar longterm
average gross margins for two operating segments would be expected if their
economic characteristics were similar Two or more operating segments may be
aggregated into a single operating segment if aggregation is consistent with the
core principle of this IFRS the segments have similar economic characteristics
and the segments are similar in each of the following respects
(a) the nature of the products and services
(b) the nature of the production processes
(c) the type or class of customer for their products and services
(d) the methods used to distribute their products or provide their services
and
(e) if applicable the nature of the regulatory environment for example
banking insurance or public utilities
Quantitative thresholds
13 An entity shall report separately information about an operating segment that
meets any of the following quantitative thresholds
(a) Its reported revenue including both sales to external customers and
intersegment sales or transfers is 10 per cent or more of the combined
revenue internal and external of all operating segments
(b) The absolute amount of its reported profit or loss is 10 per cent or more
of the greater in absolute amount of (i) the combined reported profit of
all operating segments that did not report a loss and (ii) the combined
reported loss of all operating segments that reported a loss
(c) Its assets are 10 per cent or more of the combined assets of all operating
segments
Operating segments that do not meet any of the quantitative thresholds may be
considered reportable and separately disclosed if management believes that
information about the segment would be useful to users of the financial
statements
IFRS 8
IFRS Foundation A30714 An entity may combine information about operating segments that do not meet
the quantitative thresholds with information about other operating segments
that do not meet the quantitative thresholds to produce a reportable segment
only if the operating segments have similar economic characteristics and share a
majority of the aggregation criteria listed in paragraph 12
15 If the total external revenue reported by operating segments constitutes less
than 75 per cent of the entity’s revenue additional operating segments shall be
identified as reportable segments (even if they do not meet the criteria in
paragraph 13) until at least 75 per cent of the entity’s revenue is included in
reportable segments
16 Information about other business activities and operating segments that are not
reportable shall be combined and disclosed in an all other segments’ category
separately from other reconciling items in the reconciliations required by
paragraph 28 The sources of the revenue included in the all other segments’
category shall be described
17 If management judges that an operating segment identified as a reportable
segment in the immediately preceding period is of continuing significance
information about that segment shall continue to be reported separately in the
current period even if it no longer meets the criteria for reportability in
paragraph 13
18 If an operating segment is identified as a reportable segment in the current
period in accordance with the quantitative thresholds segment data for a prior
period presented for comparative purposes shall be restated to reflect the newly
reportable segment as a separate segment even if that segment did not satisfy
the criteria for reportability in paragraph 13 in the prior period unless the
necessary information is not available and the cost to develop it would be
excessive
19 There may be a practical limit to the number of reportable segments that an
entity separately discloses beyond which segment information may become too
detailed Although no precise limit has been determined as the number of
segments that are reportable in accordance with paragraphs 13–18 increases
above ten the entity should consider whether a practical limit has been reached
Disclosure
20 An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates
21 To give effect to the principle in paragraph 20 an entity shall disclose the
following for each period for which a statement of comprehensive income is
presented
(a) general information as described in paragraph 22
IFRS 8
IFRS FoundationA308(b) information about reported segment profit or loss including specified
revenues and expenses included in reported segment profit or loss
segment assets segment liabilities and the basis of measurement as
described in paragraphs 23–27 and
(c) reconciliations of the totals of segment revenues reported segment
profit or loss segment assets segment liabilities and other material
segment items to corresponding entity amounts as described in
paragraph 28
Reconciliations of the amounts in the statement of financial position for
reportable segments to the amounts in the entity’s statement of financial
position are required for each date at which a statement of financial position is
presented Information for prior periods shall be restated as described in
paragraphs 29 and 30
General information
22 An entity shall disclose the following general information
(a) factors used to identify the entity’s reportable segments including the
basis of organisation (for example whether management has chosen to
organise the entity around differences in products and services
geographical areas regulatory environments or a combination of factors
and whether operating segments have been aggregated)
(aa) the judgements made by management in applying the aggregation
criteria in paragraph 12 This includes a brief description of the
operating segments that have been aggregated in this way and the
economic indicators that have been assessed in determining that the
aggregated operating segments share similar economic characteristics
and
(b) types of products and services from which each reportable segment
derives its revenues
Information about profit or loss assets and liabilities
23 An entity shall report a measure of profit or loss for each reportable segment
An entity shall report a measure of total assets and liabilities for each reportable
segment if such amounts are regularly provided to the chief operating decision
maker An entity shall also disclose the following about each reportable
segment if the specified amounts are included in the measure of segment profit
or loss reviewed by the chief operating decision maker or are otherwise
regularly provided to the chief operating decision maker even if not included in
that measure of segment profit or loss
(a) revenues from external customers
(b) revenues from transactions with other operating segments of the same
entity
(c) interest revenue
(d) interest expense
(e) depreciation and amortisation
IFRS 8
IFRS Foundation A309(f) material items of income and expense disclosed in accordance with
paragraph 97 of IAS 1 Presentation of Financial Statements (as revised in
2007)
(g) the entity’s interest in the profit or loss of associates and joint ventures
accounted for by the equity method
(h) income tax expense or income and
(i) material noncash items other than depreciation and amortisation
An entity shall report interest revenue separately from interest expense for each
reportable segment unless a majority of the segment’s revenues are from
interest and the chief operating decision maker relies primarily on net interest
revenue to assess the performance of the segment and make decisions about
resources to be allocated to the segment In that situation an entity may report
that segment’s interest revenue net of its interest expense and disclose that it
has done so
24 An entity shall disclose the following about each reportable segment if the
specified amounts are included in the measure of segment assets reviewed by
the chief operating decision maker or are otherwise regularly provided to the
chief operating decision maker even if not included in the measure of segment
assets
(a) the amount of investment in associates and joint ventures accounted for
by the equity method and
(b) the amounts of additions to noncurrent assets1 other than financial
instruments deferred tax assets net defined benefit assets (see IAS 19
Employee Benefits) and rights arising under insurance contracts
Measurement
25 The amount of each segment item reported shall be the measure reported to the
chief operating decision maker for the purposes of making decisions about
allocating resources to the segment and assessing its performance Adjustments
and eliminations made in preparing an entity’s financial statements and
allocations of revenues expenses and gains or losses shall be included in
determining reported segment profit or loss only if they are included in the
measure of the segment’s profit or loss that is used by the chief operating
decision maker Similarly only those assets and liabilities that are included in
the measures of the segment’s assets and segment’s liabilities that are used by
the chief operating decision maker shall be reported for that segment If
amounts are allocated to reported segment profit or loss assets or liabilities
those amounts shall be allocated on a reasonable basis
26 If the chief operating decision maker uses only one measure of an operating
segment’s profit or loss the segment’s assets or the segment’s liabilities in
assessing segment performance and deciding how to allocate resources segment
profit or loss assets and liabilities shall be reported at those measures If the
1 For assets classified according to a liquidity presentation noncurrent assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period
IFRS 8
IFRS FoundationA310chief operating decision maker uses more than one measure of an operating
segment’s profit or loss the segment’s assets or the segment’s liabilities the
reported measures shall be those that management believes are determined in
accordance with the measurement principles most consistent with those used in
measuring the corresponding amounts in the entity’s financial statements
27 An entity shall provide an explanation of the measurements of segment profit or
loss segment assets and segment liabilities for each reportable segment At a
minimum an entity shall disclose the following
(a) the basis of accounting for any transactions between reportable
segments
(b) the nature of any differences between the measurements of the
reportable segments’ profits or losses and the entity’s profit or loss before
income tax expense or income and discontinued operations (if not
apparent from the reconciliations described in paragraph 28) Those
differences could include accounting policies and policies for allocation
of centrally incurred costs that are necessary for an understanding of the
reported segment information
(c) the nature of any differences between the measurements of the
reportable segments’ assets and the entity’s assets (if not apparent from
the reconciliations described in paragraph 28) Those differences could
include accounting policies and policies for allocation of jointly used
assets that are necessary for an understanding of the reported segment
information
(d) the nature of any differences between the measurements of the
reportable segments’ liabilities and the entity’s liabilities (if not apparent
from the reconciliations described in paragraph 28) Those differences
could include accounting policies and policies for allocation of jointly
utilised liabilities that are necessary for an understanding of the
reported segment information
(e) the nature of any changes from prior periods in the measurement
methods used to determine reported segment profit or loss and the
effect if any of those changes on the measure of segment profit or loss
(f) the nature and effect of any asymmetrical allocations to reportable
segments For example an entity might allocate depreciation expense to
a segment without allocating the related depreciable assets to that
segment
Reconciliations
28 An entity shall provide reconciliations of all of the following
(a) the total of the reportable segments’ revenues to the entity’s revenue
(b) the total of the reportable segments’ measures of profit or loss to the
entity’s profit or loss before tax expense (tax income) and discontinued
operations However if an entity allocates to reportable segments items
IFRS 8
IFRS Foundation A311such as tax expense (tax income) the entity may reconcile the total of the
segments’ measures of profit or loss to the entity’s profit or loss after
those items
(c) the total of the reportable segments’ assets to the entity’s assets if the
segment assets are reported in accordance with paragraph 23
(d) the total of the reportable segments’ liabilities to the entity’s liabilities if
segment liabilities are reported in accordance with paragraph 23
(e) the total of the reportable segments’ amounts for every other material
item of information disclosed to the corresponding amount for the
entity
All material reconciling items shall be separately identified and described For
example the amount of each material adjustment needed to reconcile
reportable segment profit or loss to the entity’s profit or loss arising from
different accounting policies shall be separately identified and described
Restatement of previously reported information
29 If an entity changes the structure of its internal organisation in a manner that
causes the composition of its reportable segments to change the corresponding
information for earlier periods including interim periods shall be restated
unless the information is not available and the cost to develop it would be
excessive The determination of whether the information is not available and
the cost to develop it would be excessive shall be made for each individual item
of disclosure Following a change in the composition of its reportable segments
an entity shall disclose whether it has restated the corresponding items of
segment information for earlier periods
30 If an entity has changed the structure of its internal organisation in a manner
that causes the composition of its reportable segments to change and if segment
information for earlier periods including interim periods is not restated to
reflect the change the entity shall disclose in the year in which the change
occurs segment information for the current period on both the old basis and the
new basis of segmentation unless the necessary information is not available and
the cost to develop it would be excessive
Entitywide disclosures
31 Paragraphs 32–34 apply to all entities subject to this IFRS including those
entities that have a single reportable segment Some entities’ business activities
are not organised on the basis of differences in related products and services or
differences in geographical areas of operations Such an entity’s reportable
segments may report revenues from a broad range of essentially different
products and services or more than one of its reportable segments may provide
essentially the same products and services Similarly an entity’s reportable
segments may hold assets in different geographical areas and report revenues
from customers in different geographical areas or more than one of its
reportable segments may operate in the same geographical area Information
required by paragraphs 32–34 shall be provided only if it is not provided as part
of the reportable segment information required by this IFRS
IFRS 8
IFRS FoundationA312Information about products and services
32 An entity shall report the revenues from external customers for each product
and service or each group of similar products and services unless the necessary
information is not available and the cost to develop it would be excessive in
which case that fact shall be disclosed The amounts of revenues reported shall
be based on the financial information used to produce the entity’s financial
statements
Information about geographical areas
33 An entity shall report the following geographical information unless the
necessary information is not available and the cost to develop it would be
excessive
(a) revenues from external customers (i) attributed to the entity’s country of
domicile and (ii) attributed to all foreign countries in total from which
the entity derives revenues If revenues from external customers
attributed to an individual foreign country are material those revenues
shall be disclosed separately An entity shall disclose the basis for
attributing revenues from external customers to individual countries
(b) noncurrent assets2 other than financial instruments deferred tax assets
postemployment benefit assets and rights arising under insurance
contracts (i) located in the entity’s country of domicile and (ii) located in
all foreign countries in total in which the entity holds assets If assets in
an individual foreign country are material those assets shall be disclosed
separately
The amounts reported shall be based on the financial information that is used to
produce the entity’s financial statements If the necessary information is not
available and the cost to develop it would be excessive that fact shall be
disclosed An entity may provide in addition to the information required by
this paragraph subtotals of geographical information about groups of countries
Information about major customers
34 An entity shall provide information about the extent of its reliance on its major
customers If revenues from transactions with a single external customer
amount to 10 per cent or more of an entity’s revenues the entity shall disclose
that fact the total amount of revenues from each such customer and the
identity of the segment or segments reporting the revenues The entity need not
disclose the identity of a major customer or the amount of revenues that each
segment reports from that customer For the purposes of this IFRS a group of
entities known to a reporting entity to be under common control shall be
considered a single customer However judgement is required to assess whether
a government (including government agencies and similar bodies whether local
national or international) and entities known to the reporting entity to be under
2 For assets classified according to a liquidity presentation noncurrent assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period
IFRS 8
IFRS Foundation A313the control of that government are considered a single customer In assessing
this the reporting entity shall consider the extent of economic integration
between those entities
Transition and effective date
35 An entity shall apply this IFRS in its annual financial statements for periods
beginning on or after 1 January 2009 Earlier application is permitted If an
entity applies this IFRS in its financial statements for a period before 1 January
2009 it shall disclose that fact
35A Paragraph 23 was amended by Improvements to IFRSs issued in April 2009 An
entity shall apply that amendment for annual periods beginning on or after
1 January 2010 Earlier application is permitted If an entity applies the
amendment for an earlier period it shall disclose that fact
36 Segment information for prior years that is reported as comparative information
for the initial year of application (including application of the amendment to
paragraph 23 made in April 2009) shall be restated to conform to the
requirements of this IFRS unless the necessary information is not available and
the cost to develop it would be excessive
36A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraph 23(f) An entity shall apply those amendments
for annual periods beginning on or after 1 January 2009 If an entity applies
IAS 1 (revised 2007) for an earlier period the amendments shall be applied for
that earlier period
36B IAS 24 Related Party Disclosures (as revised in 2009) amended paragraph 34 for
annual periods beginning on or after 1 January 2011 If an entity applies IAS 24
(revised 2009) for an earlier period it shall apply the amendment to
paragraph 34 for that earlier period
36C Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 22 and 28 An entity shall apply those amendments for annual
periods beginning on or after 1 July 2014 Earlier application is permitted If an
entity applies those amendments for an earlier period it shall disclose that fact
Withdrawal of IAS 14
37 This IFRS supersedes IAS 14 Segment Reporting
IFRS 8
IFRS FoundationA314Appendix A
Defined term
This appendix is an integral part of the IFRS
operating segment An operating segment is a component of an entity
(a) that engages in business activities from which it may earn
revenues and incur expenses (including revenues and
expenses relating to transactions with other components
of the same entity)
(b) whose operating results are regularly reviewed by the
entity’s chief operating decision maker to make decisions
about resources to be allocated to the segment and assess
its performance and
(c) for which discrete financial information is available
IFRS 8
IFRS Foundation A315Appendix B
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2009 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period In the amended paragraphs new text is underlined and deleted text
is struck through
*****
The amendments contained in this appendix when this IFRS was issued in 2006 have been incorporated
into the text of the relevant IFRSs in this volume
IFRS 8
IFRS FoundationA316IFRS Standard 9
Financial Instruments
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 39
Financial Instruments Recognition and Measurement which had originally been issued by the
International Accounting Standards Committee in March 1999
The Board had always intended that IFRS 9 Financial Instruments would replace IAS 39 in its
entirety However in response to requests from interested parties that the accounting for
financial instruments should be improved quickly the Board divided its project to replace
IAS 39 into three main phases As the Board completed each phase it issued chapters in
IFRS 9 that replaced the corresponding requirements in IAS 39
In November 2009 the Board issued the chapters of IFRS 9 relating to the classification and
measurement of financial assets In October 2010 the Board added the requirements related
to the classification and measurement of financial liabilities to IFRS 9 This includes
requirements on embedded derivatives and how to account for changes in own credit risk
on financial liabilities designated under the fair value option
In October 2010 the Board also decided to carry forward unchanged from IAS 39 the
requirements related to the derecognition of financial assets and financial liabilities
Because of these changes in October 2010 the Board restructured IFRS 9 and its Basis for
Conclusions In December 2011 the Board deferred the mandatory effective date of IFRS 9
In November 2013 the Board added a Hedge Accounting chapter
In July 2014 the Board issued the completed version of IFRS 9 The Board made limited
amendments to the classification and measurement requirements for financial assets by
addressing a narrow range of application questions and by introducing a fair value through
other comprehensive income’ measurement category for particular simple debt
instruments The Board also added the impairment requirements relating to the
accounting for an entity’s expected credit losses on its financial assets and commitments to
extend credit A new mandatory effective date was also set
Other Standards have made minor consequential amendments to IFRS 9 They include
Severe Hyperinflation and Removal of Fixed Dates for Firsttime Adopters (Amendments to IFRS 1)
(issued December 2010) IFRS 10 Consolidated Financial Statements (issued May 2011) IFRS 11
Joint Arrangements (issued May 2011) IFRS 13 Fair Value Measurement (issued May 2011) IAS 19
Employee Benefits (issued June 2011) Annual Improvements to IFRSs 2010–2012 Cycle (issued
December 2013) IFRS 15 Revenue from Contracts with Customers (issued May 2014) and IFRS 16
Leases (issued January 2016)
IFRS 9
IFRS Foundation A317CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 9
FINANCIAL INSTRUMENTS
CHAPTERS
1 OBJECTIVE 11
2 SCOPE 21
3 RECOGNITION AND DERECOGNITION 311
31 Initial recognition 311
32 Derecognition of financial assets 321
33 Derecognition of financial liabilities 331
4 CLASSIFICATION 411
41 Classification of financial assets 411
42 Classification of financial liabilities 421
43 Embedded derivatives 431
44 Reclassification 441
5 MEASUREMENT 511
51 Initial measurement 511
52 Subsequent measurement of financial assets 521
53 Subsequent measurement of financial liabilities 531
54 Amortised cost measurement 541
55 Impairment 551
56 Reclassification of financial assets 561
57 Gains and losses 571
6 HEDGE ACCOUNTING 611
61 Objective and scope of hedge accounting 611
62 Hedging instruments 621
63 Hedged items 631
64 Qualifying criteria for hedge accounting 641
65 Accounting for qualifying hedging relationships 651
66 Hedges of a group of items 661
67 Option to designate a credit exposure as measured at fair value through
profit or loss 671
7 EFFECTIVE DATE AND TRANSITION 711
71 Effective date 711
72 Transition 721
73 Withdrawal of IFRIC 9 IFRS 9 (2009) IFRS 9 (2010) and IFRS 9 (2013) 731
IFRS 9
IFRS FoundationA318APPENDICES
A Defined terms
B Application guidance
C Amendments to other Standards
APPROVAL BY THE BOARD OF IFRS 9 ISSUED IN NOVEMBER 2009
APPROVAL BY THE BOARD OF THE REQUIREMENTS ADDED TO IFRS 9 IN
OCTOBER 2010
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 9
MANDATORY EFFECTIVE DATE IFRS 9 AND TRANSITION DISCLOSURES
(AMENDMENTS TO IFRS 9 (2009) IFRS 9 (2010) AND IFRS 7) ISSUED IN
DECEMBER 2011
IFRS 9 FINANCIAL INSTRUMENTS (HEDGE ACCOUNTING AND
AMENDMENTS TO IFRS 9 IFRS 7 AND IAS 39) ISSUED IN NOVEMBER 2013
APPROVAL BY THE BOARD OF IFRS 9 FINANCIAL INSTRUMENTS ISSUED IN
JULY 2014
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
APPENDICES
A Previous dissenting opinions
B Amendments to the Basis for Conclusions on other Standards
ILLUSTRATIVE EXAMPLES
GUIDANCE ON IMPLEMENTING IFRS 9 FINANCIAL INSTRUMENTS
APPENDIX
Amendments to the guidance on other Standards
IFRS 9
IFRS Foundation A319International Financial Reporting Standard 9 Financial Instruments (IFRS 9) is set out in
paragraphs 11–732 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the IFRS Definitions of other terms are given in the
Glossary for International Financial Reporting Standards IFRS 9 should be read in the
context of its objective and the Basis for Conclusions the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance
IFRS 9
IFRS FoundationA320Introduction
Reasons for issuing IFRS 9
IN1 IFRS 9 Financial Instruments sets out the requirements for recognising and
measuring financial assets financial liabilities and some contracts to buy or sell
nonfinancial items This Standard replaces IAS 39 Financial Instruments
Recognition and Measurement
IN2 Many users of financial statements and other interested parties told the
International Accounting Standards Board (IASB) that the requirements in
IAS 39 were difficult to understand apply and interpret They urged the IASB to
develop a new Standard for the financial reporting of financial instruments that
was principlebased and less complex Although the IASB amended IAS 39
several times to clarify requirements add guidance and eliminate internal
inconsistencies it had not previously undertaken a fundamental
reconsideration of the reporting for financial instruments
IN3 In 2005 the IASB and the US national standardsetter the Financial Accounting
Standards Board (FASB) began working towards a longterm objective of
improving and simplifying the reporting for financial instruments This work
resulted in the publication of the Discussion Paper Reducing Complexity in
Reporting Financial Instruments in March 2008 Focusing on the measurement of
financial instruments and hedge accounting the Discussion Paper identified
several possible approaches for improving and simplifying the accounting for
financial instruments The responses to the Discussion Paper indicated support
for a significant change in the requirements for reporting financial instruments
In November 2008 the IASB added this project to its active agenda
IN4 In April 2009 in response to the feedback received on its work responding to the
global financial crisis and following the conclusions of the G20 leaders and the
recommendations of international bodies such as the Financial Stability Board
the IASB announced an accelerated timetable for replacing IAS 39
The IASB’s approach to replacing IAS 39
IN5 The IASB had always intended that IFRS 9 would replace IAS 39 in its entirety
However in response to requests from interested parties that the accounting for
financial instruments be improved quickly the IASB divided its project to
replace IAS 39 into three main phases As the IASB completed each phase it
created chapters in IFRS 9 that replaced the corresponding requirements in
IAS 39
IN6 The three main phases of the IASB’s project to replace IAS 39 were
(a) Phase 1 classification and measurement of financial assets and
financial liabilities In November 2009 the IASB issued the chapters of
IFRS 9 relating to the classification and measurement of financial assets
Those chapters require financial assets to be classified on the basis of the
business model within which they are held and their contractual cash
IFRS 9
IFRS Foundation A321flow characteristics In October 2010 the IASB added to IFRS 9 the
requirements related to the classification and measurement of financial
liabilities Those additional requirements are described further in
paragraph IN7 In July 2014 the IASB made limited amendments to the
classification and measurement requirements in IFRS 9 for financial
assets Those amendments are described further in paragraph IN8
(b) Phase 2 impairment methodology In July 2014 the IASB added to
IFRS 9 the impairment requirements related to the accounting for
expected credit losses on an entity’s financial assets and commitments to
extend credit Those requirements are described further in
paragraph IN9
(c) Phase 3 hedge accounting In November 2013 the IASB added to
IFRS 9 the requirements related to hedge accounting Those additional
requirements are described further in paragraph IN10
Classification and measurement
IN7 In November 2009 the IASB issued the chapters of IFRS 9 relating to the
classification and measurement of financial assets Financial assets are classified
on the basis of the business model within which they are held and their
contractual cash flow characteristics In October 2010 the IASB added to IFRS 9
the requirements for the classification and measurement of financial liabilities
Most of those requirements were carried forward unchanged from IAS 39
However the requirements related to the fair value option for financial
liabilities were changed to address own credit risk Those improvements
respond to consistent feedback from users of financial statements and others
that the effects of changes in a liability’s credit risk ought not to affect profit or
loss unless the liability is held for trading In November 2013 the IASB amended
IFRS 9 to permit entities to early apply those requirements without applying the
other requirements of IFRS 9 at the same time
IN8 In July 2014 the IASB made limited amendments to the requirements in IFRS 9
for the classification and measurement of financial assets Those amendments
addressed a narrow range of application questions and introduced a fair value
through other comprehensive income’ measurement category for particular
simple debt instruments The introduction of that third measurement category
responded to feedback from interested parties including many insurance
companies that this is the most relevant measurement basis for financial assets
that are held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets
Impairment methodology
IN9 Also in July 2014 the IASB added to IFRS 9 the impairment requirements relating
to the accounting for an entity’s expected credit losses on its financial assets and
commitments to extend credit Those requirements eliminate the threshold
that was in IAS 39 for the recognition of credit losses Under the impairment
approach in IFRS 9 it is no longer necessary for a credit event to have occurred
before credit losses are recognised Instead an entity always accounts for
expected credit losses and changes in those expected credit losses The amount
of expected credit losses is updated at each reporting date to reflect changes in
IFRS 9
IFRS FoundationA322credit risk since initial recognition and consequently more timely information
is provided about expected credit losses
Hedge accounting
IN10 In November 2013 the IASB added to IFRS 9 the requirements related to hedge
accounting These requirements align hedge accounting more closely with risk
management establish a more principlebased approach to hedge accounting
and address inconsistencies and weaknesses in the hedge accounting model in
IAS 39 In its discussion of these general hedge accounting requirements the
IASB did not address specific accounting for open portfolios or macro hedging
Instead the IASB is discussing proposals for those items as part of its current
active agenda and in April 2014 published a Discussion Paper Accounting for
Dynamic Risk Management a Portfolio Revaluation Approach to Macro Hedging
Consequently the exception in IAS 39 for a fair value hedge of an interest rate
exposure of a portfolio of financial assets or financial liabilities continues to
apply The IASB also provided entities with an accounting policy choice between
applying the hedge accounting requirements of IFRS 9 or continuing to apply
the existing hedge accounting requirements in IAS 39 for all hedge accounting
because it had not yet completed its project on the accounting for macro
hedging
Other requirements
IN11 In addition to the three phases described above in March 2009 the IASB
published the Exposure Draft Derecognition (Proposed amendments to IAS 39 and
IFRS 7) However in June 2010 the IASB revised its strategy and work plan and
decided to retain the existing requirements in IAS 39 for the derecognition of
financial assets and financial liabilities but to finalise improved disclosure
requirements Those new disclosure requirements were issued in October 2010
as an amendment to IFRS 7 Financial Instruments Disclosures and had an effective
date of 1 July 2011 In October 2010 the requirements in IAS 39 for the
derecognition of financial assets and financial liabilities were carried forward
unchanged to IFRS 9
IN12 As a result of the added requirements described in paragraphs IN7 and IN11
IFRS 9 and its Basis for Conclusions (as issued in 2009) were restructured in 2010
Many paragraphs were renumbered and some were resequenced New
paragraphs were added to accommodate the guidance that was carried forward
unchanged from IAS 39 In addition new sections were added to IFRS 9
Otherwise the restructuring did not change the requirements in IFRS 9 (2009)
In addition the Basis for Conclusions on IFRS 9 was expanded in 2010 to include
material from the Basis for Conclusions on IAS 39 that discusses guidance that
was carried forward without being reconsidered Minor editorial changes were
made to that material
IN13 In 2014 as a result of the added requirements described in paragraph IN9
additional minor structural changes were made to the application guidance on
Chapter 5 (Measurement) of IFRS 9 Specifically the paragraphs related to the
measurement of investments in equity instruments and contracts on those
investments were renumbered as paragraphs B523–B526 These requirements
IFRS 9
IFRS Foundation A323were not otherwise changed This renumbering made it possible to add the
requirements for amortised cost and impairment as Sections 54 and 55
IFRS 9
IFRS FoundationA324International Financial Reporting Standard 9
Financial Instruments
Chapter 1 Objective
11 The objective of this Standard is to establish principles for the financial
reporting of financial assets and financial liabilities that will present relevant and
useful information to users of financial statements for their assessment of the
amounts timing and uncertainty of an entity’s future cash flows
Chapter 2 Scope
21 This Standard shall be applied by all entities to all types of financial
instruments except
(a) those interests in subsidiaries associates and joint ventures that
are accounted for in accordance with IFRS 10 Consolidated
Financial Statements IAS 27 Separate Financial Statements or
IAS 28 Investments in Associates and Joint Ventures However in
some cases IFRS 10 IAS 27 or IAS 28 require or permit an entity to
account for an interest in a subsidiary associate or joint venture
in accordance with some or all of the requirements of this
Standard Entities shall also apply this Standard to derivatives on
an interest in a subsidiary associate or joint venture unless the
derivative meets the definition of an equity instrument of the
entity in IAS 32 Financial Instruments Presentation
(b) rights and obligations under leases to which IFRS 16 Leases
applies However
(i) finance lease receivables (ie net investments in finance
leases) and operating lease receivables recognised by a
lessor are subject to the derecognition and impairment
requirements of this Standard
(ii) lease liabilities recognised by a lessee are subject to the
derecognition requirements in paragraph 331 of this
Standard and
(iii) derivatives that are embedded in leases are subject to the
embedded derivatives requirements of this Standard
(c) employers’ rights and obligations under employee benefit plans
to which IAS 19 Employee Benefits applies
(d) financial instruments issued by the entity that meet the definition
of an equity instrument in IAS 32 (including options and warrants)
or that are required to be classified as an equity instrument in
accordance with paragraphs 16A and 16B or paragraphs 16C
and 16D of IAS 32 However the holder of such equity instruments
shall apply this Standard to those instruments unless they meet
the exception in (a)
IFRS 9
IFRS Foundation A325(e) rights and obligations arising under (i) an insurance contract as
defined in IFRS 4 Insurance Contracts other than an issuer’s rights
and obligations arising under an insurance contract that meets
the definition of a financial guarantee contract or (ii) a contract
that is within the scope of IFRS 4 because it contains a
discretionary participation feature However this Standard
applies to a derivative that is embedded in a contract within the
scope of IFRS 4 if the derivative is not itself a contract within the
scope of IFRS 4 Moreover if an issuer of financial guarantee
contracts has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting that is
applicable to insurance contracts the issuer may elect to apply
either this Standard or IFRS 4 to such financial guarantee
contracts (see paragraphs B25–B26) The issuer may make that
election contract by contract but the election for each contract is
irrevocable
(f) any forward contract between an acquirer and a selling
shareholder to buy or sell an acquiree that will result in a business
combination within the scope of IFRS 3 Business Combinations at
a future acquisition date The term of the forward contract should
not exceed a reasonable period normally necessary to obtain any
required approvals and to complete the transaction
(g) loan commitments other than those loan commitments described
in paragraph 23 However an issuer of loan commitments shall
apply the impairment requirements of this Standard to loan
commitments that are not otherwise within the scope of this
Standard Also all loan commitments are subject to the
derecognition requirements of this Standard
(h) financial instruments contracts and obligations under
sharebased payment transactions to which IFRS 2 Sharebased
Payment applies except for contracts within the scope of
paragraphs 24–27 of this Standard to which this Standard applies
(i) rights to payments to reimburse the entity for expenditure that it
is required to make to settle a liability that it recognises as a
provision in accordance with IAS 37 Provisions Contingent
Liabilities and Contingent Assets or for which in an earlier
period it recognised a provision in accordance with IAS 37
(j) rights and obligations within the scope of IFRS 15 Revenue from
Contracts with Customers that are financial instruments except
for those that IFRS 15 specifies are accounted for in accordance
with this Standard
22 The impairment requirements of this Standard shall be applied to those
rights that IFRS 15 specifies are accounted for in accordance with this
Standard for the purposes of recognising impairment gains or losses
23 The following loan commitments are within the scope of this Standard
IFRS 9
IFRS FoundationA326(a) loan commitments that the entity designates as financial
liabilities at fair value through profit or loss (see paragraph 422)
An entity that has a past practice of selling the assets resulting
from its loan commitments shortly after origination shall apply
this Standard to all its loan commitments in the same class
(b) loan commitments that can be settled net in cash or by delivering
or issuing another financial instrument These loan commitments
are derivatives A loan commitment is not regarded as settled net
merely because the loan is paid out in instalments (for example a
mortgage construction loan that is paid out in instalments in line
with the progress of construction)
(c) commitments to provide a loan at a belowmarket interest rate
(see paragraph 421(d))
24 This Standard shall be applied to those contracts to buy or sell a
nonfinancial item that can be settled net in cash or another financial
instrument or by exchanging financial instruments as if the contracts
were financial instruments with the exception of contracts that were
entered into and continue to be held for the purpose of the receipt or
delivery of a nonfinancial item in accordance with the entity’s expected
purchase sale or usage requirements However this Standard shall be
applied to those contracts that an entity designates as measured at fair
value through profit or loss in accordance with paragraph 25
25 A contract to buy or sell a nonfinancial item that can be settled net in
cash or another financial instrument or by exchanging financial
instruments as if the contract was a financial instrument may be
irrevocably designated as measured at fair value through profit or loss
even if it was entered into for the purpose of the receipt or delivery of a
nonfinancial item in accordance with the entity’s expected purchase sale
or usage requirements This designation is available only at inception of
the contract and only if it eliminates or significantly reduces a
recognition inconsistency (sometimes referred to as an accounting
mismatch’) that would otherwise arise from not recognising that contract
because it is excluded from the scope of this Standard (see paragraph 24)
26 There are various ways in which a contract to buy or sell a nonfinancial item
can be settled net in cash or another financial instrument or by exchanging
financial instruments These include
(a) when the terms of the contract permit either party to settle it net in cash
or another financial instrument or by exchanging financial instruments
(b) when the ability to settle net in cash or another financial instrument or
by exchanging financial instruments is not explicit in the terms of the
contract but the entity has a practice of settling similar contracts net in
cash or another financial instrument or by exchanging financial
instruments (whether with the counterparty by entering into offsetting
contracts or by selling the contract before its exercise or lapse)
IFRS 9
IFRS Foundation A327(c) when for similar contracts the entity has a practice of taking delivery of
the underlying and selling it within a short period after delivery for the
purpose of generating a profit from shortterm fluctuations in price or
dealer’s margin and
(d) when the nonfinancial item that is the subject of the contract is readily
convertible to cash
A contract to which (b) or (c) applies is not entered into for the purpose of the
receipt or delivery of the nonfinancial item in accordance with the entity’s
expected purchase sale or usage requirements and accordingly is within the
scope of this Standard Other contracts to which paragraph 24 applies are
evaluated to determine whether they were entered into and continue to be held
for the purpose of the receipt or delivery of the nonfinancial item in accordance
with the entity’s expected purchase sale or usage requirements and
accordingly whether they are within the scope of this Standard
27 A written option to buy or sell a nonfinancial item that can be settled net in
cash or another financial instrument or by exchanging financial instruments
in accordance with paragraph 26(a) or 26(d) is within the scope of this
Standard Such a contract cannot be entered into for the purpose of the receipt
or delivery of the nonfinancial item in accordance with the entity’s expected
purchase sale or usage requirements
Chapter 3 Recognition and derecognition
31 Initial recognition
311 An entity shall recognise a financial asset or a financial liability in its
statement of financial position when and only when the entity becomes
party to the contractual provisions of the instrument (see
paragraphs B311 and B312) When an entity first recognises a financial
asset it shall classify it in accordance with paragraphs 411–415 and
measure it in accordance with paragraphs 511–513 When an entity first
recognises a financial liability it shall classify it in accordance with
paragraphs 421 and 422 and measure it in accordance with
paragraph 511
Regular way purchase or sale of financial assets
312 A regular way purchase or sale of financial assets shall be recognised and
derecognised as applicable using trade date accounting or settlement
date accounting (see paragraphs B313–B316)
32 Derecognition of financial assets
321 In consolidated financial statements paragraphs 322–329 B311 B312 and
B321–B3217 are applied at a consolidated level Hence an entity first
consolidates all subsidiaries in accordance with IFRS 10 and then applies those
paragraphs to the resulting group
322 Before evaluating whether and to what extent derecognition is
appropriate under paragraphs 323–329 an entity determines whether
IFRS 9
IFRS FoundationA328those paragraphs should be applied to a part of a financial asset (or a part
of a group of similar financial assets) or a financial asset (or a group of
similar financial assets) in its entirety as follows
(a) Paragraphs 323–329 are applied to a part of a financial asset (or a
part of a group of similar financial assets) if and only if the part
being considered for derecognition meets one of the following
three conditions
(i) The part comprises only specifically identified cash flows
from a financial asset (or a group of similar financial
assets) For example when an entity enters into an interest
rate strip whereby the counterparty obtains the right to the
interest cash flows but not the principal cash flows from a
debt instrument paragraphs 323–329 are applied to the
interest cash flows
(ii) The part comprises only a fully proportionate (pro rata)
share of the cash flows from a financial asset (or a group of
similar financial assets) For example when an entity
enters into an arrangement whereby the counterparty
obtains the rights to a 90 per cent share of all cash flows of a
debt instrument paragraphs 323–329 are applied to
90 per cent of those cash flows If there is more than one
counterparty each counterparty is not required to have a
proportionate share of the cash flows provided that the
transferring entity has a fully proportionate share
(iii) The part comprises only a fully proportionate (pro rata)
share of specifically identified cash flows from a financial
asset (or a group of similar financial assets) For example
when an entity enters into an arrangement whereby the
counterparty obtains the rights to a 90 per cent share of
interest cash flows from a financial asset paragraphs
323–329 are applied to 90 per cent of those interest cash
flows If there is more than one counterparty each
counterparty is not required to have a proportionate share
of the specifically identified cash flows provided that the
transferring entity has a fully proportionate share
(b) In all other cases paragraphs 323–329 are applied to the
financial asset in its entirety (or to the group of similar financial
assets in their entirety) For example when an entity transfers
(i) the rights to the first or the last 90 per cent of cash collections
from a financial asset (or a group of financial assets) or (ii) the
rights to 90 per cent of the cash flows from a group of receivables
but provides a guarantee to compensate the buyer for any credit
losses up to 8 per cent of the principal amount of the receivables
paragraphs 323–329 are applied to the financial asset (or a group
of similar financial assets) in its entirety
In paragraphs 323–3212 the term financial asset’ refers to either a part
of a financial asset (or a part of a group of similar financial assets) as
IFRS 9
IFRS Foundation A329identified in (a) above or otherwise a financial asset (or a group of
similar financial assets) in its entirety
323 An entity shall derecognise a financial asset when and only when
(a) the contractual rights to the cash flows from the financial asset
expire or
(b) it transfers the financial asset as set out in paragraphs 324 and
325 and the transfer qualifies for derecognition in accordance
with paragraph 326
(See paragraph 312 for regular way sales of financial assets)
324 An entity transfers a financial asset if and only if it either
(a) transfers the contractual rights to receive the cash flows of the
financial asset or
(b) retains the contractual rights to receive the cash flows of the
financial asset but assumes a contractual obligation to pay the
cash flows to one or more recipients in an arrangement that meets
the conditions in paragraph 325
325 When an entity retains the contractual rights to receive the cash flows of
a financial asset (the original asset’) but assumes a contractual
obligation to pay those cash flows to one or more entities (the eventual
recipients’) the entity treats the transaction as a transfer of a financial
asset if and only if all of the following three conditions are met
(a) The entity has no obligation to pay amounts to the eventual
recipients unless it collects equivalent amounts from the original
asset Shortterm advances by the entity with the right of full
recovery of the amount lent plus accrued interest at market rates
do not violate this condition
(b) The entity is prohibited by the terms of the transfer contract from
selling or pledging the original asset other than as security to the
eventual recipients for the obligation to pay them cash flows
(c) The entity has an obligation to remit any cash flows it collects on
behalf of the eventual recipients without material delay In
addition the entity is not entitled to reinvest such cash flows
except for investments in cash or cash equivalents (as defined in
IAS 7 Statement of Cash Flows) during the short settlement period
from the collection date to the date of required remittance to the
eventual recipients and interest earned on such investments is
passed to the eventual recipients
326 When an entity transfers a financial asset (see paragraph 324) it shall
evaluate the extent to which it retains the risks and rewards of ownership
of the financial asset In this case
IFRS 9
IFRS FoundationA330(a) if the entity transfers substantially all the risks and rewards of
ownership of the financial asset the entity shall derecognise the
financial asset and recognise separately as assets or liabilities any
rights and obligations created or retained in the transfer
(b) if the entity retains substantially all the risks and rewards of
ownership of the financial asset the entity shall continue to
recognise the financial asset
(c) if the entity neither transfers nor retains substantially all the risks
and rewards of ownership of the financial asset the entity shall
determine whether it has retained control of the financial asset
In this case
(i) if the entity has not retained control it shall derecognise
the financial asset and recognise separately as assets or
liabilities any rights and obligations created or retained in
the transfer
(ii) if the entity has retained control it shall continue to
recognise the financial asset to the extent of its continuing
involvement in the financial asset (see paragraph 3216)
327 The transfer of risks and rewards (see paragraph 326) is evaluated by comparing
the entity’s exposure before and after the transfer with the variability in the
amounts and timing of the net cash flows of the transferred asset An entity has
retained substantially all the risks and rewards of ownership of a financial asset
if its exposure to the variability in the present value of the future net cash flows
from the financial asset does not change significantly as a result of the transfer
(eg because the entity has sold a financial asset subject to an agreement to buy it
back at a fixed price or the sale price plus a lender’s return) An entity has
transferred substantially all the risks and rewards of ownership of a financial
asset if its exposure to such variability is no longer significant in relation to the
total variability in the present value of the future net cash flows associated with
the financial asset (eg because the entity has sold a financial asset subject only to
an option to buy it back at its fair value at the time of repurchase or has
transferred a fully proportionate share of the cash flows from a larger financial
asset in an arrangement such as a loan subparticipation that meets the
conditions in paragraph 325)
328 Often it will be obvious whether the entity has transferred or retained
substantially all risks and rewards of ownership and there will be no need to
perform any computations In other cases it will be necessary to compute and
compare the entity’s exposure to the variability in the present value of the
future net cash flows before and after the transfer The computation and
comparison are made using as the discount rate an appropriate current market
interest rate All reasonably possible variability in net cash flows is considered
with greater weight being given to those outcomes that are more likely to occur
329 Whether the entity has retained control (see paragraph 326(c)) of the
transferred asset depends on the transferee’s ability to sell the asset If the
transferee has the practical ability to sell the asset in its entirety to an unrelated
third party and is able to exercise that ability unilaterally and without needing
IFRS 9
IFRS Foundation A331to impose additional restrictions on the transfer the entity has not retained
control In all other cases the entity has retained control
Transfers that qualify for derecognition
3210 If an entity transfers a financial asset in a transfer that qualifies for
derecognition in its entirety and retains the right to service the financial
asset for a fee it shall recognise either a servicing asset or a servicing
liability for that servicing contract If the fee to be received is not
expected to compensate the entity adequately for performing the
servicing a servicing liability for the servicing obligation shall be
recognised at its fair value If the fee to be received is expected to be more
than adequate compensation for the servicing a servicing asset shall be
recognised for the servicing right at an amount determined on the basis
of an allocation of the carrying amount of the larger financial asset in
accordance with paragraph 3213
3211 If as a result of a transfer a financial asset is derecognised in its entirety
but the transfer results in the entity obtaining a new financial asset or
assuming a new financial liability or a servicing liability the entity shall
recognise the new financial asset financial liability or servicing liability
at fair value
3212 On derecognition of a financial asset in its entirety the difference
between
(a) the carrying amount (measured at the date of derecognition) and
(b) the consideration received (including any new asset obtained less
any new liability assumed)
shall be recognised in profit or loss
3213 If the transferred asset is part of a larger financial asset (eg when an
entity transfers interest cash flows that are part of a debt instrument see
paragraph 322(a)) and the part transferred qualifies for derecognition in
its entirety the previous carrying amount of the larger financial asset
shall be allocated between the part that continues to be recognised and
the part that is derecognised on the basis of the relative fair values of
those parts on the date of the transfer For this purpose a retained
servicing asset shall be treated as a part that continues to be recognised
The difference between
(a) the carrying amount (measured at the date of derecognition)
allocated to the part derecognised and
(b) the consideration received for the part derecognised (including
any new asset obtained less any new liability assumed)
shall be recognised in profit or loss
3214 When an entity allocates the previous carrying amount of a larger financial asset
between the part that continues to be recognised and the part that is
derecognised the fair value of the part that continues to be recognised needs to
be measured When the entity has a history of selling parts similar to the part
that continues to be recognised or other market transactions exist for such
IFRS 9
IFRS FoundationA332parts recent prices of actual transactions provide the best estimate of its fair
value When there are no price quotes or recent market transactions to support
the fair value of the part that continues to be recognised the best estimate of the
fair value is the difference between the fair value of the larger financial asset as
a whole and the consideration received from the transferee for the part that is
derecognised
Transfers that do not qualify for derecognition
3215 If a transfer does not result in derecognition because the entity has
retained substantially all the risks and rewards of ownership of the
transferred asset the entity shall continue to recognise the transferred
asset in its entirety and shall recognise a financial liability for the
consideration received In subsequent periods the entity shall recognise
any income on the transferred asset and any expense incurred on the
financial liability
Continuing involvement in transferred assets
3216 If an entity neither transfers nor retains substantially all the risks and
rewards of ownership of a transferred asset and retains control of the
transferred asset the entity continues to recognise the transferred asset
to the extent of its continuing involvement The extent of the entity’s
continuing involvement in the transferred asset is the extent to which it
is exposed to changes in the value of the transferred asset For example
(a) When the entity’s continuing involvement takes the form of
guaranteeing the transferred asset the extent of the entity’s
continuing involvement is the lower of (i) the amount of the asset
and (ii) the maximum amount of the consideration received that
the entity could be required to repay (the guarantee amount’)
(b) When the entity’s continuing involvement takes the form of a
written or purchased option (or both) on the transferred asset the
extent of the entity’s continuing involvement is the amount of the
transferred asset that the entity may repurchase However in the
case of a written put option on an asset that is measured at fair
value the extent of the entity’s continuing involvement is limited
to the lower of the fair value of the transferred asset and the
option exercise price (see paragraph B3213)
(c) When the entity’s continuing involvement takes the form of a
cashsettled option or similar provision on the transferred asset
the extent of the entity’s continuing involvement is measured in
the same way as that which results from noncash settled options
as set out in (b) above
3217 When an entity continues to recognise an asset to the extent of its
continuing involvement the entity also recognises an associated liability
Despite the other measurement requirements in this Standard the
transferred asset and the associated liability are measured on a basis that
reflects the rights and obligations that the entity has retained The
IFRS 9
IFRS Foundation A333associated liability is measured in such a way that the net carrying
amount of the transferred asset and the associated liability is
(a) the amortised cost of the rights and obligations retained by the
entity if the transferred asset is measured at amortised cost or
(b) equal to the fair value of the rights and obligations retained by the
entity when measured on a standalone basis if the transferred
asset is measured at fair value
3218 The entity shall continue to recognise any income arising on the
transferred asset to the extent of its continuing involvement and shall
recognise any expense incurred on the associated liability
3219 For the purpose of subsequent measurement recognised changes in the
fair value of the transferred asset and the associated liability are
accounted for consistently with each other in accordance
with paragraph 571 and shall not be offset
3220 If an entity’s continuing involvement is in only a part of a financial asset
(eg when an entity retains an option to repurchase part of a transferred
asset or retains a residual interest that does not result in the retention of
substantially all the risks and rewards of ownership and the entity retains
control) the entity allocates the previous carrying amount of the
financial asset between the part it continues to recognise under
continuing involvement and the part it no longer recognises on the basis
of the relative fair values of those parts on the date of the transfer For
this purpose the requirements of paragraph 3214 apply The difference
between
(a) the carrying amount (measured at the date of derecognition)
allocated to the part that is no longer recognised and
(b) the consideration received for the part no longer recognised
shall be recognised in profit or loss
3221 If the transferred asset is measured at amortised cost the option in this
Standard to designate a financial liability as at fair value through profit or loss is
not applicable to the associated liability
All transfers
3222 If a transferred asset continues to be recognised the asset and the
associated liability shall not be offset Similarly the entity shall not
offset any income arising from the transferred asset with any expense
incurred on the associated liability (see paragraph 42 of IAS 32)
3223 If a transferor provides noncash collateral (such as debt or equity
instruments) to the transferee the accounting for the collateral by the
transferor and the transferee depends on whether the transferee has the
right to sell or repledge the collateral and on whether the transferor has
defaulted The transferor and transferee shall account for the collateral
as follows
IFRS 9
IFRS FoundationA334(a) If the transferee has the right by contract or custom to sell or
repledge the collateral then the transferor shall reclassify that
asset in its statement of financial position (eg as a loaned asset
pledged equity instruments or repurchase receivable) separately
from other assets
(b) If the transferee sells collateral pledged to it it shall recognise the
proceeds from the sale and a liability measured at fair value for its
obligation to return the collateral
(c) If the transferor defaults under the terms of the contract and is no
longer entitled to redeem the collateral it shall derecognise the
collateral and the transferee shall recognise the collateral as its
asset initially measured at fair value or if it has already sold the
collateral derecognise its obligation to return the collateral
(d) Except as provided in (c) the transferor shall continue to carry the
collateral as its asset and the transferee shall not recognise the
collateral as an asset
33 Derecognition of financial liabilities
331 An entity shall remove a financial liability (or a part of a financial
liability) from its statement of financial position when and only when it
is extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires
332 An exchange between an existing borrower and lender of debt
instruments with substantially different terms shall be accounted for as
an extinguishment of the original financial liability and the recognition
of a new financial liability Similarly a substantial modification of the
terms of an existing financial liability or a part of it (whether or not
attributable to the financial difficulty of the debtor) shall be accounted
for as an extinguishment of the original financial liability and the
recognition of a new financial liability
333 The difference between the carrying amount of a financial liability (or
part of a financial liability) extinguished or transferred to another party
and the consideration paid including any noncash assets transferred or
liabilities assumed shall be recognised in profit or loss
334 If an entity repurchases a part of a financial liability the entity shall allocate the
previous carrying amount of the financial liability between the part that
continues to be recognised and the part that is derecognised based on the
relative fair values of those parts on the date of the repurchase The difference
between (a) the carrying amount allocated to the part derecognised and (b) the
consideration paid including any noncash assets transferred or liabilities
assumed for the part derecognised shall be recognised in profit or loss
IFRS 9
IFRS Foundation A335Chapter 4 Classification
41 Classification of financial assets
411 Unless paragraph 415 applies an entity shall classify financial assets as
subsequently measured at amortised cost fair value through other
comprehensive income or fair value through profit or loss on the basis of
both
(a) the entity’s business model for managing the financial assets and
(b) the contractual cash flow characteristics of the financial asset
412 A financial asset shall be measured at amortised cost if both of the
following conditions are met
(a) the financial asset is held within a business model whose objective
is to hold financial assets in order to collect contractual cash flows
and
(b) the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding
Paragraphs B411–B4126 provide guidance on how to apply these
conditions
412A A financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met
(a) the financial asset is held within a business model whose objective
is achieved by both collecting contractual cash flows and selling
financial assets and
(b) the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding
Paragraphs B411–B4126 provide guidance on how to apply these
conditions
413 For the purpose of applying paragraphs 412(b) and 412A(b)
(a) principal is the fair value of the financial asset at initial
recognition Paragraph B417B provides additional guidance on
the meaning of principal
(b) interest consists of consideration for the time value of money for
the credit risk associated with the principal amount outstanding
during a particular period of time and for other basic lending
risks and costs as well as a profit margin Paragraphs B417A
and B419A–B419E provide additional guidance on the meaning
of interest including the meaning of the time value of money
414 A financial asset shall be measured at fair value through profit or loss
unless it is measured at amortised cost in accordance with
paragraph 412 or at fair value through other comprehensive income in
IFRS 9
IFRS FoundationA336accordance with paragraph 412A However an entity may make an
irrevocable election at initial recognition for particular investments in
equity instruments that would otherwise be measured at fair value
through profit or loss to present subsequent changes in fair value in
other comprehensive income (see paragraphs 575–576)
Option to designate a financial asset at fair value
through profit or loss
415 Despite paragraphs 411–414 an entity may at initial recognition
irrevocably designate a financial asset as measured at fair value through
profit or loss if doing so eliminates or significantly reduces a
measurement or recognition inconsistency (sometimes referred to as an
accounting mismatch’) that would otherwise arise from measuring assets
or liabilities or recognising the gains and losses on them on different
bases (see paragraphs B4129–B4132)
42 Classification of financial liabilities
421 An entity shall classify all financial liabilities as subsequently measured
at amortised cost except for
(a) financial liabilities at fair value through profit or loss Such
liabilities including derivatives that are liabilities shall be
subsequently measured at fair value
(b) financial liabilities that arise when a transfer of a financial asset
does not qualify for derecognition or when the continuing
involvement approach applies Paragraphs 3215 and 3217 apply
to the measurement of such financial liabilities
(c) financial guarantee contracts After initial recognition an issuer
of such a contract shall (unless paragraph 421(a) or (b) applies)
subsequently measure it at the higher of
(i) the amount of the loss allowance determined in accordance
with Section 55 and
(ii) the amount initially recognised (see paragraph 511) less
when appropriate the cumulative amount of income
recognised in accordance with the principles of IFRS 15
(d) commitments to provide a loan at a belowmarket interest rate
An issuer of such a commitment shall (unless paragraph 421(a)
applies) subsequently measure it at the higher of
(i) the amount of the loss allowance determined in accordance
with Section 55 and
(ii) the amount initially recognised (see paragraph 511) less
when appropriate the cumulative amount of income
recognised in accordance with the principles of IFRS 15
IFRS 9
IFRS Foundation A337(e) contingent consideration recognised by an acquirer in a business
combination to which IFRS 3 applies Such contingent
consideration shall subsequently be measured at fair value with
changes recognised in profit or loss
Option to designate a financial liability at fair value
through profit or loss
422 An entity may at initial recognition irrevocably designate a financial
liability as measured at fair value through profit or loss when permitted
by paragraph 435 or when doing so results in more relevant
information because either
(a) it eliminates or significantly reduces a measurement or
recognition inconsistency (sometimes referred to as an
accounting mismatch’) that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them on
different bases (see paragraphs B4129–B4132) or
(b) a group of financial liabilities or financial assets and financial
liabilities is managed and its performance is evaluated on a fair
value basis in accordance with a documented risk management or
investment strategy and information about the group is provided
internally on that basis to the entity’s key management personnel
(as defined in IAS 24 Related Party Disclosures) for example the
entity’s board of directors and chief executive officer (see
paragraphs B4133–B4136)
43 Embedded derivatives
431 An embedded derivative is a component of a hybrid contract that also includes a
nonderivative host—with the effect that some of the cash flows of the combined
instrument vary in a way similar to a standalone derivative An embedded
derivative causes some or all of the cash flows that otherwise would be required
by the contract to be modified according to a specified interest rate financial
instrument price commodity price foreign exchange rate index of prices or
rates credit rating or credit index or other variable provided in the case of a
nonfinancial variable that the variable is not specific to a party to the contract
A derivative that is attached to a financial instrument but is contractually
transferable independently of that instrument or has a different counterparty
is not an embedded derivative but a separate financial instrument
Hybrid contracts with financial asset hosts
432 If a hybrid contract contains a host that is an asset within the scope of
this Standard an entity shall apply the requirements in
paragraphs 411–415 to the entire hybrid contract
Other hybrid contracts
433 If a hybrid contract contains a host that is not an asset within the scope of
this Standard an embedded derivative shall be separated from the host
and accounted for as a derivative under this Standard if and only if
IFRS 9
IFRS FoundationA338(a) the economic characteristics and risks of the embedded derivative
are not closely related to the economic characteristics and risks of
the host (see paragraphs B435 and B438)
(b) a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative and
(c) the hybrid contract is not measured at fair value with changes in
fair value recognised in profit or loss (ie a derivative that is
embedded in a financial liability at fair value through profit or
loss is not separated)
434 If an embedded derivative is separated the host contract shall be
accounted for in accordance with the appropriate Standards This
Standard does not address whether an embedded derivative shall be
presented separately in the statement of financial position
435 Despite paragraphs 433 and 434 if a contract contains one or more
embedded derivatives and the host is not an asset within the scope of this
Standard an entity may designate the entire hybrid contract as at fair
value through profit or loss unless
(a) the embedded derivative(s) do(es) not significantly modify the cash
flows that otherwise would be required by the contract or
(b) it is clear with little or no analysis when a similar hybrid
instrument is first considered that separation of the embedded
derivative(s) is prohibited such as a prepayment option embedded
in a loan that permits the holder to prepay the loan for
approximately its amortised cost
436 If an entity is required by this Standard to separate an embedded
derivative from its host but is unable to measure the embedded
derivative separately either at acquisition or at the end of a subsequent
financial reporting period it shall designate the entire hybrid contract as
at fair value through profit or loss
437 If an entity is unable to measure reliably the fair value of an embedded
derivative on the basis of its terms and conditions the fair value of the
embedded derivative is the difference between the fair value of the hybrid
contract and the fair value of the host If the entity is unable to measure the fair
value of the embedded derivative using this method paragraph 436 applies and
the hybrid contract is designated as at fair value through profit or loss
44 Reclassification
441 When and only when an entity changes its business model for managing
financial assets it shall reclassify all affected financial assets in
accordance with paragraphs 411–414 See paragraphs 561–567
B441–B443 and B561–B562 for additional guidance on reclassifying
financial assets
442 An entity shall not reclassify any financial liability
IFRS 9
IFRS Foundation A339443 The following changes in circumstances are not reclassifications for the
purposes of paragraphs 441–442
(a) an item that was previously a designated and effective hedging
instrument in a cash flow hedge or net investment hedge no longer
qualifies as such
(b) an item becomes a designated and effective hedging instrument in a cash
flow hedge or net investment hedge and
(c) changes in measurement in accordance with Section 67
Chapter 5 Measurement
51 Initial measurement
511 Except for trade receivables within the scope of paragraph 513 at initial
recognition an entity shall measure a financial asset or financial liability
at its fair value plus or minus in the case of a financial asset or financial
liability not at fair value through profit or loss transaction costs that are
directly attributable to the acquisition or issue of the financial asset or
financial liability
511A However if the fair value of the financial asset or financial liability at
initial recognition differs from the transaction price an entity shall
apply paragraph B512A
512 When an entity uses settlement date accounting for an asset that is subsequently
measured at amortised cost the asset is recognised initially at its fair value on
the trade date (see paragraphs B313–B316)
513 Despite the requirement in paragraph 511 at initial recognition an entity
shall measure trade receivables at their transaction price (as defined in IFRS 15)
if the trade receivables do not contain a significant financing component in
accordance with IFRS 15 (or when the entity applies the practical expedient in
accordance with paragraph 63 of IFRS 15)
52 Subsequent measurement of financial assets
521 After initial recognition an entity shall measure a financial asset in
accordance with paragraphs 411–415 at
(a) amortised cost
(b) fair value through other comprehensive income or
(c) fair value through profit or loss
522 An entity shall apply the impairment requirements in Section 55 to
financial assets that are measured at amortised cost in accordance with
paragraph 412 and to financial assets that are measured at fair value
through other comprehensive income in accordance with
paragraph 412A
523 An entity shall apply the hedge accounting requirements in
paragraphs 658–6514 (and if applicable paragraphs 89–94 of IAS 39
IFRS 9
IFRS FoundationA340Financial Instruments Recognition and Measurement for the fair value
hedge accounting for a portfolio hedge of interest rate risk) to a financial
asset that is designated as a hedged item1
53 Subsequent measurement of financial liabilities
531 After initial recognition an entity shall measure a financial liability in
accordance with paragraphs 421–422
532 An entity shall apply the hedge accounting requirements in
paragraphs 658–6514 (and if applicable paragraphs 89–94 of IAS 39 for
the fair value hedge accounting for a portfolio hedge of interest rate risk)
to a financial liability that is designated as a hedged item
54 Amortised cost measurement
Financial assets
Effective interest method
541 Interest revenue shall be calculated by using the effective interest method
(see Appendix A and paragraphs B541–B547) This shall be calculated by
applying the effective interest rate to the gross carrying amount of a
financial asset except for
(a) purchased or originated creditimpaired financial assets For
those financial assets the entity shall apply the creditadjusted
effective interest rate to the amortised cost of the financial asset
from initial recognition
(b) financial assets that are not purchased or originated
creditimpaired financial assets but subsequently have become
creditimpaired financial assets For those financial assets the
entity shall apply the effective interest rate to the amortised cost
of the financial asset in subsequent reporting periods
542 An entity that in a reporting period calculates interest revenue by applying the
effective interest method to the amortised cost of a financial asset in accordance
with paragraph 541(b) shall in subsequent reporting periods calculate the
interest revenue by applying the effective interest rate to the gross carrying
amount if the credit risk on the financial instrument improves so that the
financial asset is no longer creditimpaired and the improvement can be related
objectively to an event occurring after the requirements in paragraph 541(b)
were applied (such as an improvement in the borrower’s credit rating)
1 In accordance with paragraph 7221 an entity may choose as its accounting policy to continue to
apply the hedge accounting requirements in IAS 39 instead of the requirements in Chapter 6 of this
Standard If an entity has made this election the references in this Standard to particular hedge
accounting requirements in Chapter 6 are not relevant Instead the entity applies the relevant
hedge accounting requirements in IAS 39
IFRS 9
IFRS Foundation A341Modification of contractual cash flows
543 When the contractual cash flows of a financial asset are renegotiated or
otherwise modified and the renegotiation or modification does not result in the
derecognition of that financial asset in accordance with this Standard an entity
shall recalculate the gross carrying amount of the financial asset and shall
recognise a modification gain or loss in profit or loss The gross carrying amount of
the financial asset shall be recalculated as the present value of the renegotiated
or modified contractual cash flows that are discounted at the financial asset’s
original effective interest rate (or creditadjusted effective interest rate for
purchased or originated creditimpaired financial assets) or when applicable
the revised effective interest rate calculated in accordance with
paragraph 6510 Any costs or fees incurred adjust the carrying amount of the
modified financial asset and are amortised over the remaining term of the
modified financial asset
Writeoff
544 An entity shall directly reduce the gross carrying amount of a financial
asset when the entity has no reasonable expectations of recovering a
financial asset in its entirety or a portion thereof A writeoff constitutes
a derecognition event (see paragraph B3216(r))
55 Impairment
Recognition of expected credit losses
General approach
551 An entity shall recognise a loss allowance for expected credit losses on a
financial asset that is measured in accordance with paragraphs 412 or
412A a lease receivable a contract asset or a loan commitment and a
financial guarantee contract to which the impairment requirements
apply in accordance with paragraphs 21(g) 421(c) or 421(d)
552 An entity shall apply the impairment requirements for the recognition and
measurement of a loss allowance for financial assets that are measured at fair
value through other comprehensive income in accordance with
paragraph 412A However the loss allowance shall be recognised in other
comprehensive income and shall not reduce the carrying amount of the
financial asset in the statement of financial position
553 Subject to paragraphs 5513–5516 at each reporting date an entity shall
measure the loss allowance for a financial instrument at an amount
equal to the lifetime expected credit losses if the credit risk on that
financial instrument has increased significantly since initial recognition
554 The objective of the impairment requirements is to recognise lifetime expected
credit losses for all financial instruments for which there have been significant
increases in credit risk since initial recognition — whether assessed on an
individual or collective basis — considering all reasonable and supportable
information including that which is forwardlooking
IFRS 9
IFRS FoundationA342555 Subject to paragraphs 5513–5516 if at the reporting date the credit risk
on a financial instrument has not increased significantly since initial
recognition an entity shall measure the loss allowance for that financial
instrument at an amount equal to 12month expected credit losses
556 For loan commitments and financial guarantee contracts the date that the
entity becomes a party to the irrevocable commitment shall be considered to be
the date of initial recognition for the purposes of applying the impairment
requirements
557 If an entity has measured the loss allowance for a financial instrument at an
amount equal to lifetime expected credit losses in the previous reporting period
but determines at the current reporting date that paragraph 553 is no longer
met the entity shall measure the loss allowance at an amount equal to
12month expected credit losses at the current reporting date
558 An entity shall recognise in profit or loss as an impairment gain or loss the
amount of expected credit losses (or reversal) that is required to adjust the loss
allowance at the reporting date to the amount that is required to be recognised
in accordance with this Standard
Determining significant increases in credit risk
559 At each reporting date an entity shall assess whether the credit risk on a
financial instrument has increased significantly since initial recognition When
making the assessment an entity shall use the change in the risk of a default
occurring over the expected life of the financial instrument instead of the
change in the amount of expected credit losses To make that assessment an
entity shall compare the risk of a default occurring on the financial instrument
as at the reporting date with the risk of a default occurring on the financial
instrument as at the date of initial recognition and consider reasonable and
supportable information that is available without undue cost or effort that is
indicative of significant increases in credit risk since initial recognition
5510 An entity may assume that the credit risk on a financial instrument has not
increased significantly since initial recognition if the financial instrument is
determined to have low credit risk at the reporting date (see
paragraphs B5522‒B5524)
5511 If reasonable and supportable forwardlooking information is available without
undue cost or effort an entity cannot rely solely on past due information when
determining whether credit risk has increased significantly since initial
recognition However when information that is more forwardlooking than past
due status (either on an individual or a collective basis) is not available without
undue cost or effort an entity may use past due information to determine
whether there have been significant increases in credit risk since initial
recognition Regardless of the way in which an entity assesses significant
increases in credit risk there is a rebuttable presumption that the credit risk on
a financial asset has increased significantly since initial recognition when
contractual payments are more than 30 days past due An entity can rebut this
presumption if the entity has reasonable and supportable information that is
available without undue cost or effort that demonstrates that the credit risk has
not increased significantly since initial recognition even though the contractual
IFRS 9
IFRS Foundation A343payments are more than 30 days past due When an entity determines that
there have been significant increases in credit risk before contractual payments
are more than 30 days past due the rebuttable presumption does not apply
Modified financial assets
5512 If the contractual cash flows on a financial asset have been renegotiated or
modified and the financial asset was not derecognised an entity shall assess
whether there has been a significant increase in the credit risk of the financial
instrument in accordance with paragraph 553 by comparing
(a) the risk of a default occurring at the reporting date (based on the
modified contractual terms) and
(b) the risk of a default occurring at initial recognition (based on the
original unmodified contractual terms)
Purchased or originated creditimpaired financial assets
5513 Despite paragraphs 553 and 555 at the reporting date an entity shall
only recognise the cumulative changes in lifetime expected credit losses
since initial recognition as a loss allowance for purchased or originated
creditimpaired financial assets
5514 At each reporting date an entity shall recognise in profit or loss the amount of
the change in lifetime expected credit losses as an impairment gain or loss An
entity shall recognise favourable changes in lifetime expected credit losses as an
impairment gain even if the lifetime expected credit losses are less than the
amount of expected credit losses that were included in the estimated cash flows
on initial recognition
Simplified approach for trade receivables contract
assets and lease receivables
5515 Despite paragraphs 553 and 555 an entity shall always measure the loss
allowance at an amount equal to lifetime expected credit losses for
(a) trade receivables or contract assets that result from transactions
that are within the scope of IFRS 15 and that
(i) do not contain a significant financing component in
accordance with IFRS 15 (or when the entity applies the
practical expedient in accordance with paragraph 63 of
IFRS 15) or
(ii) contain a significant financing component in accordance
with IFRS 15 if the entity chooses as its accounting policy to
measure the loss allowance at an amount equal to lifetime
expected credit losses That accounting policy shall be
applied to all such trade receivables or contract assets but
may be applied separately to trade receivables and contract
assets
(b) lease receivables that result from transactions that are within the
scope of IFRS 16 if the entity chooses as its accounting policy to
measure the loss allowance at an amount equal to lifetime
IFRS 9
IFRS FoundationA344expected credit losses That accounting policy shall be applied to
all lease receivables but may be applied separately to finance and
operating lease receivables
5516 An entity may select its accounting policy for trade receivables lease receivables
and contract assets independently of each other
Measurement of expected credit losses
5517 An entity shall measure expected credit losses of a financial instrument
in a way that reflects
(a) an unbiased and probabilityweighted amount that is determined
by evaluating a range of possible outcomes
(b) the time value of money and
(c) reasonable and supportable information that is available without
undue cost or effort at the reporting date about past events
current conditions and forecasts of future economic conditions
5518 When measuring expected credit losses an entity need not necessarily identify
every possible scenario However it shall consider the risk or probability that a
credit loss occurs by reflecting the possibility that a credit loss occurs and the
possibility that no credit loss occurs even if the possibility of a credit loss
occurring is very low
5519 The maximum period to consider when measuring expected credit losses is the
maximum contractual period (including extension options) over which the
entity is exposed to credit risk and not a longer period even if that longer period
is consistent with business practice
5520 However some financial instruments include both a loan and an undrawn
commitment component and the entity’s contractual ability to demand
repayment and cancel the undrawn commitment does not limit the entity’s
exposure to credit losses to the contractual notice period For such financial
instruments and only those financial instruments the entity shall measure
expected credit losses over the period that the entity is exposed to credit risk and
expected credit losses would not be mitigated by credit risk management
actions even if that period extends beyond the maximum contractual period
56 Reclassification of financial assets
561 If an entity reclassifies financial assets in accordance with
paragraph 441 it shall apply the reclassification prospectively from the
reclassification date The entity shall not restate any previously
recognised gains losses (including impairment gains or losses) or
interest Paragraphs 562–567 set out the requirements for
reclassifications
562 If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through profit or loss
measurement category its fair value is measured at the reclassification
IFRS 9
IFRS Foundation A345date Any gain or loss arising from a difference between the previous
amortised cost of the financial asset and fair value is recognised in profit
or loss
563 If an entity reclassifies a financial asset out of the fair value through
profit or loss measurement category and into the amortised cost
measurement category its fair value at the reclassification date becomes
its new gross carrying amount (See paragraph B562 for guidance on
determining an effective interest rate and a loss allowance at the
reclassification date)
564 If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through other
comprehensive income measurement category its fair value is measured
at the reclassification date Any gain or loss arising from a difference
between the previous amortised cost of the financial asset and fair value
is recognised in other comprehensive income The effective interest rate
and the measurement of expected credit losses are not adjusted as a
result of the reclassification (See paragraph B561)
565 If an entity reclassifies a financial asset out of the fair value through
other comprehensive income measurement category and into the
amortised cost measurement category the financial asset is reclassified
at its fair value at the reclassification date However the cumulative gain
or loss previously recognised in other comprehensive income is removed
from equity and adjusted against the fair value of the financial asset at
the reclassification date As a result the financial asset is measured at
the reclassification date as if it had always been measured at amortised
cost This adjustment affects other comprehensive income but does not
affect profit or loss and therefore is not a reclassification adjustment (see
IAS 1 Presentation of Financial Statements) The effective interest rate
and the measurement of expected credit losses are not adjusted as a
result of the reclassification (See paragraph B561)
566 If an entity reclassifies a financial asset out of the fair value through
profit or loss measurement category and into the fair value through other
comprehensive income measurement category the financial asset
continues to be measured at fair value (See paragraph B562 for
guidance on determining an effective interest rate and a loss allowance at
the reclassification date)
567 If an entity reclassifies a financial asset out of the fair value through
other comprehensive income measurement category and into the fair
value through profit or loss measurement category the financial asset
continues to be measured at fair value The cumulative gain or loss
previously recognised in other comprehensive income is reclassified from
equity to profit or loss as a reclassification adjustment (see IAS 1) at the
reclassification date
IFRS 9
IFRS FoundationA34657 Gains and losses
571 A gain or loss on a financial asset or financial liability that is measured at
fair value shall be recognised in profit or loss unless
(a) it is part of a hedging relationship (see paragraphs 658–6514 and
if applicable paragraphs 89–94 of IAS 39 for the fair value hedge
accounting for a portfolio hedge of interest rate risk)
(b) it is an investment in an equity instrument and the entity has
elected to present gains and losses on that investment in other
comprehensive income in accordance with paragraph 575
(c) it is a financial liability designated as at fair value through profit
or loss and the entity is required to present the effects of changes
in the liability’s credit risk in other comprehensive income in
accordance with paragraph 577 or
(d) it is a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 412A and
the entity is required to recognise some changes in fair value in
other comprehensive income in accordance with paragraph 5710
571A Dividends are recognised in profit or loss only when
(a) the entity’s right to receive payment of the dividend is established
(b) it is probable that the economic benefits associated with the dividend
will flow to the entity and
(c) the amount of the dividend can be measured reliably
572 A gain or loss on a financial asset that is measured at amortised cost and
is not part of a hedging relationship (see paragraphs 658–6514 and if
applicable paragraphs 89–94 of IAS 39 for the fair value hedge accounting
for a portfolio hedge of interest rate risk) shall be recognised in profit or
loss when the financial asset is derecognised reclassified in accordance
with paragraph 562 through the amortisation process or in order to
recognise impairment gains or losses An entity shall apply
paragraphs 562 and 564 if it reclassifies financial assets out of the
amortised cost measurement category A gain or loss on a financial
liability that is measured at amortised cost and is not part of a hedging
relationship (see paragraphs 658–6514 and if applicable paragraphs
89–94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of
interest rate risk) shall be recognised in profit or loss when the financial
liability is derecognised and through the amortisation process (See
paragraph B572 for guidance on foreign exchange gains or losses)
573 A gain or loss on financial assets or financial liabilities that are hedged
items in a hedging relationship shall be recognised in accordance with
paragraphs 658–6514 and if applicable paragraphs 89–94 of IAS 39 for
the fair value hedge accounting for a portfolio hedge of interest rate risk
574 If an entity recognises financial assets using settlement date accounting
(see paragraphs 312 B313 and B316) any change in the fair value of the
IFRS 9
IFRS Foundation A347asset to be received during the period between the trade date and the
settlement date is not recognised for assets measured at amortised cost
For assets measured at fair value however the change in fair value shall
be recognised in profit or loss or in other comprehensive income as
appropriate in accordance with paragraph 571 The trade date shall be
considered the date of initial recognition for the purposes of applying the
impairment requirements
Investments in equity instruments
575 At initial recognition an entity may make an irrevocable election to
present in other comprehensive income subsequent changes in the fair
value of an investment in an equity instrument within the scope of this
Standard that is neither held for trading nor contingent consideration
recognised by an acquirer in a business combination to which IFRS 3
applies (See paragraph B573 for guidance on foreign exchange gains or
losses)
576 If an entity makes the election in paragraph 575 it shall recognise in profit or
loss dividends from that investment in accordance with paragraph 571A
Liabilities designated as at fair value through profit or
loss
577 An entity shall present a gain or loss on a financial liability that is
designated as at fair value through profit or loss in accordance with
paragraph 422 or paragraph 435 as follows
(a) The amount of change in the fair value of the financial liability
that is attributable to changes in the credit risk of that liability
shall be presented in other comprehensive income (see
paragraphs B5713–B5720) and
(b) the remaining amount of change in the fair value of the liability
shall be presented in profit or loss
unless the treatment of the effects of changes in the liability’s credit risk
described in (a) would create or enlarge an accounting mismatch in profit
or loss (in which case paragraph 578 applies) Paragraphs B575–B577
and B5710–B5712 provide guidance on determining whether an
accounting mismatch would be created or enlarged
578 If the requirements in paragraph 577 would create or enlarge an
accounting mismatch in profit or loss an entity shall present all gains or
losses on that liability (including the effects of changes in the credit risk
of that liability) in profit or loss
579 Despite the requirements in paragraphs 577 and 578 an entity shall present
in profit or loss all gains and losses on loan commitments and financial
guarantee contracts that are designated as at fair value through profit or loss
IFRS 9
IFRS FoundationA348Assets measured at fair value through other
comprehensive income
5710 A gain or loss on a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 412A shall be
recognised in other comprehensive income except for impairment gains
or losses (see Section 55) and foreign exchange gains and losses (see
paragraphs B572–B572A) until the financial asset is derecognised or
reclassified When the financial asset is derecognised the cumulative
gain or loss previously recognised in other comprehensive income is
reclassified from equity to profit or loss as a reclassification adjustment
(see IAS 1) If the financial asset is reclassified out of the fair value
through other comprehensive income measurement category the entity
shall account for the cumulative gain or loss that was previously
recognised in other comprehensive income in accordance with
paragraphs 565 and 567 Interest calculated using the effective interest
method is recognised in profit or loss
5711 As described in paragraph 5710 if a financial asset is measured at fair
value through other comprehensive income in accordance with
paragraph 412A the amounts that are recognised in profit or loss are the
same as the amounts that would have been recognised in profit or loss if
the financial asset had been measured at amortised cost
Chapter 6 Hedge accounting
61 Objective and scope of hedge accounting
611 The objective of hedge accounting is to represent in the financial statements
the effect of an entity’s risk management activities that use financial
instruments to manage exposures arising from particular risks that could affect
profit or loss (or other comprehensive income in the case of investments in
equity instruments for which an entity has elected to present changes in fair
value in other comprehensive income in accordance with paragraph 575) This
approach aims to convey the context of hedging instruments for which hedge
accounting is applied in order to allow insight into their purpose and effect
612 An entity may choose to designate a hedging relationship between a hedging
instrument and a hedged item in accordance with paragraphs 621–637 and
B621–B6325 For hedging relationships that meet the qualifying criteria an
entity shall account for the gain or loss on the hedging instrument and the
hedged item in accordance with paragraphs 651–6514 and B651–B6528
When the hedged item is a group of items an entity shall comply with the
additional requirements in paragraphs 661–666 and B661–B6616
613 For a fair value hedge of the interest rate exposure of a portfolio of financial
assets or financial liabilities (and only for such a hedge) an entity may apply the
hedge accounting requirements in IAS 39 instead of those in this Standard In
that case the entity must also apply the specific requirements for the fair value
hedge accounting for a portfolio hedge of interest rate risk and designate as the
hedged item a portion that is a currency amount (see paragraphs 81A 89A and
AG114–AG132 of IAS 39)
IFRS 9
IFRS Foundation A34962 Hedging instruments
Qualifying instruments
621 A derivative measured at fair value through profit or loss may be
designated as a hedging instrument except for some written options (see
paragraph B624)
622 A nonderivative financial asset or a nonderivative financial liability
measured at fair value through profit or loss may be designated as a
hedging instrument unless it is a financial liability designated as at fair
value through profit or loss for which the amount of its change in fair
value that is attributable to changes in the credit risk of that liability is
presented in other comprehensive income in accordance with
paragraph 577 For a hedge of foreign currency risk the foreign
currency risk component of a nonderivative financial asset or a
nonderivative financial liability may be designated as a hedging
instrument provided that it is not an investment in an equity instrument
for which an entity has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 575
623 For hedge accounting purposes only contracts with a party external to
the reporting entity (ie external to the group or individual entity that is
being reported on) can be designated as hedging instruments
Designation of hedging instruments
624 A qualifying instrument must be designated in its entirety as a hedging
instrument The only exceptions permitted are
(a) separating the intrinsic value and time value of an option contract and
designating as the hedging instrument only the change in intrinsic value
of an option and not the change in its time value (see paragraphs 6515
and B6529–B6533)
(b) separating the forward element and the spot element of a forward
contract and designating as the hedging instrument only the change in
the value of the spot element of a forward contract and not the forward
element similarly the foreign currency basis spread may be separated
and excluded from the designation of a financial instrument as the
hedging instrument (see paragraphs 6516 and B6534–B6539) and
(c) a proportion of the entire hedging instrument such as 50 per cent of the
nominal amount may be designated as the hedging instrument in a
hedging relationship However a hedging instrument may not be
designated for a part of its change in fair value that results from only a
portion of the time period during which the hedging instrument
remains outstanding
625 An entity may view in combination and jointly designate as the hedging
instrument any combination of the following (including those circumstances in
which the risk or risks arising from some hedging instruments offset those
arising from others)
IFRS 9
IFRS FoundationA350(a) derivatives or a proportion of them and
(b) nonderivatives or a proportion of them
626 However a derivative instrument that combines a written option and a
purchased option (for example an interest rate collar) does not qualify as a
hedging instrument if it is in effect a net written option at the date of
designation (unless it qualifies in accordance with paragraph B624) Similarly
two or more instruments (or proportions of them) may be jointly designated as
the hedging instrument only if in combination they are not in effect a net
written option at the date of designation (unless it qualifies in accordance with
paragraph B624)
63 Hedged items
Qualifying items
631 A hedged item can be a recognised asset or liability an unrecognised firm
commitmentaforecast transaction or a net investment in a foreign
operation The hedged item can be
(a) a single item or
(b) a group of items (subject to paragraphs 661–666 and
B661–B6616)
A hedged item can also be a component of such an item or group of items
(see paragraphs 637 and B637–B6325)
632 The hedged item must be reliably measurable
633 If a hedged item is a forecast transaction (or a component thereof) that
transaction must be highly probable
634 An aggregated exposure that is a combination of an exposure that could
qualify as a hedged item in accordance with paragraph 631 and a
derivative may be designated as a hedged item (see paragraphs
B633–B634) This includes a forecast transaction of an aggregated
exposure (ie uncommitted but anticipated future transactions that would
give rise to an exposure and a derivative) if that aggregated exposure is
highly probable and once it has occurred and is therefore no longer
forecast is eligible as a hedged item
635 For hedge accounting purposes only assets liabilities firm commitments
or highly probable forecast transactions with a party external to the
reporting entity can be designated as hedged items Hedge accounting
can be applied to transactions between entities in the same group only in
the individual or separate financial statements of those entities and not
in the consolidated financial statements of the group except for the
consolidated financial statements of an investment entity as defined in
IFRS 10 where transactions between an investment entity and its
subsidiaries measured at fair value through profit or loss will not be
eliminated in the consolidated financial statements
IFRS 9
IFRS Foundation A351636 However as an exception to paragraph 635 the foreign currency risk of an
intragroup monetary item (for example a payablereceivable between two
subsidiaries) may qualify as a hedged item in the consolidated financial
statements if it results in an exposure to foreign exchange rate gains or losses
that are not fully eliminated on consolidation in accordance with IAS 21 The
Effects of Changes in Foreign Exchange Rates In accordance with IAS 21 foreign
exchange rate gains and losses on intragroup monetary items are not fully
eliminated on consolidation when the intragroup monetary item is transacted
between two group entities that have different functional currencies In
addition the foreign currency risk of a highly probable forecast intragroup
transaction may qualify as a hedged item in consolidated financial statements
provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign
currency risk will affect consolidated profit or loss
Designation of hedged items
637 An entity may designate an item in its entirety or a component of an item as the
hedged item in a hedging relationship An entire item comprises all changes in
the cash flows or fair value of an item A component comprises less than the
entire fair value change or cash flow variability of an item In that case an
entity may designate only the following types of components (including
combinations) as hedged items
(a) only changes in the cash flows or fair value of an item attributable to a
specific risk or risks (risk component) provided that based on an
assessment within the context of the particular market structure the
risk component is separately identifiable and reliably measurable (see
paragraphs B638–B6315) Risk components include a designation of
only changes in the cash flows or the fair value of a hedged item above or
below a specified price or other variable (a onesided risk)
(b) one or more selected contractual cash flows
(c) components of a nominal amount ie a specified part of the amount of an
item (see paragraphs B6316–B6320)
64 Qualifying criteria for hedge accounting
641 A hedging relationship qualifies for hedge accounting only if all of the
following criteria are met
(a) the hedging relationship consists only of eligible hedging
instruments and eligible hedged items
(b) at the inception of the hedging relationship there is formal
designation and documentation of the hedging relationship and
the entity’s risk management objective and strategy for
undertaking the hedge That documentation shall include
identification of the hedging instrument the hedged item the
nature of the risk being hedged and how the entity will assess
whether the hedging relationship meets the hedge effectiveness
IFRS 9
IFRS FoundationA352requirements (including its analysis of the sources of hedge
ineffectiveness and how it determines the hedge ratio)
(c) the hedging relationship meets all of the following hedge
effectiveness requirements
(i) there is an economic relationship between the hedged item
and the hedging instrument (see paragraphs B644–B646)
(ii) the effect of credit risk does not dominate the value
changes that result from that economic relationship (see
paragraphs B647–B648) and
(iii) the hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that the
entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that
quantity of hedged item However that designation shall
not reflect an imbalance between the weightings of the
hedged item and the hedging instrument that would create
hedge ineffectiveness (irrespective of whether recognised or
not) that could result in an accounting outcome that would
be inconsistent with the purpose of hedge accounting (see
paragraphs B649–B6411)
65 Accounting for qualifying hedging relationships
651 An entity applies hedge accounting to hedging relationships that meet
the qualifying criteria in paragraph 641 (which include the entity’s
decision to designate the hedging relationship)
652 There are three types of hedging relationships
(a) fair value hedge a hedge of the exposure to changes in fair value of
a recognised asset or liability or an unrecognised firm
commitment or a component of any such item that is attributable
to a particular risk and could affect profit or loss
(b) cash flow hedge a hedge of the exposure to variability in cash
flows that is attributable to a particular risk associated with all or
a component of a recognised asset or liability (such as all or some
future interest payments on variablerate debt) or a highly
probable forecast transaction and could affect profit or loss
(c) hedge of a net investment in a foreign operation as defined in
IAS 21
653 If the hedged item is an equity instrument for which an entity has elected to
present changes in fair value in other comprehensive income in accordance with
paragraph 575 the hedged exposure referred to in paragraph 652(a) must be
one that could affect other comprehensive income In that case and only in that
case the recognised hedge ineffectiveness is presented in other comprehensive
income
IFRS 9
IFRS Foundation A353654 A hedge of the foreign currency risk of a firm commitment may be accounted for
as a fair value hedge or a cash flow hedge
655 If a hedging relationship ceases to meet the hedge effectiveness
requirement relating to the hedge ratio (see paragraph 641(c)(iii)) but the
risk management objective for that designated hedging relationship
remains the same an entity shall adjust the hedge ratio of the hedging
relationship so that it meets the qualifying criteria again (this is referred
to in this Standard as rebalancing’—see paragraphs B657–B6521)
656 An entity shall discontinue hedge accounting prospectively only when the
hedging relationship (or a part of a hedging relationship) ceases to meet
the qualifying criteria (after taking into account any rebalancing of the
hedging relationship if applicable) This includes instances when the
hedging instrument expires or is sold terminated or exercised For this
purpose the replacement or rollover of a hedging instrument into
another hedging instrument is not an expiration or termination if such a
replacement or rollover is part of and consistent with the entity’s
documented risk management objective Additionally for this purpose
there is not an expiration or termination of the hedging instrument if
(a) as a consequence of laws or regulations or the introduction of laws
or regulations the parties to the hedging instrument agree that
one or more clearing counterparties replace their original
counterparty to become the new counterparty to each of the
parties For this purpose a clearing counterparty is a central
counterparty (sometimes called a clearing organisation’ or
clearing agency’) or an entity or entities for example a clearing
member of a clearing organisation or a client of a clearing
member of a clearing organisation that are acting as a
counterparty in order to effect clearing by a central counterparty
However when the parties to the hedging instrument replace their
original counterparties with different counterparties the
requirement in this subparagraph is met only if each of those
parties effects clearing with the same central counterparty
(b) other changes if any to the hedging instrument are limited to
those that are necessary to effect such a replacement of the
counterparty Such changes are limited to those that are
consistent with the terms that would be expected if the hedging
instrument were originally cleared with the clearing counterparty
These changes include changes in the collateral requirements
rights to offset receivables and payables balances and charges
levied
Discontinuing hedge accounting can either affect a hedging relationship
in its entirety or only a part of it (in which case hedge accounting
continues for the remainder of the hedging relationship)
657 An entity shall apply
IFRS 9
IFRS FoundationA354(a) paragraph 6510 when it discontinues hedge accounting for a fair value
hedge for which the hedged item is (or is a component of) a financial
instrument measured at amortised cost and
(b) paragraph 6512 when it discontinues hedge accounting for cash flow
hedges
Fair value hedges
658 As long as a fair value hedge meets the qualifying criteria in
paragraph 641 the hedging relationship shall be accounted for as
follows
(a) the gain or loss on the hedging instrument shall be recognised in
profit or loss (or other comprehensive income if the hedging
instrument hedges an equity instrument for which an entity has
elected to present changes in fair value in other comprehensive
income in accordance with paragraph 575)
(b) the hedging gain or loss on the hedged item shall adjust the
carrying amount of the hedged item (if applicable) and be
recognised in profit or loss If the hedged item is a financial asset
(or a component thereof) that is measured at fair value through
other comprehensive income in accordance with paragraph 412A
the hedging gain or loss on the hedged item shall be recognised in
profit or loss However if the hedged item is an equity instrument
for which an entity has elected to present changes in fair value in
other comprehensive income in accordance with paragraph 575
those amounts shall remain in other comprehensive income
When a hedged item is an unrecognised firm commitment (or a
component thereof) the cumulative change in the fair value of the
hedged item subsequent to its designation is recognised as an
asset or a liability with a corresponding gain or loss recognised in
profit or loss
659 When a hedged item in a fair value hedge is a firm commitment (or a
component thereof) to acquire an asset or assume a liability the initial carrying
amount of the asset or the liability that results from the entity meeting the firm
commitment is adjusted to include the cumulative change in the fair value of
the hedged item that was recognised in the statement of financial position
6510 Any adjustment arising from paragraph 658(b) shall be amortised to profit or
loss if the hedged item is a financial instrument (or a component thereof)
measured at amortised cost Amortisation may begin as soon as an adjustment
exists and shall begin no later than when the hedged item ceases to be adjusted
for hedging gains and losses The amortisation is based on a recalculated
effective interest rate at the date that amortisation begins In the case of a
financial asset (or a component thereof) that is a hedged item and that is
measured at fair value through other comprehensive income in accordance with
paragraph 412A amortisation applies in the same manner but to the amount
that represents the cumulative gain or loss previously recognised in accordance
with paragraph 658(b) instead of by adjusting the carrying amount
IFRS 9
IFRS Foundation A355Cash flow hedges
6511 As long as a cash flow hedge meets the qualifying criteria in
paragraph 641 the hedging relationship shall be accounted for as
follows
(a) the separate component of equity associated with the hedged item
(cash flow hedge reserve) is adjusted to the lower of the following
(in absolute amounts)
(i) the cumulative gain or loss on the hedging instrument
from inception of the hedge and
(ii) the cumulative change in fair value (present value) of the
hedged item (ie the present value of the cumulative change
in the hedged expected future cash flows) from inception of
the hedge
(b) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (ie the portion that is offset by
the change in the cash flow hedge reserve calculated in accordance
with (a)) shall be recognised in other comprehensive income
(c) any remaining gain or loss on the hedging instrument (or any gain
or loss required to balance the change in the cash flow hedge
reserve calculated in accordance with (a)) is hedge ineffectiveness
that shall be recognised in profit or loss
(d) the amount that has been accumulated in the cash flow hedge
reserve in accordance with (a) shall be accounted for as follows
(i) if a hedged forecast transaction subsequently results in the
recognition of a nonfinancial asset or nonfinancial
liability or a hedged forecast transaction for a
nonfinancial asset or a nonfinancial liability becomes a
firm commitment for which fair value hedge accounting is
applied the entity shall remove that amount from the cash
flow hedge reserve and include it directly in the initial cost
or other carrying amount of the asset or the liability This
is not a reclassification adjustment (see IAS 1) and hence it
does not affect other comprehensive income
(ii) for cash flow hedges other than those covered by (i) that
amount shall be reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment (see
IAS 1) in the same period or periods during which the
hedged expected future cash flows affect profit or loss (for
example in the periods that interest income or interest
expense is recognised or when a forecast sale occurs)
(iii) however if that amount is a loss and an entity expects that
all or a portion of that loss will not be recovered in one or
more future periods it shall immediately reclassify the
amount that is not expected to be recovered into profit or
loss as a reclassification adjustment (see IAS 1)
IFRS 9
IFRS FoundationA3566512 When an entity discontinues hedge accounting for a cash flow hedge (see
paragraphs 656 and 657(b)) it shall account for the amount that has been
accumulated in the cash flow hedge reserve in accordance with
paragraph 6511(a) as follows
(a) if the hedged future cash flows are still expected to occur that amount
shall remain in the cash flow hedge reserve until the future cash flows
occur or until paragraph 6511(d)(iii) applies When the future cash
flows occur paragraph 6511(d) applies
(b) if the hedged future cash flows are no longer expected to occur that
amount shall be immediately reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment (see IAS 1) A
hedged future cash flow that is no longer highly probable to occur may
still be expected to occur
Hedges of a net investment in a foreign operation
6513 Hedges of a net investment in a foreign operation including a hedge of a
monetary item that is accounted for as part of the net investment (see
IAS 21) shall be accounted for similarly to cash flow hedges
(a) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge shall be recognised in other
comprehensive income (see paragraph 6511) and
(b) the ineffective portion shall be recognised in profit or loss
6514 The cumulative gain or loss on the hedging instrument relating to the
effective portion of the hedge that has been accumulated in the foreign
currency translation reserve shall be reclassified from equity to profit or
loss as a reclassification adjustment (see IAS 1) in accordance with
paragraphs 48–49 of IAS 21 on the disposal or partial disposal of the
foreign operation
Accounting for the time value of options
6515 When an entity separates the intrinsic value and time value of an option
contract and designates as the hedging instrument only the change in intrinsic
value of the option (see paragraph 624(a)) it shall account for the time value of
the option as follows (see paragraphs B6529–B6533)
(a) an entity shall distinguish the time value of options by the type of
hedged item that the option hedges (see paragraph B6529)
(i) a transaction related hedged item or
(ii) a timeperiod related hedged item
(b) the change in fair value of the time value of an option that hedges a
transaction related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged item
and shall be accumulated in a separate component of equity The
cumulative change in fair value arising from the time value of the option
that has been accumulated in a separate component of equity (the
amount’) shall be accounted for as follows
IFRS 9
IFRS Foundation A357(i) if the hedged item subsequently results in the recognition of a
nonfinancial asset or a nonfinancial liability or a firm
commitment for a nonfinancial asset or a nonfinancial liability
for which fair value hedge accounting is applied the entity shall
remove the amount from the separate component of equity and
include it directly in the initial cost or other carrying amount of
the asset or the liability This is not a reclassification adjustment
(see IAS 1) and hence does not affect other comprehensive
income
(ii) for hedging relationships other than those covered by (i) the
amount shall be reclassified from the separate component of
equity to profit or loss as a reclassification adjustment (see IAS 1)
in the same period or periods during which the hedged expected
future cash flows affect profit or loss (for example when a
forecast sale occurs)
(iii) however if all or a portion of that amount is not expected to be
recovered in one or more future periods the amount that is not
expected to be recovered shall be immediately reclassified into
profit or loss as a reclassification adjustment (see IAS 1)
(c) the change in fair value of the time value of an option that hedges a
timeperiod related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged item
and shall be accumulated in a separate component of equity The time
value at the date of designation of the option as a hedging instrument to
the extent that it relates to the hedged item shall be amortised on a
systematic and rational basis over the period during which the hedge
adjustment for the option’s intrinsic value could affect profit or loss (or
other comprehensive income if the hedged item is an equity instrument
for which an entity has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 575) Hence in
each reporting period the amortisation amount shall be reclassified
from the separate component of equity to profit or loss as a
reclassification adjustment (see IAS 1) However if hedge accounting is
discontinued for the hedging relationship that includes the change in
intrinsic value of the option as the hedging instrument the net amount
(ie including cumulative amortisation) that has been accumulated in the
separate component of equity shall be immediately reclassified into
profit or loss as a reclassification adjustment (see IAS 1)
Accounting for the forward element of forward contracts
and foreign currency basis spreads of financial
instruments
6516 When an entity separates the forward element and the spot element of a forward
contract and designates as the hedging instrument only the change in the value
of the spot element of the forward contract or when an entity separates the
foreign currency basis spread from a financial instrument and excludes it from
the designation of that financial instrument as the hedging instrument (see
paragraph 624(b)) the entity may apply paragraph 6515 to the forward
IFRS 9
IFRS FoundationA358element of the forward contract or to the foreign currency basis spread in the
same manner as it is applied to the time value of an option In that case the
entity shall apply the application guidance in paragraphs B6534–B6539
66 Hedges of a group of items
Eligibility of a group of items as the hedged item
661 A group of items (including a group of items that constitute a net
position see paragraphs B661–B668) is an eligible hedged item only if
(a) it consists of items (including components of items) that are
individually eligible hedged items
(b) the items in the group are managed together on a group basis for
risk management purposes and
(c) in the case of a cash flow hedge of a group of items whose
variabilities in cash flows are not expected to be approximately
proportional to the overall variability in cash flows of the group so
that offsetting risk positions arise
(i) it is a hedge of foreign currency risk and
(ii) the designation of that net position specifies the reporting
period in which the forecast transactions are expected to
affect profit or loss as well as their nature and volume (see
paragraphs B667–B668)
Designation of a component of a nominal amount
662 A component that is a proportion of an eligible group of items is an eligible
hedged item provided that designation is consistent with the entity’s risk
management objective
663 A layer component of an overall group of items (for example a bottom layer) is
eligible for hedge accounting only if
(a) it is separately identifiable and reliably measurable
(b) the risk management objective is to hedge a layer component
(c) the items in the overall group from which the layer is identified are
exposed to the same hedged risk (so that the measurement of the hedged
layer is not significantly affected by which particular items from the
overall group form part of the hedged layer)
(d) for a hedge of existing items (for example an unrecognised firm
commitment or a recognised asset) an entity can identify and track the
overall group of items from which the hedged layer is defined (so that
the entity is able to comply with the requirements for the accounting for
qualifying hedging relationships) and
(e) any items in the group that contain prepayment options meet the
requirements for components of a nominal amount (see
paragraph B6320)
IFRS 9
IFRS Foundation A359Presentation
664 For a hedge of a group of items with offsetting risk positions (ie in a hedge of a
net position) whose hedged risk affects different line items in the statement of
profit or loss and other comprehensive income any hedging gains or losses in
that statement shall be presented in a separate line from those affected by the
hedged items Hence in that statement the amount in the line item that relates
to the hedged item itself (for example revenue or cost of sales) remains
unaffected
665 For assets and liabilities that are hedged together as a group in a fair value
hedge the gain or loss in the statement of financial position on the individual
assets and liabilities shall be recognised as an adjustment of the carrying
amount of the respective individual items comprising the group in accordance
with paragraph 658(b)
Nil net positions
666 When the hedged item is a group that is a nil net position (ie the hedged items
among themselves fully offset the risk that is managed on a group basis) an
entity is permitted to designate it in a hedging relationship that does not
include a hedging instrument provided that
(a) the hedge is part of a rolling net risk hedging strategy whereby the
entity routinely hedges new positions of the same type as time moves on
(for example when transactions move into the time horizon for which
the entity hedges)
(b) the hedged net position changes in size over the life of the rolling net
risk hedging strategy and the entity uses eligible hedging instruments to
hedge the net risk (ie when the net position is not nil)
(c) hedge accounting is normally applied to such net positions when the net
position is not nil and it is hedged with eligible hedging instruments
and
(d) not applying hedge accounting to the nil net position would give rise to
inconsistent accounting outcomes because the accounting would not
recognise the offsetting risk positions that would otherwise be
recognised in a hedge of a net position
67 Option to designate a credit exposure as measured at fair
value through profit or loss
Eligibility of credit exposures for designation at fair
value through profit or loss
671 If an entity uses a credit derivative that is measured at fair value through
profit or loss to manage the credit risk of all or a part of a financial
instrument (credit exposure) it may designate that financial instrument
to the extent that it is so managed (ie all or a proportion of it) as
measured at fair value through profit or loss if
IFRS 9
IFRS FoundationA360(a) the name of the credit exposure (for example the borrower or the
holder of a loan commitment) matches the reference entity of the
credit derivative (name matching’) and
(b) the seniority of the financial instrument matches that of the
instruments that can be delivered in accordance with the credit
derivative
An entity may make this designation irrespective of whether the financial
instrument that is managed for credit risk is within the scope of this
Standard (for example an entity may designate loan commitments that
are outside the scope of this Standard) The entity may designate that
financial instrument at or subsequent to initial recognition or while it
is unrecognised The entity shall document the designation concurrently
Accounting for credit exposures designated at fair value
through profit or loss
672 If a financial instrument is designated in accordance with paragraph 671 as
measured at fair value through profit or loss after its initial recognition or was
previously not recognised the difference at the time of designation between the
carrying amount if any and the fair value shall immediately be recognised in
profit or loss For financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A the cumulative
gain or loss previously recognised in other comprehensive income shall
immediately be reclassified from equity to profit or loss as a reclassification
adjustment (see IAS 1)
673 An entity shall discontinue measuring the financial instrument that gave rise to
the credit risk or a proportion of that financial instrument at fair value
through profit or loss if
(a) the qualifying criteria in paragraph 671 are no longer met for example
(i) the credit derivative or the related financial instrument that
gives rise to the credit risk expires or is sold terminated or
settled or
(ii) the credit risk of the financial instrument is no longer managed
using credit derivatives For example this could occur because of
improvements in the credit quality of the borrower or the loan
commitment holder or changes to capital requirements imposed
on an entity and
(b) the financial instrument that gives rise to the credit risk is not otherwise
required to be measured at fair value through profit or loss (ie the
entity’s business model has not changed in the meantime so that a
reclassification in accordance with paragraph 441 was required)
674 When an entity discontinues measuring the financial instrument that gives rise
to the credit risk or a proportion of that financial instrument at fair value
through profit or loss that financial instrument’s fair value at the date of
discontinuation becomes its new carrying amount Subsequently the same
measurement that was used before designating the financial instrument at fair
value through profit or loss shall be applied (including amortisation that results
IFRS 9
IFRS Foundation A361from the new carrying amount) For example a financial asset that had
originally been classified as measured at amortised cost would revert to that
measurement and its effective interest rate would be recalculated based on its
new gross carrying amount on the date of discontinuing measurement at fair
value through profit or loss
Chapter 7 Effective date and transition
71 Effective date
711 An entity shall apply this Standard for annual periods beginning on or after
1 January 2018 Earlier application is permitted If an entity elects to apply this
Standard early it must disclose that fact and apply all of the requirements in
this Standard at the same time (but see also paragraphs 712 7221 and 732) It
shall also at the same time apply the amendments in Appendix C
712 Despite the requirements in paragraph 711 for annual periods beginning
before 1 January 2018 an entity may elect to early apply only the requirements
for the presentation of gains and losses on financial liabilities designated as at
fair value through profit or loss in paragraphs 571(c) 577–579 7214 and
B575–B5720 without applying the other requirements in this Standard If an
entity elects to apply only those paragraphs it shall disclose that fact and
provide on an ongoing basis the related disclosures set out in paragraphs 10–11
of IFRS 7 Financial Instruments Disclosures (as amended by IFRS 9 (2010)) (See also
paragraphs 722 and 7215)
713 Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 421 and 575 as a consequential amendment derived from the
amendment to IFRS 3 An entity shall apply that amendment prospectively to
business combinations to which the amendment to IFRS 3 applies
714 IFRS 15 issued in May 2014 amended paragraphs 311 421 511 521 576
B3213 B571 C5 and C42 and deleted paragraph C16 and its related heading
Paragraphs 513 and 571A and a definition to Appendix A were added An
entity shall apply those amendments when it applies IFRS 15
715 IFRS 16 issued in January 2016 amended paragraphs 21 5515 B438 B5534
and B5546 An entity shall apply those amendments when it applies IFRS 16
72 Transition
721 An entity shall apply this Standard retrospectively in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors except as specified in
paragraphs 724–7226 and 7228 This Standard shall not be applied to items
that have already been derecognised at the date of initial application
722 For the purposes of the transition provisions in paragraphs 721 723–7228
and 732 the date of initial application is the date when an entity first applies
those requirements of this Standard and must be the beginning of a reporting
period after the issue of this Standard Depending on the entity’s chosen
approach to applying IFRS 9 the transition can involve one or more than one
date of initial application for different requirements
IFRS 9
IFRS FoundationA362Transition for classification and measurement
(Chapters 4 and 5)
723 At the date of initial application an entity shall assess whether a financial asset
meets the condition in paragraphs 412(a) or 412A(a) on the basis of the facts
and circumstances that exist at that date The resulting classification shall be
applied retrospectively irrespective of the entity’s business model in prior
reporting periods
724 If at the date of initial application it is impracticable (as defined in IAS 8) for an
entity to assess a modified time value of money element in accordance with
paragraphs B419B–B419D on the basis of the facts and circumstances that
existed at the initial recognition of the financial asset an entity shall assess the
contractual cash flow characteristics of that financial asset on the basis of the
facts and circumstances that existed at the initial recognition of the financial
asset without taking into account the requirements related to the modification
of the time value of money element in paragraphs B419B–B419D (See also
paragraph 42R of IFRS 7)
725 If at the date of initial application it is impracticable (as defined in IAS 8) for an
entity to assess whether the fair value of a prepayment feature was insignificant
in accordance with paragraph B4112(c) on the basis of the facts and
circumstances that existed at the initial recognition of the financial asset an
entity shall assess the contractual cash flow characteristics of that financial asset
on the basis of the facts and circumstances that existed at the initial recognition
of the financial asset without taking into account the exception for prepayment
features in paragraph B4112 (See also paragraph 42S of IFRS 7)
726 If an entity measures a hybrid contract at fair value in accordance with
paragraphs 412A 414 or 415 but the fair value of the hybrid contract had not
been measured in comparative reporting periods the fair value of the hybrid
contract in the comparative reporting periods shall be the sum of the fair values
of the components (ie the nonderivative host and the embedded derivative) at
the end of each comparative reporting period if the entity restates prior periods
(see paragraph 7215)
727 If an entity has applied paragraph 726 then at the date of initial application the
entity shall recognise any difference between the fair value of the entire hybrid
contract at the date of initial application and the sum of the fair values of the
components of the hybrid contract at the date of initial application in the
opening retained earnings (or other component of equity as appropriate) of the
reporting period that includes the date of initial application
728 At the date of initial application an entity may designate
(a) a financial asset as measured at fair value through profit or loss in
accordance with paragraph 415 or
(b) an investment in an equity instrument as at fair value through other
comprehensive income in accordance with paragraph 575
Such a designation shall be made on the basis of the facts and circumstances
that exist at the date of initial application That classification shall be applied
retrospectively
IFRS 9
IFRS Foundation A363729 At the date of initial application an entity
(a) shall revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that financial asset does not meet the
condition in paragraph 415
(b) may revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that financial asset meets the
condition in paragraph 415
Such a revocation shall be made on the basis of the facts and circumstances that
exist at the date of initial application That classification shall be applied
retrospectively
7210 At the date of initial application an entity
(a) may designate a financial liability as measured at fair value through
profit or loss in accordance with paragraph 422(a)
(b) shall revoke its previous designation of a financial liability as measured
at fair value through profit or loss if such designation was made at initial
recognition in accordance with the condition now in paragraph 422(a)
and such designation does not satisfy that condition at the date of initial
application
(c) may revoke its previous designation of a financial liability as measured
at fair value through profit or loss if such designation was made at initial
recognition in accordance with the condition now in paragraph 422(a)
and such designation satisfies that condition at the date of initial
application
Such a designation and revocation shall be made on the basis of the facts and
circumstances that exist at the date of initial application That classification
shall be applied retrospectively
7211 If it is impracticable (as defined in IAS 8) for an entity to apply retrospectively
the effective interest method the entity shall treat
(a) the fair value of the financial asset or the financial liability at the end of
each comparative period presented as the gross carrying amount of that
financial asset or the amortised cost of that financial liability if the
entity restates prior periods and
(b) the fair value of the financial asset or the financial liability at the date of
initial application as the new gross carrying amount of that financial
asset or the new amortised cost of that financial liability at the date of
initial application of this Standard
7212 If an entity previously accounted at cost (in accordance with IAS 39) for an
investment in an equity instrument that does not have a quoted price in an
active market for an identical instrument (ie a Level 1 input) (or for a derivative
asset that is linked to and must be settled by delivery of such an equity
instrument) it shall measure that instrument at fair value at the date of initial
application Any difference between the previous carrying amount and the fair
IFRS 9
IFRS FoundationA364value shall be recognised in the opening retained earnings (or other component
of equity as appropriate) of the reporting period that includes the date of initial
application
7213 If an entity previously accounted for a derivative liability that is linked to and
must be settled by delivery of an equity instrument that does not have a quoted
price in an active market for an identical instrument (ie a Level 1 input) at cost
in accordance with IAS 39 it shall measure that derivative liability at fair value
at the date of initial application Any difference between the previous carrying
amount and the fair value shall be recognised in the opening retained earnings
of the reporting period that includes the date of initial application
7214 At the date of initial application an entity shall determine whether the
treatment in paragraph 577 would create or enlarge an accounting mismatch
in profit or loss on the basis of the facts and circumstances that exist at the date
of initial application This Standard shall be applied retrospectively on the basis
of that determination
7214A At the date of initial application an entity is permitted to make the designation
in paragraph 25 for contracts that already exist on the date but only if it
designates all similar contracts The change in the net assets resulting from
such designations shall be recognised in retained earnings at the date of initial
application
7215 Despite the requirement in paragraph 721 an entity that adopts the
classification and measurement requirements of this Standard (which include
the requirements related to amortised cost measurement for financial assets and
impairment in Sections 54 and 55) shall provide the disclosures set out in
paragraphs 42L–42O of IFRS 7 but need not restate prior periods The entity may
restate prior periods if and only if it is possible without the use of hindsight If
an entity does not restate prior periods the entity shall recognise any difference
between the previous carrying amount and the carrying amount at the
beginning of the annual reporting period that includes the date of initial
application in the opening retained earnings (or other component of equity as
appropriate) of the annual reporting period that includes the date of initial
application However if an entity restates prior periods the restated financial
statements must reflect all of the requirements in this Standard If an entity’s
chosen approach to applying IFRS 9 results in more than one date of initial
application for different requirements this paragraph applies at each date of
initial application (see paragraph 722) This would be the case for example if
an entity elects to early apply only the requirements for the presentation of
gains and losses on financial liabilities designated as at fair value through profit
or loss in accordance with paragraph 712 before applying the other
requirements in this Standard
7216 If an entity prepares interim financial reports in accordance with IAS 34 Interim
Financial Reporting the entity need not apply the requirements in this Standard to
interim periods prior to the date of initial application if it is impracticable
(as defined in IAS 8)
IFRS 9
IFRS Foundation A365Impairment (Section 55)
7217 An entity shall apply the impairment requirements in Section 55 retrospectively
in accordance with IAS 8 subject to paragraphs 7215 and 7218–7220
7218 At the date of initial application an entity shall use reasonable and supportable
information that is available without undue cost or effort to determine the
credit risk at the date that a financial instrument was initially recognised (or for
loan commitments and financial guarantee contracts at the date that the entity
became a party to the irrevocable commitment in accordance with
paragraph 556) and compare that to the credit risk at the date of initial
application of this Standard
7219 When determining whether there has been a significant increase in credit risk
since initial recognition an entity may apply
(a) the requirements in paragraphs 5510 and B5522–B5524 and
(b) the rebuttable presumption in paragraph 5511 for contractual
payments that are more than 30 days past due if an entity will apply the
impairment requirements by identifying significant increases in credit
risk since initial recognition for those financial instruments on the basis
of past due information
7220 If at the date of initial application determining whether there has been a
significant increase in credit risk since initial recognition would require undue
cost or effort an entity shall recognise a loss allowance at an amount equal to
lifetime expected credit losses at each reporting date until that financial
instrument is derecognised (unless that financial instrument is low credit risk at
a reporting date in which case paragraph 7219(a) applies)
Transition for hedge accounting (Chapter 6)
7221 When an entity first applies this Standard it may choose as its accounting policy
to continue to apply the hedge accounting requirements of IAS 39 instead of the
requirements in Chapter 6 of this Standard An entity shall apply that policy to
all of its hedging relationships An entity that chooses that policy shall also
apply IFRIC 16 Hedges of a Net Investment in a Foreign Operation without the
amendments that conform that Interpretation to the requirements in Chapter 6
of this Standard
7222 Except as provided in paragraph 7226 an entity shall apply the hedge
accounting requirements of this Standard prospectively
7223 To apply hedge accounting from the date of initial application of the hedge
accounting requirements of this Standard all qualifying criteria must be met as
at that date
7224 Hedging relationships that qualified for hedge accounting in accordance with
IAS 39 that also qualify for hedge accounting in accordance with the criteria of
this Standard (see paragraph 641) after taking into account any rebalancing of
the hedging relationship on transition (see paragraph 7225(b)) shall be
regarded as continuing hedging relationships
IFRS 9
IFRS FoundationA3667225 On initial application of the hedge accounting requirements of this Standard an
entity
(a) may start to apply those requirements from the same point in time as it
ceases to apply the hedge accounting requirements of IAS 39 and
(b) shall consider the hedge ratio in accordance with IAS 39 as the starting
point for rebalancing the hedge ratio of a continuing hedging
relationship if applicable Any gain or loss from such a rebalancing
shall be recognised in profit or loss
7226 As an exception to prospective application of the hedge accounting
requirements of this Standard an entity
(a) shall apply the accounting for the time value of options in accordance
with paragraph 6515 retrospectively if in accordance with IAS 39 only
the change in an option’s intrinsic value was designated as a hedging
instrument in a hedging relationship This retrospective application
applies only to those hedging relationships that existed at the beginning
of the earliest comparative period or were designated thereafter
(b) may apply the accounting for the forward element of forward contracts
in accordance with paragraph 6516 retrospectively if in accordance
with IAS 39 only the change in the spot element of a forward contract
was designated as a hedging instrument in a hedging relationship This
retrospective application applies only to those hedging relationships
that existed at the beginning of the earliest comparative period or were
designated thereafter In addition if an entity elects retrospective
application of this accounting it shall be applied to all hedging
relationships that qualify for this election (ie on transition this election
is not available on a hedgingrelationshipbyhedgingrelationship basis)
The accounting for foreign currency basis spreads (see paragraph 6516)
may be applied retrospectively for those hedging relationships that
existed at the beginning of the earliest comparative period or were
designated thereafter
(c) shall apply retrospectively the requirement of paragraph 656 that there
is not an expiration or termination of the hedging instrument if
(i) as a consequence of laws or regulations or the introduction of
laws or regulations the parties to the hedging instrument agree
that one or more clearing counterparties replace their original
counterparty to become the new counterparty to each of the
parties and
(ii) other changes if any to the hedging instrument are limited to
those that are necessary to effect such a replacement of the
counterparty
Entities that have applied IFRS 9 (2009) IFRS 9 (2010) or
IFRS 9 (2013) early
7227 An entity shall apply the transition requirements in paragraphs 721–7226 at
the relevant date of initial application An entity shall apply each of the
transition provisions in paragraphs 723–7214A and 7217–7226 only once
IFRS 9
IFRS Foundation A367(ie if an entity chooses an approach of applying IFRS 9 that involves more than
one date of initial application it cannot apply any of those provisions again if
they were already applied at an earlier date) (See paragraphs 722 and 732)
7228 An entity that applied IFRS 9 (2009) IFRS 9 (2010) or IFRS 9 (2013) and
subsequently applies this Standard
(a) shall revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that designation was previously made
in accordance with the condition in paragraph 415 but that condition is
no longer satisfied as a result of the application of this Standard
(b) may designate a financial asset as measured at fair value through profit
or loss if that designation would not have previously satisfied the
condition in paragraph 415 but that condition is now satisfied as a
result of the application of this Standard
(c) shall revoke its previous designation of a financial liability as measured
at fair value through profit or loss if that designation was previously
made in accordance with the condition in paragraph 422(a) but that
condition is no longer satisfied as a result of the application of this
Standard and
(d) may designate a financial liability as measured at fair value through
profit or loss if that designation would not have previously satisfied the
condition in paragraph 422(a) but that condition is now satisfied as a
result of the application of this Standard
Such a designation and revocation shall be made on the basis of the facts and
circumstances that exist at the date of initial application of this Standard That
classification shall be applied retrospectively
73 Withdrawal of IFRIC 9 IFRS 9 (2009) IFRS 9 (2010) and
IFRS 9 (2013)
731 This Standard supersedes IFRIC 9 Reassessment of Embedded Derivatives The
requirements added to IFRS 9 in October 2010 incorporated the requirements
previously set out in paragraphs 5 and 7 of IFRIC 9 As a consequential
amendment IFRS 1 Firsttime Adoption of International Financial Reporting Standards
incorporated the requirements previously set out in paragraph 8 of IFRIC 9
732 This Standard supersedes IFRS 9 (2009) IFRS 9 (2010) and IFRS 9 (2013) However
for annual periods beginning before 1 January 2018 an entity may elect to apply
those earlier versions of IFRS 9 instead of applying this Standard if and only if
the entity’s relevant date of initial application is before 1 February 2015
IFRS 9
IFRS FoundationA368Appendix A
Defined terms
This appendix is an integral part of the Standard
12month expected
credit losses
The portion of lifetime expected credit losses that represent
the expected credit losses that result from default events on a
financial instrument that are possible within the 12 months after
the reporting date
amortised cost of a
financial asset or
financial liability
The amount at which the financial asset or financial liability is
measured at initial recognition minus the principal repayments
plus or minus the cumulative amortisation using the effective
interest method of any difference between that initial amount
and the maturity amount and for financial assets adjusted for
any loss allowance
contract assets Those rights that IFRS 15 Revenue from Contracts with Customers
specifies are accounted for in accordance with this Standard for
the purposes of recognising and measuring impairment gains or
losses
creditimpaired
financial asset
A financial asset is creditimpaired when one or more events that
have a detrimental impact on the estimated future cash flows of
that financial asset have occurred Evidence that a financial asset
is creditimpaired include observable data about the following
events
(a) significant financial difficulty of the issuer or the
borrower
(b) a breach of contract such as a default or past due event
(c) the lender(s) of the borrower for economic or contractual
reasons relating to the borrower’s financial difficulty
having granted to the borrower a concession(s) that the
lender(s) would not otherwise consider
(d) it is becoming probable that the borrower will enter
bankruptcy or other financial reorganisation
(e) the disappearance of an active market for that financial
asset because of financial difficulties or
(f) the purchase or origination of a financial asset at a deep
discount that reflects the incurred credit losses
It may not be possible to identify a single discrete event—instead
the combined effect of several events may have caused financial
assets to become creditimpaired
IFRS 9
IFRS Foundation A369credit loss The difference between all contractual cash flows that are due to
an entity in accordance with the contract and all the cash flows
that the entity expects to receive (ie all cash shortfalls)
discounted at the original effective interest rate (or
creditadjusted effective interest rate for purchased or
originated creditimpaired financial assets) An entity shall
estimate cash flows by considering all contractual terms of the
financial instrument (for example prepayment extension call
and similar options) through the expected life of that financial
instrument The cash flows that are considered shall include
cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms There
is a presumption that the expected life of a financial instrument
can be estimated reliably However in those rare cases when it is
not possible to reliably estimate the expected life of a financial
instrument the entity shall use the remaining contractual term
of the financial instrument
creditadjusted
effective interest rate
The rate that exactly discounts the estimated future cash
payments or receipts through the expected life of the financial
asset to the amortised cost of a financial asset that is a
purchased or originated creditimpaired financial asset
When calculating the creditadjusted effective interest rate an
entity shall estimate the expected cash flows by considering all
contractual terms of the financial asset (for example
prepayment extension call and similar options) and expected
credit losses The calculation includes all fees and points paid
or received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B541‒B543)
transaction costs and all other premiums or discounts There
is a presumption that the cash flows and the expected life of a
group of similar financial instruments can be estimated reliably
However in those rare cases when it is not possible to reliably
estimate the cash flows or the remaining life of a financial
instrument (or group of financial instruments) the entity shall
use the contractual cash flows over the full contractual term of
the financial instrument (or group of financial instruments)
derecognition The removal of a previously recognised financial asset or
financial liability from an entity’s statement of financial position
IFRS 9
IFRS FoundationA370derivative A financial instrument or other contract within the scope of this
Standard with all three of the following characteristics
(a) its value changes in response to the change in a specified
interest rate financial instrument price commodity
price foreign exchange rate index of prices or rates
credit rating or credit index or other variable provided
in the case of a nonfinancial variable that the variable is
not specific to a party to the contract (sometimes called
the underlying’)
(b) it requires no initial net investment or an initial net
investment that is smaller than would be required for
other types of contracts that would be expected to have a
similar response to changes in market factors
(c) it is settled at a future date
dividends Distributions of profits to holders of equity instruments in
proportion to their holdings of a particular class of capital
effective interest
method
The method that is used in the calculation of the amortised cost
of a financial asset or a financial liability and in the
allocation and recognition of the interest revenue or interest
expense in profit or loss over the relevant period
effective interest rate The rate that exactly discounts estimated future cash payments
or receipts through the expected life of the financial asset or
financial liability to the gross carrying amount of a financial
asset or to the amortised cost of a financial liability When
calculating the effective interest rate an entity shall estimate the
expected cash flows by considering all the contractual terms of
the financial instrument (for example prepayment extension
call and similar options) but shall not consider the expected
credit losses The calculation includes all fees and points paid
or received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B541–B543)
transaction costs and all other premiums or discounts There
is a presumption that the cash flows and the expected life of a
group of similar financial instruments can be estimated reliably
However in those rare cases when it is not possible to reliably
estimate the cash flows or the expected life of a financial
instrument (or group of financial instruments) the entity shall
use the contractual cash flows over the full contractual term of
the financial instrument (or group of financial instruments)
expected credit losses The weighted average of credit losses with the respective risks of
a default occurring as the weights
financial guarantee
contract
A contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument
IFRS 9
IFRS Foundation A371financial liability at
fair value through
profit or loss
A financial liability that meets one of the following conditions
(a) it meets the definition of held for trading
(b) upon initial recognition it is designated by the entity as at
fair value through profit or loss in accordance with
paragraph 422 or 435
(c) it is designated either upon initial recognition or
subsequently as at fair value through profit or loss in
accordance with paragraph 671
firm commitment A binding agreement for the exchange of a specified quantity of
resources at a specified price on a specified future date or dates
forecast transaction An uncommitted but anticipated future transaction
gross carrying amount
of a financial asset
The amortised cost of a financial asset before adjusting for
any loss allowance
hedge ratio The relationship between the quantity of the hedging instrument
and the quantity of the hedged item in terms of their relative
weighting
held for trading A financial asset or financial liability that
(a) is acquired or incurred principally for the purpose of
selling or repurchasing it in the near term
(b) on initial recognition is part of a portfolio of identified
financial instruments that are managed together and for
which there is evidence of a recent actual pattern of
shortterm profittaking or
(c) is a derivative (except for a derivative that is a financial
guarantee contract or a designated and effective hedging
instrument)
impairment gain or
loss
Gains or losses that are recognised in profit or loss in accordance
with paragraph 558 and that arise from applying the
impairment requirements in Section 55
lifetime expected
credit losses
The expected credit losses that result from all possible default
events over the expected life of a financial instrument
loss allowance The allowance for expected credit losses on financial assets
measured in accordance with paragraph 412 lease receivables
and contract assets the accumulated impairment amount for
financial assets measured in accordance with paragraph 412A
and the provision for expected credit losses on loan
commitments and financial guarantee contracts
IFRS 9
IFRS FoundationA372modification gain or
loss
The amount arising from adjusting the gross carrying amount
of a financial asset to reflect the renegotiated or modified
contractual cash flows The entity recalculates the gross carrying
amount of a financial asset as the present value of the estimated
future cash payments or receipts through the expected life of the
renegotiated or modified financial asset that are discounted at
the financial asset’s original effective interest rate (or the
original creditadjusted effective interest rate for purchased
or originated creditimpaired financial assets) or when
applicable the revised effective interest rate calculated in
accordance with paragraph 6510 When estimating the
expected cash flows of a financial asset an entity shall consider
all contractual terms of the financial asset (for example
prepayment call and similar options) but shall not consider the
expected credit losses unless the financial asset is a purchased
or originated creditimpaired financial asset in which case
an entity shall also consider the initial expected credit losses that
were considered when calculating the original creditadjusted
effective interest rate
past due A financial asset is past due when a counterparty has failed to
make a payment when that payment was contractually due
purchased or
originated
creditimpaired
financial asset
Purchased or originated financial asset(s) that are
creditimpaired on initial recognition
reclassification date The first day of the first reporting period following the change in
business model that results in an entity reclassifying financial
assets
regular way purchase
or sale
A purchase or sale of a financial asset under a contract whose
terms require delivery of the asset within the time frame
established generally by regulation or convention in the
marketplace concerned
transaction costs Incremental costs that are directly attributable to the acquisition
issue or disposal of a financial asset or financial liability (see
paragraph B548) An incremental cost is one that would not
have been incurred if the entity had not acquired issued or
disposed of the financial instrument
The following terms are defined in paragraph 11 of IAS 32 Appendix A of IFRS 7
Appendix A of IFRS 13 or Appendix A of IFRS 15 and are used in this Standard with the
meanings specified in IAS 32 IFRS 7 IFRS 13 or IFRS 15
(a) credit risk2
(b) equity instrument
(c) fair value
2 This term (as defined in IFRS 7) is used in the requirements for presenting the effects of changes in
credit risk on liabilities designated as at fair value through profit or loss (see paragraph 577)
IFRS 9
IFRS Foundation A373(d) financial asset
(e) financial instrument
(f) financial liability
(g) transaction price
IFRS 9
IFRS FoundationA374Appendix B
Application guidance
This appendix is an integral part of the Standard
Scope (Chapter 2)
B21 Some contracts require a payment based on climatic geological or other
physical variables (Those based on climatic variables are sometimes referred to
as weather derivatives’) If those contracts are not within the scope of IFRS 4
Insurance Contracts they are within the scope of this Standard
B22 This Standard does not change the requirements relating to employee benefit
plans that comply with IAS 26 Accounting and Reporting by Retirement Benefit Plans
and royalty agreements based on the volume of sales or service revenues that are
accounted for under IFRS 15 Revenue from Contracts with Customers
B23 Sometimes an entity makes what it views as a strategic investment’ in equity
instruments issued by another entity with the intention of establishing or
maintaining a longterm operating relationship with the entity in which the
investment is made The investor or joint venturer entity uses IAS 28 Investments
in Associates and Joint Ventures to determine whether the equity method of
accounting shall be applied to such an investment
B24 This Standard applies to the financial assets and financial liabilities of insurers
other than rights and obligations that paragraph 21(e) excludes because they
arise under contracts within the scope of IFRS 4
B25 Financial guarantee contracts may have various legal forms such as a guarantee
some types of letter of credit a credit default contract or an insurance contract
Their accounting treatment does not depend on their legal form The following
are examples of the appropriate treatment (see paragraph 21(e))
(a) Although a financial guarantee contract meets the definition of an
insurance contract in IFRS 4 if the risk transferred is significant the
issuer applies this Standard Nevertheless if the issuer has previously
asserted explicitly that it regards such contracts as insurance contracts
and has used accounting that is applicable to insurance contracts the
issuer may elect to apply either this Standard or IFRS 4 to such financial
guarantee contracts If this Standard applies paragraph 511 requires
the issuer to recognise a financial guarantee contract initially at fair
value If the financial guarantee contract was issued to an unrelated
party in a standalone arm’s length transaction its fair value at inception
is likely to equal the premium received unless there is evidence to the
contrary Subsequently unless the financial guarantee contract was
designated at inception as at fair value through profit or loss or unless
paragraphs 3215–3223 and B3212–B3217 apply (when a transfer of a
financial asset does not qualify for derecognition or the continuing
involvement approach applies) the issuer measures it at the higher of
(i) the amount determined in accordance with Section 55 and
IFRS 9
IFRS Foundation A375(ii) the amount initially recognised less when appropriate the
cumulative amount of income recognised in accordance with the
principles of IFRS 15 (see paragraph 421(c))
(b) Some creditrelated guarantees do not as a precondition for payment
require that the holder is exposed to and has incurred a loss on the
failure of the debtor to make payments on the guaranteed asset when
due An example of such a guarantee is one that requires payments in
response to changes in a specified credit rating or credit index Such
guarantees are not financial guarantee contracts as defined in this
Standard and are not insurance contracts as defined in IFRS 4 Such
guarantees are derivatives and the issuer applies this Standard to them
(c) If a financial guarantee contract was issued in connection with the sale
of goods the issuer applies IFRS 15 in determining when it recognises
the revenue from the guarantee and from the sale of goods
B26 Assertions that an issuer regards contracts as insurance contracts are typically
found throughout the issuer’s communications with customers and regulators
contracts business documentation and financial statements Furthermore
insurance contracts are often subject to accounting requirements that are
distinct from the requirements for other types of transaction such as contracts
issued by banks or commercial companies In such cases an issuer’s financial
statements typically include a statement that the issuer has used those
accounting requirements
Recognition and derecognition (Chapter 3)
Initial recognition (Section 31)
B311 As a consequence of the principle in paragraph 311 an entity recognises all of
its contractual rights and obligations under derivatives in its statement of
financial position as assets and liabilities respectively except for derivatives
that prevent a transfer of financial assets from being accounted for as a sale (see
paragraph B3214) If a transfer of a financial asset does not qualify for
derecognition the transferee does not recognise the transferred asset as its asset
(see paragraph B3215)
B312 The following are examples of applying the principle in paragraph 311
(a) Unconditional receivables and payables are recognised as assets or
liabilities when the entity becomes a party to the contract and as a
consequence has a legal right to receive or a legal obligation to pay cash
(b) Assets to be acquired and liabilities to be incurred as a result of a firm
commitment to purchase or sell goods or services are generally not
recognised until at least one of the parties has performed under the
agreement For example an entity that receives a firm order does not
generally recognise an asset (and the entity that places the order does not
recognise a liability) at the time of the commitment but instead delays
recognition until the ordered goods or services have been shipped
delivered or rendered If a firm commitment to buy or sell nonfinancial
items is within the scope of this Standard in accordance with
IFRS 9
IFRS FoundationA376paragraphs 24–27 its net fair value is recognised as an asset or a
liability on the commitment date (see paragraph B4130(c)) In addition
if a previously unrecognised firm commitment is designated as a hedged
item in a fair value hedge any change in the net fair value attributable
to the hedged risk is recognised as an asset or a liability after the
inception of the hedge (see paragraphs 658(b) and 659)
(c) A forward contract that is within the scope of this Standard (see
paragraph 21) is recognised as an asset or a liability on the commitment
date instead of on the date on which settlement takes place When an
entity becomes a party to a forward contract the fair values of the right
and obligation are often equal so that the net fair value of the forward is
zero If the net fair value of the right and obligation is not zero the
contract is recognised as an asset or liability
(d) Option contracts that are within the scope of this Standard (see
paragraph 21) are recognised as assets or liabilities when the holder or
writer becomes a party to the contract
(e) Planned future transactions no matter how likely are not assets and
liabilities because the entity has not become a party to a contract
Regular way purchase or sale of financial assets
B313 A regular way purchase or sale of financial assets is recognised using either trade
date accounting or settlement date accounting as described in paragraphs B315
and B316 An entity shall apply the same method consistently for all purchases
and sales of financial assets that are classified in the same way in accordance
with this Standard For this purpose assets that are mandatorily measured at
fair value through profit or loss form a separate classification from assets
designated as measured at fair value through profit or loss In addition
investments in equity instruments accounted for using the option provided in
paragraph 575 form a separate classification
B314 A contract that requires or permits net settlement of the change in the value of
the contract is not a regular way contract Instead such a contract is accounted
for as a derivative in the period between the trade date and the settlement date
B315 The trade date is the date that an entity commits itself to purchase or sell an
asset Trade date accounting refers to (a) the recognition of an asset to be
received and the liability to pay for it on the trade date and (b) derecognition of
an asset that is sold recognition of any gain or loss on disposal and the
recognition of a receivable from the buyer for payment on the trade date
Generally interest does not start to accrue on the asset and corresponding
liability until the settlement date when title passes
B316 The settlement date is the date that an asset is delivered to or by an entity
Settlement date accounting refers to (a) the recognition of an asset on the day it
is received by the entity and (b) the derecognition of an asset and recognition of
any gain or loss on disposal on the day that it is delivered by the entity When
settlement date accounting is applied an entity accounts for any change in the
fair value of the asset to be received during the period between the trade date
and the settlement date in the same way as it accounts for the acquired asset In
IFRS 9
IFRS Foundation A377other words the change in value is not recognised for assets measured at
amortised cost it is recognised in profit or loss for assets classified as financial
assets measured at fair value through profit or loss and it is recognised in other
comprehensive income for financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A and for
investments in equity instruments accounted for in accordance with
paragraph 575
IFRS 9
IFRS FoundationA378Derecognition of financial assets (Section 32)
B321 The following flow chart illustrates the evaluation of whether and to what
extent a financial asset is derecognised
Continue to recognise the asset
Continue to recognise the asset
Derecognise the asset
Derecognise the asset
Derecognise the asset
IFRS 9
IFRS Foundation A379Arrangements under which an entity retains the contractual rights to
receive the cash flows of a financial asset but assumes a contractual
obligation to pay the cash flows to one or more recipients
(paragraph 324(b))
B322 The situation described in paragraph 324(b) (when an entity retains the
contractual rights to receive the cash flows of the financial asset but assumes a
contractual obligation to pay the cash flows to one or more recipients) occurs
for example if the entity is a trust and issues to investors beneficial interests in
the underlying financial assets that it owns and provides servicing of those
financial assets In that case the financial assets qualify for derecognition if the
conditions in paragraphs 325 and 326 are met
B323 In applying paragraph 325 the entity could be for example the originator of
the financial asset or it could be a group that includes a subsidiary that has
acquired the financial asset and passes on cash flows to unrelated third party
investors
Evaluation of the transfer of risks and rewards of ownership
(paragraph 326)
B324 Examples of when an entity has transferred substantially all the risks and
rewards of ownership are
(a) an unconditional sale of a financial asset
(b) a sale of a financial asset together with an option to repurchase the
financial asset at its fair value at the time of repurchase and
(c) a sale of a financial asset together with a put or call option that is deeply
out of the money (ie an option that is so far out of the money it is highly
unlikely to go into the money before expiry)
B325 Examples of when an entity has retained substantially all the risks and rewards
of ownership are
(a) a sale and repurchase transaction where the repurchase price is a fixed
price or the sale price plus a lender’s return
(b) a securities lending agreement
(c) a sale of a financial asset together with a total return swap that transfers
the market risk exposure back to the entity
(d) a sale of a financial asset together with a deep inthemoney put or call
option (ie an option that is so far in the money that it is highly unlikely
to go out of the money before expiry) and
(e) a sale of shortterm receivables in which the entity guarantees to
compensate the transferee for credit losses that are likely to occur
B326 If an entity determines that as a result of the transfer it has transferred
substantially all the risks and rewards of ownership of the transferred asset it
does not recognise the transferred asset again in a future period unless it
reacquires the transferred asset in a new transaction
IFRS 9
IFRS FoundationA380Evaluation of the transfer of control
B327 An entity has not retained control of a transferred asset if the transferee has the
practical ability to sell the transferred asset An entity has retained control of a
transferred asset if the transferee does not have the practical ability to sell the
transferred asset A transferee has the practical ability to sell the transferred
asset if it is traded in an active market because the transferee could repurchase
the transferred asset in the market if it needs to return the asset to the entity
For example a transferee may have the practical ability to sell a transferred asset
if the transferred asset is subject to an option that allows the entity to
repurchase it but the transferee can readily obtain the transferred asset in the
market if the option is exercised A transferee does not have the practical ability
to sell the transferred asset if the entity retains such an option and the
transferee cannot readily obtain the transferred asset in the market if the entity
exercises its option
B328 The transferee has the practical ability to sell the transferred asset only if the
transferee can sell the transferred asset in its entirety to an unrelated third party
and is able to exercise that ability unilaterally and without imposing additional
restrictions on the transfer The critical question is what the transferee is able to
do in practice not what contractual rights the transferee has concerning what it
can do with the transferred asset or what contractual prohibitions exist In
particular
(a) a contractual right to dispose of the transferred asset has little practical
effect if there is no market for the transferred asset and
(b) an ability to dispose of the transferred asset has little practical effect if it
cannot be exercised freely For that reason
(i) the transferee’s ability to dispose of the transferred asset must be
independent of the actions of others (ie it must be a unilateral
ability) and
(ii) the transferee must be able to dispose of the transferred asset
without needing to attach restrictive conditions or strings’ to the
transfer (eg conditions about how a loan asset is serviced or an
option giving the transferee the right to repurchase the asset)
B329 That the transferee is unlikely to sell the transferred asset does not of itself
mean that the transferor has retained control of the transferred asset However
if a put option or guarantee constrains the transferee from selling the
transferred asset then the transferor has retained control of the transferred
asset For example if a put option or guarantee is sufficiently valuable it
constrains the transferee from selling the transferred asset because the
transferee would in practice not sell the transferred asset to a third party
without attaching a similar option or other restrictive conditions Instead the
transferee would hold the transferred asset so as to obtain payments under the
guarantee or put option Under these circumstances the transferor has retained
control of the transferred asset
IFRS 9
IFRS Foundation A381Transfers that qualify for derecognition
B3210 An entity may retain the right to a part of the interest payments on transferred
assets as compensation for servicing those assets The part of the interest
payments that the entity would give up upon termination or transfer of the
servicing contract is allocated to the servicing asset or servicing liability The
part of the interest payments that the entity would not give up is an
interestonly strip receivable For example if the entity would not give up any
interest upon termination or transfer of the servicing contract the entire
interest spread is an interestonly strip receivable For the purposes of applying
paragraph 3213 the fair values of the servicing asset and interestonly strip
receivable are used to allocate the carrying amount of the receivable between
the part of the asset that is derecognised and the part that continues to be
recognised If there is no servicing fee specified or the fee to be received is not
expected to compensate the entity adequately for performing the servicing a
liability for the servicing obligation is recognised at fair value
B3211 When measuring the fair values of the part that continues to be recognised and
the part that is derecognised for the purposes of applying paragraph 3213 an
entity applies the fair value measurement requirements in IFRS 13 Fair Value
Measurement in addition to paragraph 3214
Transfers that do not qualify for derecognition
B3212 The following is an application of the principle outlined in paragraph 3215 If
a guarantee provided by the entity for default losses on the transferred asset
prevents a transferred asset from being derecognised because the entity has
retained substantially all the risks and rewards of ownership of the transferred
asset the transferred asset continues to be recognised in its entirety and the
consideration received is recognised as a liability
Continuing involvement in transferred assets
B3213 The following are examples of how an entity measures a transferred asset and
the associated liability under paragraph 3216
All assets
(a) If a guarantee provided by an entity to pay for default losses on a
transferred asset prevents the transferred asset from being derecognised
to the extent of the continuing involvement the transferred asset at the
date of the transfer is measured at the lower of (i) the carrying amount of
the asset and (ii) the maximum amount of the consideration received in
the transfer that the entity could be required to repay (the guarantee
amount’) The associated liability is initially measured at the guarantee
amount plus the fair value of the guarantee (which is normally the
consideration received for the guarantee) Subsequently the initial fair
value of the guarantee is recognised in profit or loss when (or as) the
obligation is satisfied (in accordance with the principles of IFRS 15) and
the carrying value of the asset is reduced by any loss allowance
IFRS 9
IFRS FoundationA382Assets measured at amortised cost
(b) If a put option obligation written by an entity or call option right held by
an entity prevents a transferred asset from being derecognised and the
entity measures the transferred asset at amortised cost the associated
liability is measured at its cost (ie the consideration received) adjusted
for the amortisation of any difference between that cost and the gross
carrying amount of the transferred asset at the expiration date of the
option For example assume that the gross carrying amount of the asset
on the date of the transfer is CU98 and that the consideration received is
CU95 The gross carrying amount of the asset on the option exercise date
will be CU100 The initial carrying amount of the associated liability is
CU95 and the difference between CU95 and CU100 is recognised in profit
or loss using the effective interest method If the option is exercised any
difference between the carrying amount of the associated liability and
the exercise price is recognised in profit or loss
Assets measured at fair value
(c) If a call option right retained by an entity prevents a transferred asset
from being derecognised and the entity measures the transferred asset at
fair value the asset continues to be measured at its fair value The
associated liability is measured at (i) the option exercise price less the
time value of the option if the option is in or at the money or (ii) the fair
value of the transferred asset less the time value of the option if the
option is out of the money The adjustment to the measurement of the
associated liability ensures that the net carrying amount of the asset and
the associated liability is the fair value of the call option right For
example if the fair value of the underlying asset is CU80 the option
exercise price is CU95 and the time value of the option is CU5 the
carrying amount of the associated liability is CU75 (CU80 – CU5) and the
carrying amount of the transferred asset is CU80 (ie its fair value)
(d) If a put option written by an entity prevents a transferred asset from
being derecognised and the entity measures the transferred asset at fair
value the associated liability is measured at the option exercise price
plus the time value of the option The measurement of the asset at fair
value is limited to the lower of the fair value and the option exercise
price because the entity has no right to increases in the fair value of the
transferred asset above the exercise price of the option This ensures that
the net carrying amount of the asset and the associated liability is the
fair value of the put option obligation For example if the fair value of
the underlying asset is CU120 the option exercise price is CU100 and the
time value of the option is CU5 the carrying amount of the associated
liability is CU105 (CU100 + CU5) and the carrying amount of the asset is
CU100 (in this case the option exercise price)
(e) If a collar in the form of a purchased call and written put prevents a
transferred asset from being derecognised and the entity measures the
asset at fair value it continues to measure the asset at fair value The
associated liability is measured at (i) the sum of the call exercise price
and fair value of the put option less the time value of the call option if
IFRS 9
IFRS Foundation A383the call option is in or at the money or (ii) the sum of the fair value of
the asset and the fair value of the put option less the time value of the
call option if the call option is out of the money The adjustment to the
associated liability ensures that the net carrying amount of the asset and
the associated liability is the fair value of the options held and written by
the entity For example assume an entity transfers a financial asset that
is measured at fair value while simultaneously purchasing a call with an
exercise price of CU120 and writing a put with an exercise price of CU80
Assume also that the fair value of the asset is CU100 at the date of the
transfer The time value of the put and call are CU1 and CU5
respectively In this case the entity recognises an asset of CU100 (the fair
value of the asset) and a liability of CU96 [(CU100 + CU1) – CU5] This
gives a net asset value of CU4 which is the fair value of the options held
and written by the entity
All transfers
B3214 To the extent that a transfer of a financial asset does not qualify for
derecognition the transferor’s contractual rights or obligations related to the
transfer are not accounted for separately as derivatives if recognising both the
derivative and either the transferred asset or the liability arising from the
transfer would result in recognising the same rights or obligations twice For
example a call option retained by the transferor may prevent a transfer of
financial assets from being accounted for as a sale In that case the call option is
not separately recognised as a derivative asset
B3215 To the extent that a transfer of a financial asset does not qualify for
derecognition the transferee does not recognise the transferred asset as its asset
The transferee derecognises the cash or other consideration paid and recognises
a receivable from the transferor If the transferor has both a right and an
obligation to reacquire control of the entire transferred asset for a fixed amount
(such as under a repurchase agreement) the transferee may measure its
receivable at amortised cost if it meets the criteria in paragraph 412
Examples
B3216 The following examples illustrate the application of the derecognition
principles of this Standard
(a) Repurchase agreements and securities lending If a financial asset is sold under
an agreement to repurchase it at a fixed price or at the sale price plus a
lender’s return or if it is loaned under an agreement to return it to the
transferor it is not derecognised because the transferor retains
substantially all the risks and rewards of ownership If the transferee
obtains the right to sell or pledge the asset the transferor reclassifies the
asset in its statement of financial position for example as a loaned asset
or repurchase receivable
(b) Repurchase agreements and securities lending—assets that are substantially the
same If a financial asset is sold under an agreement to repurchase the
same or substantially the same asset at a fixed price or at the sale price
plus a lender’s return or if a financial asset is borrowed or loaned under
an agreement to return the same or substantially the same asset to the
IFRS 9
IFRS FoundationA384transferor it is not derecognised because the transferor retains
substantially all the risks and rewards of ownership
(c) Repurchase agreements and securities lending—right of substitutionIfa
repurchase agreement at a fixed repurchase price or a price equal to the
sale price plus a lender’s return or a similar securities lending
transaction provides the transferee with a right to substitute assets that
are similar and of equal fair value to the transferred asset at the
repurchase date the asset sold or lent under a repurchase or securities
lending transaction is not derecognised because the transferor retains
substantially all the risks and rewards of ownership
(d) Repurchase right of first refusal at fair value If an entity sells a financial asset
and retains only a right of first refusal to repurchase the transferred
asset at fair value if the transferee subsequently sells it the entity
derecognises the asset because it has transferred substantially all the
risks and rewards of ownership
(e) Wash sale transaction The repurchase of a financial asset shortly after it
has been sold is sometimes referred to as a wash sale Such a repurchase
does not preclude derecognition provided that the original transaction
met the derecognition requirements However if an agreement to sell a
financial asset is entered into concurrently with an agreement to
repurchase the same asset at a fixed price or the sale price plus a lender’s
return then the asset is not derecognised
(f) Put options and call options that are deeply in the money If a transferred
financial asset can be called back by the transferor and the call option is
deeply in the money the transfer does not qualify for derecognition
because the transferor has retained substantially all the risks and
rewards of ownership Similarly if the financial asset can be put back by
the transferee and the put option is deeply in the money the transfer
does not qualify for derecognition because the transferor has retained
substantially all the risks and rewards of ownership
(g) Put options and call options that are deeply out of the money A financial asset
that is transferred subject only to a deep outofthemoney put option
held by the transferee or a deep outofthemoney call option held by the
transferor is derecognised This is because the transferor has transferred
substantially all the risks and rewards of ownership
(h) Readily obtainable assets subject to a call option that is neither deeply in the money
nor deeply out of the money If an entity holds a call option on an asset that
is readily obtainable in the market and the option is neither deeply in
the money nor deeply out of the money the asset is derecognised This is
because the entity (i) has neither retained nor transferred substantially
all the risks and rewards of ownership and (ii) has not retained control
However if the asset is not readily obtainable in the market
derecognition is precluded to the extent of the amount of the asset that
is subject to the call option because the entity has retained control of the
asset
IFRS 9
IFRS Foundation A385(i) A not readily obtainable asset subject to a put option written by an entity that is
neither deeply in the money nor deeply out of the money If an entity transfers a
financial asset that is not readily obtainable in the market and writes a
put option that is not deeply out of the money the entity neither retains
nor transfers substantially all the risks and rewards of ownership
because of the written put option The entity retains control of the asset
if the put option is sufficiently valuable to prevent the transferee from
selling the asset in which case the asset continues to be recognised to
the extent of the transferor’s continuing involvement (see
paragraph B329) The entity transfers control of the asset if the put
option is not sufficiently valuable to prevent the transferee from selling
the asset in which case the asset is derecognised
(j) Assets subject to a fair value put or call option or a forward repurchase agreement
A transfer of a financial asset that is subject only to a put or call option
or a forward repurchase agreement that has an exercise or repurchase
price equal to the fair value of the financial asset at the time of
repurchase results in derecognition because of the transfer of
substantially all the risks and rewards of ownership
(k) Cashsettled call or put options An entity evaluates the transfer of a
financial asset that is subject to a put or call option or a forward
repurchase agreement that will be settled net in cash to determine
whether it has retained or transferred substantially all the risks and
rewards of ownership If the entity has not retained substantially all the
risks and rewards of ownership of the transferred asset it determines
whether it has retained control of the transferred asset That the put or
the call or the forward repurchase agreement is settled net in cash does
not automatically mean that the entity has transferred control (see
paragraphs B329 and (g) (h) and (i) above)
(l) Removal of accounts provision A removal of accounts provision is an
unconditional repurchase (call) option that gives an entity the right to
reclaim assets transferred subject to some restrictions Provided that
such an option results in the entity neither retaining nor transferring
substantially all the risks and rewards of ownership it precludes
derecognition only to the extent of the amount subject to repurchase
(assuming that the transferee cannot sell the assets) For example if the
carrying amount and proceeds from the transfer of loan assets are
CU100000 and any individual loan could be called back but the
aggregate amount of loans that could be repurchased could not exceed
CU10000 CU90000 of the loans would qualify for derecognition
(m) Cleanup calls An entity which may be a transferor that services
transferred assets may hold a cleanup call to purchase remaining
transferred assets when the amount of outstanding assets falls to a
specified level at which the cost of servicing those assets becomes
burdensome in relation to the benefits of servicing Provided that such a
cleanup call results in the entity neither retaining nor transferring
substantially all the risks and rewards of ownership and the transferee
cannot sell the assets it precludes derecognition only to the extent of the
amount of the assets that is subject to the call option
IFRS 9
IFRS FoundationA386(n) Subordinated retained interests and credit guarantees An entity may provide
the transferee with credit enhancement by subordinating some or all of
its interest retained in the transferred asset Alternatively an entity may
provide the transferee with credit enhancement in the form of a credit
guarantee that could be unlimited or limited to a specified amount If
the entity retains substantially all the risks and rewards of ownership of
the transferred asset the asset continues to be recognised in its entirety
If the entity retains some but not substantially all of the risks and
rewards of ownership and has retained control derecognition is
precluded to the extent of the amount of cash or other assets that the
entity could be required to pay
(o) Total return swaps An entity may sell a financial asset to a transferee and
enter into a total return swap with the transferee whereby all of the
interest payment cash flows from the underlying asset are remitted to
the entity in exchange for a fixed payment or variable rate payment and
any increases or declines in the fair value of the underlying asset are
absorbed by the entity In such a case derecognition of all of the asset is
prohibited
(p) Interest rate swaps An entity may transfer to a transferee a fixed rate
financial asset and enter into an interest rate swap with the transferee to
receive a fixed interest rate and pay a variable interest rate based on a
notional amount that is equal to the principal amount of the transferred
financial asset The interest rate swap does not preclude derecognition
of the transferred asset provided the payments on the swap are not
conditional on payments being made on the transferred asset
(q) Amortising interest rate swaps An entity may transfer to a transferee a fixed
rate financial asset that is paid off over time and enter into an
amortising interest rate swap with the transferee to receive a fixed
interest rate and pay a variable interest rate based on a notional amount
If the notional amount of the swap amortises so that it equals the
principal amount of the transferred financial asset outstanding at any
point in time the swap would generally result in the entity retaining
substantial prepayment risk in which case the entity either continues to
recognise all of the transferred asset or continues to recognise the
transferred asset to the extent of its continuing involvement
Conversely if the amortisation of the notional amount of the swap is not
linked to the principal amount outstanding of the transferred asset such
a swap would not result in the entity retaining prepayment risk on the
asset Hence it would not preclude derecognition of the transferred
asset provided the payments on the swap are not conditional on interest
payments being made on the transferred asset and the swap does not
result in the entity retaining any other significant risks and rewards of
ownership on the transferred asset
(r) Writeoff An entity has no reasonable expectations of recovering the
contractual cash flows on a financial asset in its entirety or a portion
thereof
IFRS 9
IFRS Foundation A387B3217 This paragraph illustrates the application of the continuing involvement
approach when the entity’s continuing involvement is in a part of a financial
asset
Assume an entity has a portfolio of prepayable loans whose coupon and
effective interest rate is 10 per cent and whose principal amount and
amortised cost is CU10000 It enters into a transaction in which in return
for a payment of CU9115 the transferee obtains the right to CU9000 of any
collections of principal plus interest thereon at 95 per cent The entity
retains rights to CU1000 of any collections of principal plus interest thereon
at 10 per cent plus the excess spread of 05 per cent on the remaining
CU9000 of principal Collections from prepayments are allocated between
the entity and the transferee proportionately in the ratio of 19 but any
defaults are deducted from the entity’s interest of CU1000 until that interest
is exhausted The fair value of the loans at the date of the transaction is
CU10100 and the fair value of the excess spread of 05 per cent is CU40
The entity determines that it has transferred some significant risks and
rewards of ownership (for example significant prepayment risk) but has also
retained some significant risks and rewards of ownership (because of its
subordinated retained interest) and has retained control It therefore applies
the continuing involvement approach
To apply this Standard the entity analyses the transaction as (a) a retention
of a fully proportionate retained interest of CU1000 plus (b) the
subordination of that retained interest to provide credit enhancement to the
transferee for credit losses
The entity calculates that CU9090 (90 × CU10100) of the consideration
received of CU9115 represents the consideration for a fully proportionate
90 per cent share The remainder of the consideration received (CU25)
represents consideration received for subordinating its retained interest to
provide credit enhancement to the transferee for credit losses In addition
the excess spread of 05 per cent represents consideration received for the
credit enhancement Accordingly the total consideration received for the
credit enhancement is CU65 (CU25 + CU40)
continued
IFRS 9
IFRS FoundationA388continued
The entity calculates the gain or loss on the sale of the 90 per cent share of
cash flows Assuming that separate fair values of the 90 per cent part
transferred and the 10 per cent part retained are not available at the date of
the transfer the entity allocates the carrying amount of the asset in
accordance with paragraph 3214 of IFRS 9 as follows
Fair value Percentage Allocated
carrying
amount
Portion transferred 9090 90 9000
Portion retained 1010 10 1000
Total 10100 10000
The entity computes its gain or loss on the sale of the 90 per cent share of
the cash flows by deducting the allocated carrying amount of the portion
transferred from the consideration received ie CU90 (CU9090 – CU9000)
The carrying amount of the portion retained by the entity is CU1000
In addition the entity recognises the continuing involvement that results
from the subordination of its retained interest for credit losses Accordingly
it recognises an asset of CU1000 (the maximum amount of the cash flows it
would not receive under the subordination) and an associated liability of
CU1065 (which is the maximum amount of the cash flows it would not
receive under the subordination ie CU1000 plus the fair value of the
subordination of CU65)
The entity uses all of the above information to account for the transaction as
follows
Debit Credit
Original asset — 9000
Asset recognised for subordination or the
residual interest 1000 —
Asset for the consideration received in the
form of excess spread 40 —
Profit or loss (gain on transfer) — 90
Liability — 1065
Cash received 9115 —
Total 10155 10155
continued
IFRS 9
IFRS Foundation A389continued
Immediately following the transaction the carrying amount of the asset is
CU2040 comprising CU1000 representing the allocated cost of the portion
retained and CU1040 representing the entity’s additional continuing
involvement from the subordination of its retained interest for credit losses
(which includes the excess spread of CU40)
In subsequent periods the entity recognises the consideration received for
the credit enhancement (CU65) on a time proportion basis accrues interest
on the recognised asset using the effective interest method and recognises
any impairment losses on the recognised assets As an example of the latter
assume that in the following year there is an impairment loss on the
underlying loans of CU300 The entity reduces its recognised asset by CU600
(CU300 relating to its retained interest and CU300 relating to the additional
continuing involvement that arises from the subordination of its retained
interest for impairment losses) and reduces its recognised liability by CU300
The net result is a charge to profit or loss for impairment losses of CU300
Derecognition of financial liabilities (Section 33)
B331 A financial liability (or part of it) is extinguished when the debtor either
(a) discharges the liability (or part of it) by paying the creditor normally
with cash other financial assets goods or services or
(b) is legally released from primary responsibility for the liability (or part of
it) either by process of law or by the creditor (If the debtor has given a
guarantee this condition may still be met)
B332 If an issuer of a debt instrument repurchases that instrument the debt is
extinguished even if the issuer is a market maker in that instrument or intends
to resell it in the near term
B333 Payment to a third party including a trust (sometimes called insubstance
defeasance’) does not by itself relieve the debtor of its primary obligation to the
creditor in the absence of legal release
B334 If a debtor pays a third party to assume an obligation and notifies its creditor
that the third party has assumed its debt obligation the debtor does not
derecognise the debt obligation unless the condition in paragraph B331(b) is
met If the debtor pays a third party to assume an obligation and obtains a legal
release from its creditor the debtor has extinguished the debt However if the
debtor agrees to make payments on the debt to the third party or direct to its
original creditor the debtor recognises a new debt obligation to the third party
B335 Although legal release whether judicially or by the creditor results in
derecognition of a liability the entity may recognise a new liability if the
derecognition criteria in paragraphs 321–3223 are not met for the financial
assets transferred If those criteria are not met the transferred assets are not
derecognised and the entity recognises a new liability relating to the transferred
assets
IFRS 9
IFRS FoundationA390B336 For the purpose of paragraph 332 the terms are substantially different if the
discounted present value of the cash flows under the new terms including any
fees paid net of any fees received and discounted using the original effective
interest rate is at least 10 per cent different from the discounted present value
of the remaining cash flows of the original financial liability If an exchange of
debt instruments or modification of terms is accounted for as an
extinguishment any costs or fees incurred are recognised as part of the gain or
loss on the extinguishment If the exchange or modification is not accounted
for as an extinguishment any costs or fees incurred adjust the carrying amount
of the liability and are amortised over the remaining term of the modified
liability
B337 In some cases a creditor releases a debtor from its present obligation to make
payments but the debtor assumes a guarantee obligation to pay if the party
assuming primary responsibility defaults In these circumstances the debtor
(a) recognises a new financial liability based on the fair value of its
obligation for the guarantee and
(b) recognises a gain or loss based on the difference between (i) any proceeds
paid and (ii) the carrying amount of the original financial liability less
the fair value of the new financial liability
Classification (Chapter 4)
Classification of financial assets (Section 41)
The entity’s business model for managing financial assets
B411 Paragraph 411(a) requires an entity to classify financial assets on the basis of
the entity’s business model for managing the financial assets unless
paragraph 415 applies An entity assesses whether its financial assets meet the
condition in paragraph 412(a) or the condition in paragraph 412A(a) on the
basis of the business model as determined by the entity’s key management
personnel (as defined in IAS 24 Related Party Disclosures)
B412 An entity’s business model is determined at a level that reflects how groups of
financial assets are managed together to achieve a particular business objective
The entity’s business model does not depend on management’s intentions for an
individual instrument Accordingly this condition is not an
instrumentbyinstrument approach to classification and should be determined
on a higher level of aggregation However a single entity may have more than
one business model for managing its financial instruments Consequently
classification need not be determined at the reporting entity level For example
an entity may hold a portfolio of investments that it manages in order to collect
contractual cash flows and another portfolio of investments that it manages in
order to trade to realise fair value changes Similarly in some circumstances it
may be appropriate to separate a portfolio of financial assets into subportfolios
in order to reflect the level at which an entity manages those financial assets
For example that may be the case if an entity originates or purchases a portfolio
IFRS 9
IFRS Foundation A391of mortgage loans and manages some of the loans with an objective of collecting
contractual cash flows and manages the other loans with an objective of selling
them
B412A An entity’s business model refers to how an entity manages its financial assets in
order to generate cash flows That is the entity’s business model determines
whether cash flows will result from collecting contractual cash flows selling
financial assets or both Consequently this assessment is not performed on the
basis of scenarios that the entity does not reasonably expect to occur such as
socalled worst case’ or stress case’ scenarios For example if an entity expects
that it will sell a particular portfolio of financial assets only in a stress case
scenario that scenario would not affect the entity’s assessment of the business
model for those assets if the entity reasonably expects that such a scenario will
not occur If cash flows are realised in a way that is different from the entity’s
expectations at the date that the entity assessed the business model
(for example if the entity sells more or fewer financial assets than it expected
when it classified the assets) that does not give rise to a prior period error in the
entity’s financial statements (see IAS 8 Accounting Policies Changes in Accounting
Estimates and Errors) nor does it change the classification of the remaining
financial assets held in that business model (ie those assets that the entity
recognised in prior periods and still holds) as long as the entity considered all
relevant information that was available at the time that it made the business
model assessment However when an entity assesses the business model for
newly originated or newly purchased financial assets it must consider
information about how cash flows were realised in the past along with all other
relevant information
B412B An entity’s business model for managing financial assets is a matter of fact and
not merely an assertion It is typically observable through the activities that the
entity undertakes to achieve the objective of the business model An entity will
need to use judgement when it assesses its business model for managing
financial assets and that assessment is not determined by a single factor or
activity Instead the entity must consider all relevant evidence that is available
at the date of the assessment Such relevant evidence includes but is not limited
to
(a) how the performance of the business model and the financial assets held
within that business model are evaluated and reported to the entity’s key
management personnel
(b) the risks that affect the performance of the business model (and the
financial assets held within that business model) and in particular the
way in which those risks are managed and
(c) how managers of the business are compensated (for example whether
the compensation is based on the fair value of the assets managed or on
the contractual cash flows collected)
A business model whose objective is to hold assets in order to collect
contractual cash flows
B412C Financial assets that are held within a business model whose objective is to hold
assets in order to collect contractual cash flows are managed to realise cash
IFRS 9
IFRS FoundationA392flows by collecting contractual payments over the life of the instrument That is
the entity manages the assets held within the portfolio to collect those
particular contractual cash flows (instead of managing the overall return on the
portfolio by both holding and selling assets) In determining whether cash flows
are going to be realised by collecting the financial assets’ contractual cash flows
it is necessary to consider the frequency value and timing of sales in prior
periods the reasons for those sales and expectations about future sales activity
However sales in themselves do not determine the business model and therefore
cannot be considered in isolation Instead information about past sales and
expectations about future sales provide evidence related to how the entity’s
stated objective for managing the financial assets is achieved and specifically
how cash flows are realised An entity must consider information about past
sales within the context of the reasons for those sales and the conditions that
existed at that time as compared to current conditions
B413 Although the objective of an entity’s business model may be to hold financial
assets in order to collect contractual cash flows the entity need not hold all of
those instruments until maturity Thus an entity’s business model can be to
hold financial assets to collect contractual cash flows even when sales of
financial assets occur or are expected to occur in the future
B413A The business model may be to hold assets to collect contractual cash flows even
if the entity sells financial assets when there is an increase in the assets’ credit
risk To determine whether there has been an increase in the assets’ credit risk
the entity considers reasonable and supportable information including forward
looking information Irrespective of their frequency and value sales due to an
increase in the assets’ credit risk are not inconsistent with a business model
whose objective is to hold financial assets to collect contractual cash flows
because the credit quality of financial assets is relevant to the entity’s ability to
collect contractual cash flows Credit risk management activities that are aimed
at minimising potential credit losses due to credit deterioration are integral to
such a business model Selling a financial asset because it no longer meets the
credit criteria specified in the entity’s documented investment policy is an
example of a sale that has occurred due to an increase in credit risk However in
the absence of such a policy the entity may demonstrate in other ways that the
sale occurred due to an increase in credit risk
B413B Sales that occur for other reasons such as sales made to manage credit
concentration risk (without an increase in the assets’ credit risk) may also be
consistent with a business model whose objective is to hold financial assets in
order to collect contractual cash flows In particular such sales may be
consistent with a business model whose objective is to hold financial assets in
order to collect contractual cash flows if those sales are infrequent (even if
significant in value) or insignificant in value both individually and in aggregate
(even if frequent) If more than an infrequent number of such sales are made out
of a portfolio and those sales are more than insignificant in value (either
individually or in aggregate) the entity needs to assess whether and how such
sales are consistent with an objective of collecting contractual cash flows
Whether a third party imposes the requirement to sell the financial assets or
that activity is at the entity’s discretion is not relevant to this assessment An
increase in the frequency or value of sales in a particular period is not
IFRS 9
IFRS Foundation A393necessarily inconsistent with an objective to hold financial assets in order to
collect contractual cash flows if an entity can explain the reasons for those sales
and demonstrate why those sales do not reflect a change in the entity’s business
model In addition sales may be consistent with the objective of holding
financial assets in order to collect contractual cash flows if the sales are made
close to the maturity of the financial assets and the proceeds from the sales
approximate the collection of the remaining contractual cash flows
B414 The following are examples of when the objective of an entity’s business model
may be to hold financial assets to collect the contractual cash flows This list of
examples is not exhaustive Furthermore the examples are not intended to
discuss all factors that may be relevant to the assessment of the entity’s business
model nor specify the relative importance of the factors
Example Analysis
Example 1
An entity holds investments to collect
their contractual cash flows The
funding needs of the entity are
predictable and the maturity of its
financial assets is matched to the
entity’s estimated funding needs
The entity performs credit risk
management activities with the
objective of minimising credit losses
In the past sales have typically
occurred when the financial assets’
credit risk has increased such that
the assets no longer meet the credit
criteria specified in the entity’s
documented investment policy In
addition infrequent sales have
occurred as a result of unanticipated
funding needs
Reports to key management
personnel focus on the credit quality
of the financial assets and the
contractual return The entity also
monitors fair values of the financial
assets among other information
Although the entity considers among
other information the financial
assets’ fair values from a liquidity
perspective (ie the cash amount that
would be realised if the entity needs
to sell assets) the entity’s objective is
to hold the financial assets in order
to collect the contractual cash flows
Sales would not contradict that
objective if they were in response to
an increase in the assets’ credit risk
for example if the assets no longer
meet the credit criteria specified in
the entity’s documented investment
policy Infrequent sales resulting
from unanticipated funding needs
(eg in a stress case scenario) also
would not contradict that objective
even if such sales are significant in
value
continued
IFRS 9
IFRS FoundationA394continued
Example Analysis
Example 2
An entity’s business model is to
purchase portfolios of financial
assets such as loans Those portfolios
may or may not include financial
assets that are credit impaired
If payment on the loans is not made
on a timely basis the entity attempts
to realise the contractual cash flows
through various means—for example
by contacting the debtor by mail
telephone or other methods The
entity’s objective is to collect the
contractual cash flows and the entity
does not manage any of the loans in
this portfolio with an objective of
realising cash flows by selling them
In some cases the entity enters into
interest rate swaps to change the
interest rate on particular financial
assets in a portfolio from a floating
interest rate to a fixed interest rate
The objective of the entity’s business
model is to hold the financial assets
in order to collect the contractual
cash flows
The same analysis would apply even
if the entity does not expect to
receive all of the contractual cash
flows (eg some of the financial assets
are credit impaired at initial
recognition)
Moreover the fact that the entity
enters into derivatives to modify the
cash flows of the portfolio does not in
itself change the entity’s business
model
continued
IFRS 9
IFRS Foundation A395continued
Example Analysis
Example 3
An entity has a business model with
the objective of originating loans to
customers and subsequently selling
those loans to a securitisation vehicle
The securitisation vehicle issues
instruments to investors
The originating entity controls the
securitisation vehicle and thus
consolidates it
The securitisation vehicle collects the
contractual cash flows from the loans
and passes them on to its investors
It is assumed for the purposes of this
example that the loans continue to
be recognised in the consolidated
statement of financial position
because they are not derecognised by
the securitisation vehicle
The consolidated group originated
the loans with the objective of
holding them to collect the
contractual cash flows
However the originating entity has
an objective of realising cash flows on
the loan portfolio by selling the loans
to the securitisation vehicle so for
the purposes of its separate financial
statements it would not be
considered to be managing this
portfolio in order to collect the
contractual cash flows
continued
IFRS 9
IFRS FoundationA396continued
Example Analysis
Example 4
A financial institution holds financial
assets to meet liquidity needs in a
stress case’ scenario (eg a run on the
bank’s deposits) The entity does not
anticipate selling these assets except
in such scenarios
The entity monitors the credit quality
of the financial assets and its
objective in managing the financial
assets is to collect the contractual
cash flows The entity evaluates the
performance of the assets on the
basis of interest revenue earned and
credit losses realised
However the entity also monitors the
fair value of the financial assets from
a liquidity perspective to ensure that
the cash amount that would be
realised if the entity needed to sell
the assets in a stress case scenario
would be sufficient to meet the
entity’s liquidity needs Periodically
the entity makes sales that are
insignificant in value to demonstrate
liquidity
The objective of the entity’s business
model is to hold the financial assets
to collect contractual cash flows
The analysis would not change even
if during a previous stress case
scenario the entity had sales that
were significant in value in order to
meet its liquidity needs Similarly
recurring sales activity that is
insignificant in value is not
inconsistent with holding financial
assets to collect contractual cash
flows
In contrast if an entity holds
financial assets to meet its everyday
liquidity needs and meeting that
objective involves frequent sales that
are significant in value the objective
of the entity’s business model is not
to hold the financial assets to collect
contractual cash flows
Similarly if the entity is required by
its regulator to routinely sell
financial assets to demonstrate that
the assets are liquid and the value of
the assets sold is significant the
entity’s business model is not to hold
financial assets to collect contractual
cash flows Whether a third party
imposes the requirement to sell the
financial assets or that activity is at
the entity’s discretion is not relevant
to the analysis
A business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets
B414A An entity may hold financial assets in a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets
In this type of business model the entity’s key management personnel have
made a decision that both collecting contractual cash flows and selling financial
assets are integral to achieving the objective of the business model There are
various objectives that may be consistent with this type of business model For
example the objective of the business model may be to manage everyday
IFRS 9
IFRS Foundation A397liquidity needs to maintain a particular interest yield profile or to match the
duration of the financial assets to the duration of the liabilities that those assets
are funding To achieve such an objective the entity will both collect
contractual cash flows and sell financial assets
B414B Compared to a business model whose objective is to hold financial assets to
collect contractual cash flows this business model will typically involve greater
frequency and value of sales This is because selling financial assets is integral to
achieving the business model’s objective instead of being only incidental to it
However there is no threshold for the frequency or value of sales that must
occur in this business model because both collecting contractual cash flows and
selling financial assets are integral to achieving its objective
B414C The following are examples of when the objective of the entity’s business model
may be achieved by both collecting contractual cash flows and selling financial
assets This list of examples is not exhaustive Furthermore the examples are
not intended to describe all the factors that may be relevant to the assessment of
the entity’s business model nor specify the relative importance of the factors
IFRS 9
IFRS FoundationA398Example Analysis
Example 5
An entity anticipates capital
expenditure in a few years The
entity invests its excess cash in short
and longterm financial assets so that
it can fund the expenditure when the
need arises Many of the financial
assets have contractual lives that
exceed the entity’s anticipated
investment period
The entity will hold financial assets
to collect the contractual cash flows
and when an opportunity arises it
will sell financial assets to reinvest
the cash in financial assets with a
higher return
The managers responsible for the
portfolio are remunerated based on
the overall return generated by the
portfolio
The objective of the business model is
achieved by both collecting
contractual cash flows and selling
financial assets The entity will make
decisions on an ongoing basis about
whether collecting contractual cash
flows or selling financial assets will
maximise the return on the portfolio
until the need arises for the invested
cash
In contrast consider an entity that
anticipates a cash outflow in five
years to fund capital expenditure and
invests excess cash in shortterm
financial assets When the
investments mature the entity
reinvests the cash in new shortterm
financial assets The entity maintains
this strategy until the funds are
needed at which time the entity uses
the proceeds from the maturing
financial assets to fund the capital
expenditure Only sales that are
insignificant in value occur before
maturity (unless there is an increase
in credit risk) The objective of this
contrasting business model is to hold
financial assets to collect contractual
cash flows
continued
IFRS 9
IFRS Foundation A399continued
Example Analysis
Example 6
A financial institution holds financial
assets to meet its everyday liquidity
needs The entity seeks to minimise
the costs of managing those liquidity
needs and therefore actively manages
the return on the portfolio That
return consists of collecting
contractual payments as well as gains
and losses from the sale of financial
assets
As a result the entity holds financial
assets to collect contractual cash
flows and sells financial assets to
reinvest in higher yielding financial
assets or to better match the duration
of its liabilities In the past this
strategy has resulted in frequent sales
activity and such sales have been
significant in value This activity is
expected to continue in the future
The objective of the business model is
to maximise the return on the
portfolio to meet everyday liquidity
needs and the entity achieves that
objective by both collecting
contractual cash flows and selling
financial assets In other words both
collecting contractual cash flows and
selling financial assets are integral to
achieving the business model’s
objective
Example 7
An insurer holds financial assets in
order to fund insurance contract
liabilities The insurer uses the
proceeds from the contractual cash
flows on the financial assets to settle
insurance contract liabilities as they
come due To ensure that the
contractual cash flows from the
financial assets are sufficient to settle
those liabilities the insurer
undertakes significant buying and
selling activity on a regular basis to
rebalance its portfolio of assets and to
meet cash flow needs as they arise
The objective of the business model is
to fund the insurance contract
liabilities To achieve this objective
the entity collects contractual cash
flows as they come due and sells
financial assets to maintain the
desired profile of the asset portfolio
Thus both collecting contractual cash
flows and selling financial assets are
integral to achieving the business
model’s objective
Other business models
B415 Financial assets are measured at fair value through profit or loss if they are not
held within a business model whose objective is to hold assets to collect
contractual cash flows or within a business model whose objective is achieved by
both collecting contractual cash flows and selling financial assets (but see also
IFRS 9
IFRS FoundationA400paragraph 575) One business model that results in measurement at fair value
through profit or loss is one in which an entity manages the financial assets
with the objective of realising cash flows through the sale of the assets The
entity makes decisions based on the assets’ fair values and manages the assets to
realise those fair values In this case the entity’s objective will typically result in
active buying and selling Even though the entity will collect contractual cash
flows while it holds the financial assets the objective of such a business model is
not achieved by both collecting contractual cash flows and selling financial
assets This is because the collection of contractual cash flows is not integral to
achieving the business model’s objective instead it is incidental to it
B416 A portfolio of financial assets that is managed and whose performance is
evaluated on a fair value basis (as described in paragraph 422(b)) is neither held
to collect contractual cash flows nor held both to collect contractual cash flows
and to sell financial assets The entity is primarily focused on fair value
information and uses that information to assess the assets’ performance and to
make decisions In addition a portfolio of financial assets that meets the
definition of held for trading is not held to collect contractual cash flows or held
both to collect contractual cash flows and to sell financial assets For such
portfolios the collection of contractual cash flows is only incidental to achieving
the business model’s objective Consequently such portfolios of financial assets
must be measured at fair value through profit or loss
Contractual cash flows that are solely payments of principal and
interest on the principal amount outstanding
B417 Paragraph 411(b) requires an entity to classify a financial asset on the basis of
its contractual cash flow characteristics if the financial asset is held within a
business model whose objective is to hold assets to collect contractual cash flows
or within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets unless paragraph 415
applies To do so the condition in paragraphs 412(b) and 412A(b) requires an
entity to determine whether the asset’s contractual cash flows are solely
payments of principal and interest on the principal amount outstanding
B417A Contractual cash flows that are solely payments of principal and interest on the
principal amount outstanding are consistent with a basic lending arrangement
In a basic lending arrangement consideration for the time value of money (see
paragraphs B419A–B419E) and credit risk are typically the most significant
elements of interest However in such an arrangement interest can also
include consideration for other basic lending risks (for example liquidity risk)
and costs (for example administrative costs) associated with holding the
financial asset for a particular period of time In addition interest can include a
profit margin that is consistent with a basic lending arrangement In extreme
economic circumstances interest can be negative if for example the holder of a
financial asset either explicitly or implicitly pays for the deposit of its money for
a particular period of time (and that fee exceeds the consideration that the
holder receives for the time value of money credit risk and other basic lending
risks and costs) However contractual terms that introduce exposure to risks or
volatility in the contractual cash flows that is unrelated to a basic lending
arrangement such as exposure to changes in equity prices or commodity prices
IFRS 9
IFRS Foundation A401do not give rise to contractual cash flows that are solely payments of principal
and interest on the principal amount outstanding An originated or a purchased
financial asset can be a basic lending arrangement irrespective of whether it is a
loan in its legal form
B417B In accordance with paragraph 413(a) principal is the fair value of the financial
asset at initial recognition However that principal amount may change over the
life of the financial asset (for example if there are repayments of principal)
B418 An entity shall assess whether contractual cash flows are solely payments of
principal and interest on the principal amount outstanding for the currency in
which the financial asset is denominated
B419 Leverage is a contractual cash flow characteristic of some financial assets
Leverage increases the variability of the contractual cash flows with the result
that they do not have the economic characteristics of interest Standalone
option forward and swap contracts are examples of financial assets that include
such leverage Thus such contracts do not meet the condition in
paragraphs 412(b) and 412A(b) and cannot be subsequently measured at
amortised cost or fair value through other comprehensive income
Consideration for the time value of money
B419A Time value of money is the element of interest that provides consideration for
only the passage of time That is the time value of money element does not
provide consideration for other risks or costs associated with holding the
financial asset In order to assess whether the element provides consideration
for only the passage of time an entity applies judgement and considers relevant
factors such as the currency in which the financial asset is denominated and the
period for which the interest rate is set
B419B However in some cases the time value of money element may be modified
(ie imperfect) That would be the case for example if a financial asset’s interest
rate is periodically reset but the frequency of that reset does not match the tenor
of the interest rate (for example the interest rate resets every month to a
oneyear rate) or if a financial asset’s interest rate is periodically reset to an
average of particular short and longterm interest rates In such cases an entity
must assess the modification to determine whether the contractual cash flows
represent solely payments of principal and interest on the principal amount
outstanding In some circumstances the entity may be able to make that
determination by performing a qualitative assessment of the time value of
money element whereas in other circumstances it may be necessary to perform
a quantitative assessment
B419C When assessing a modified time value of money element the objective is to
determine how different the contractual (undiscounted) cash flows could be
from the (undiscounted) cash flows that would arise if the time value of money
element was not modified (the benchmark cash flows) For example if the
financial asset under assessment contains a variable interest rate that is reset
every month to a oneyear interest rate the entity would compare that financial
asset to a financial instrument with identical contractual terms and the
identical credit risk except the variable interest rate is reset monthly to a
onemonth interest rate If the modified time value of money element could
IFRS 9
IFRS FoundationA402result in contractual (undiscounted) cash flows that are significantly different
from the (undiscounted) benchmark cash flows the financial asset does not
meet the condition in paragraphs 412(b) and 412A(b) To make this
determination the entity must consider the effect of the modified time value of
money element in each reporting period and cumulatively over the life of the
financial instrument The reason for the interest rate being set in this way is not
relevant to the analysis If it is clear with little or no analysis whether the
contractual (undiscounted) cash flows on the financial asset under the
assessment could (or could not) be significantly different from the
(undiscounted) benchmark cash flows an entity need not perform a detailed
assessment
B419D When assessing a modified time value of money element an entity must
consider factors that could affect future contractual cash flows For example if
an entity is assessing a bond with a fiveyear term and the variable interest rate
is reset every six months to a fiveyear rate the entity cannot conclude that the
contractual cash flows are solely payments of principal and interest on the
principal amount outstanding simply because the interest rate curve at the time
of the assessment is such that the difference between a fiveyear interest rate and
a sixmonth interest rate is not significant Instead the entity must also
consider whether the relationship between the fiveyear interest rate and the
sixmonth interest rate could change over the life of the instrument such that
the contractual (undiscounted) cash flows over the life of the instrument could
be significantly different from the (undiscounted) benchmark cash flows
However an entity must consider only reasonably possible scenarios instead of
every possible scenario If an entity concludes that the contractual
(undiscounted) cash flows could be significantly different from the
(undiscounted) benchmark cash flows the financial asset does not meet the
condition in paragraphs 412(b) and 412A(b) and therefore cannot be measured
at amortised cost or fair value through other comprehensive income
B419E In some jurisdictions the government or a regulatory authority sets interest
rates For example such government regulation of interest rates may be part of
a broad macroeconomic policy or it may be introduced to encourage entities to
invest in a particular sector of the economy In some of these cases the objective
of the time value of money element is not to provide consideration for only the
passage of time However despite paragraphs B419A–B419D a regulated
interest rate shall be considered a proxy for the time value of money element for
the purpose of applying the condition in paragraphs 412(b) and 412A(b) if that
regulated interest rate provides consideration that is broadly consistent with the
passage of time and does not provide exposure to risks or volatility in the
contractual cash flows that are inconsistent with a basic lending arrangement
Contractual terms that change the timing or amount of contractual
cash flows
B4110 If a financial asset contains a contractual term that could change the timing or
amount of contractual cash flows (for example if the asset can be prepaid before
maturity or its term can be extended) the entity must determine whether the
contractual cash flows that could arise over the life of the instrument due to
that contractual term are solely payments of principal and interest on the
IFRS 9
IFRS Foundation A403principal amount outstanding To make this determination the entity must
assess the contractual cash flows that could arise both before and after the
change in contractual cash flows The entity may also need to assess the nature
of any contingent event (ie the trigger) that would change the timing or amount
of the contractual cash flows While the nature of the contingent event in itself
is not a determinative factor in assessing whether the contractual cash flows are
solely payments of principal and interest it may be an indicator For example
compare a financial instrument with an interest rate that is reset to a higher
rate if the debtor misses a particular number of payments to a financial
instrument with an interest rate that is reset to a higher rate if a specified equity
index reaches a particular level It is more likely in the former case that the
contractual cash flows over the life of the instrument will be solely payments of
principal and interest on the principal amount outstanding because of the
relationship between missed payments and an increase in credit risk (See also
paragraph B4118)
B4111 The following are examples of contractual terms that result in contractual cash
flows that are solely payments of principal and interest on the principal amount
outstanding
(a) a variable interest rate that consists of consideration for the time value of
money the credit risk associated with the principal amount outstanding
during a particular period of time (the consideration for credit risk may
be determined at initial recognition only and so may be fixed) and other
basic lending risks and costs as well as a profit margin
(b) a contractual term that permits the issuer (ie the debtor) to prepay a debt
instrument or permits the holder (ie the creditor) to put a debt
instrument back to the issuer before maturity and the prepayment
amount substantially represents unpaid amounts of principal and
interest on the principal amount outstanding which may include
reasonable additional compensation for the early termination of the
contract and
(c) a contractual term that permits the issuer or the holder to extend the
contractual term of a debt instrument (ie an extension option) and the
terms of the extension option result in contractual cash flows during the
extension period that are solely payments of principal and interest on
the principal amount outstanding which may include reasonable
additional compensation for the extension of the contract
B4112 Despite paragraph B4110 a financial asset that would otherwise meet the
condition in paragraphs 412(b) and 412A(b) but does not do so only as a result
of a contractual term that permits (or requires) the issuer to prepay a debt
instrument or permits (or requires) the holder to put a debt instrument back to
the issuer before maturity is eligible to be measured at amortised cost or fair
value through other comprehensive income (subject to meeting the condition in
paragraph 412(a) or the condition in paragraph 412A(a)) if
(a) the entity acquires or originates the financial asset at a premium or
discount to the contractual par amount
IFRS 9
IFRS FoundationA404(b) the prepayment amount substantially represents the contractual par
amount and accrued (but unpaid) contractual interest which may
include reasonable additional compensation for the early termination of
the contract and
(c) when the entity initially recognises the financial asset the fair value of
the prepayment feature is insignificant
B4113 The following examples illustrate contractual cash flows that are solely
payments of principal and interest on the principal amount outstanding This
list of examples is not exhaustive
Instrument Analysis
Instrument A
Instrument A is a bond with a stated
maturity date Payments of principal
and interest on the principal amount
outstanding are linked to an inflation
index of the currency in which the
instrument is issued The inflation
link is not leveraged and the principal
is protected
The contractual cash flows are solely
payments of principal and interest
on the principal amount
outstanding Linking payments of
principal and interest on the
principal amount outstanding to an
unleveraged inflation index resets
the time value of money to a current
level In other words the interest
rate on the instrument reflects real’
interest Thus the interest amounts
are consideration for the time value
of money on the principal amount
outstanding
However if the interest payments
were indexed to another variable
such as the debtor’s performance
(eg the debtor’s net income) or an
equity index the contractual cash
flows are not payments of principal
and interest on the principal amount
outstanding (unless the indexing to
the debtor’s performance results in
an adjustment that only compensates
the holder for changes in the credit
risk of the instrument such that
contractual cash flows are solely
payments of principal and interest)
That is because the contractual cash
flows reflect a return that is
inconsistent with a basic lending
arrangement (see paragraph B417A)
continued
IFRS 9
IFRS Foundation A405continued
Instrument Analysis
Instrument B
Instrument B is a variable interest
rate instrument with a stated
maturity date that permits the
borrower to choose the market
interest rate on an ongoing basis For
example at each interest rate reset
date the borrower can choose to pay
threemonth LIBOR for a threemonth
term or onemonth LIBOR for a
onemonth term
The contractual cash flows are solely
payments of principal and interest
on the principal amount outstanding
as long as the interest paid over the
life of the instrument reflects
consideration for the time value of
money for the credit risk associated
with the instrument and for other
basic lending risks and costs as well
as a profit margin (see
paragraph B417A) The fact that the
LIBOR interest rate is reset during
the life of the instrument does not in
itself disqualify the instrument
However if the borrower is able to
choose to pay a onemonth interest
rate that is reset every three months
the interest rate is reset with a
frequency that does not match the
tenor of the interest rate
Consequently the time value of
money element is modified
Similarly if an instrument has a
contractual interest rate that is based
on a term that can exceed the
instrument’s remaining life (for
example if an instrument with a
fiveyear maturity pays a variable rate
that is reset periodically but always
reflects a fiveyear maturity) the time
value of money element is modified
That is because the interest payable
in each period is disconnected from
the interest period
In such cases the entity must
qualitatively or quantitatively assess
the contractual cash flows against
those on an instrument that is
identical in all respects except the
tenor of the interest rate matches the
interest period to determine if the
cash flows are solely payments of
principal and interest on the
principal amount outstanding (But
see paragraph B419E for guidance
on regulated interest rates)
continued
IFRS 9
IFRS FoundationA406continued
Instrument Analysis
For example in assessing a bond
with a fiveyear term that pays a
variable rate that is reset every
six months but always reflects a
fiveyear maturity an entity
considers the contractual cash flows
on an instrument that resets every
six months to a sixmonth interest
rate but is otherwise identical
The same analysis would apply if the
borrower is able to choose between
the lender’s various published
interest rates (eg the borrower can
choose between the lender’s
published onemonth variable
interest rate and the lender’s
published threemonth variable
interest rate)
continued
IFRS 9
IFRS Foundation A407continued
Instrument Analysis
Instrument C
Instrument C is a bond with a stated
maturity date and pays a variable
market interest rate That variable
interest rate is capped
The contractual cash flows of both
(a) an instrument that has a
fixed interest rate and
(b) an instrument that has a
variable interest rate
are payments of principal and
interest on the principal amount
outstanding as long as the interest
reflects consideration for the time
value of money for the credit risk
associated with the instrument
during the term of the instrument
and for other basic lending risks and
costs as well as a profit margin (See
paragraph B417A)
Consequently an instrument that is
a combination of (a) and (b) (eg a
bond with an interest rate cap) can
have cash flows that are solely
payments of principal and interest
on the principal amount
outstanding Such a contractual
term may reduce cash flow
variability by setting a limit on a
variable interest rate (eg an interest
rate cap or floor) or increase the cash
flow variability because a fixed rate
becomes variable
Instrument D
Instrument D is a full recourse loan
and is secured by collateral
The fact that a full recourse loan is
collateralised does not in itself affect
the analysis of whether the
contractual cash flows are solely
payments of principal and interest
on the principal amount
outstanding
continued
IFRS 9
IFRS FoundationA408continued
Instrument Analysis
Instrument E
Instrument E is issued by a regulated
bank and has a stated maturity date
The instrument pays a fixed interest
rate and all contractual cash flows are
nondiscretionary
However the issuer is subject to
legislation that permits or requires a
national resolving authority to
impose losses on holders of particular
instruments including Instrument E
in particular circumstances For
example the national resolving
authority has the power to write
down the par amount of Instrument E
or to convert it into a fixed number of
the issuer’s ordinary shares if the
national resolving authority
determines that the issuer is having
severe financial difficulties needs
additional regulatory capital or is
failing’
The holder would analyse the
contractual terms of the financial
instrument to determine whether
they give rise to cash flows that are
solely payments of principal and
interest on the principal amount
outstanding and thus are consistent
with a basic lending arrangement
That analysis would not consider the
payments that arise only as a result
of the national resolving authority’s
power to impose losses on the
holders of Instrument E That is
because that power and the
resulting payments are not
contractual terms of the financial
instrument
In contrast the contractual cash
flows would not be solely payments
of principal and interest on the
principal amount outstanding if the
contractual terms of the financial
instrument permit or require the
issuer or another entity to impose
losses on the holder (eg by writing
down the par amount or by
converting the instrument into a
fixed number of the issuer’s ordinary
shares) as long as those contractual
terms are genuine even if the
probability is remote that such a loss
will be imposed
B4114 The following examples illustrate contractual cash flows that are not solely
payments of principal and interest on the principal amount outstanding This
list of examples is not exhaustive
IFRS 9
IFRS Foundation A409Instrument Analysis
Instrument F
Instrument F is a bond that is
convertible into a fixed number of
equity instruments of the issuer
The holder would analyse the
convertible bond in its entirety
The contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
because they reflect a return that is
inconsistent with a basic lending
arrangement (see paragraph B417A)
ie the return is linked to the value of
the equity of the issuer
Instrument G
Instrument G is a loan that pays an
inverse floating interest rate (ie the
interest rate has an inverse
relationship to market interest rates)
The contractual cash flows are not
solely payments of principal and
interest on the principal amount
outstanding
The interest amounts are not
consideration for the time value of
money on the principal amount
outstanding
Instrument H
Instrument H is a perpetual
instrument but the issuer may call
the instrument at any point and pay
the holder the par amount plus
accrued interest due
Instrument H pays a market interest
rate but payment of interest cannot
be made unless the issuer is able to
remain solvent immediately
afterwards
Deferred interest does not accrue
additional interest
The contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
That is because the issuer may be
required to defer interest payments
and additional interest does not
accrue on those deferred interest
amounts As a result interest
amounts are not consideration for
the time value of money on the
principal amount outstanding
If interest accrued on the deferred
amounts the contractual cash flows
could be payments of principal and
interest on the principal amount
outstanding
continued
IFRS 9
IFRS FoundationA410continued
Instrument Analysis
The fact that Instrument H is
perpetual does not in itself mean that
the contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
In effect a perpetual instrument has
continuous (multiple) extension
options Such options may result in
contractual cash flows that are
payments of principal and interest on
the principal amount outstanding if
interest payments are mandatory and
must be paid in perpetuity
Also the fact that Instrument H is
callable does not mean that the
contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
unless it is callable at an amount that
does not substantially reflect
payment of outstanding principal
and interest on that principal
amount outstanding Even if the
callable amount includes an amount
that reasonably compensates the
holder for the early termination of
the instrument the contractual cash
flows could be payments of principal
and interest on the principal amount
outstanding (See also
paragraph B4112)
B4115 In some cases a financial asset may have contractual cash flows that are
described as principal and interest but those cash flows do not represent the
payment of principal and interest on the principal amount outstanding as
described in paragraphs 412(b) 412A(b) and 413 of this Standard
B4116 This may be the case if the financial asset represents an investment in particular
assets or cash flows and hence the contractual cash flows are not solely
payments of principal and interest on the principal amount outstanding For
example if the contractual terms stipulate that the financial asset’s cash flows
increase as more automobiles use a particular toll road those contractual cash
flows are inconsistent with a basic lending arrangement As a result the
instrument would not satisfy the condition in paragraphs 412(b) and 412A(b)
IFRS 9
IFRS Foundation A411This could be the case when a creditor’s claim is limited to specified assets of the
debtor or the cash flows from specified assets (for example a nonrecourse’
financial asset)
B4117 However the fact that a financial asset is nonrecourse does not in itself
necessarily preclude the financial asset from meeting the condition in
paragraphs 412(b) and 412A(b) In such situations the creditor is required to
assess (look through to’) the particular underlying assets or cash flows to
determine whether the contractual cash flows of the financial asset being
classified are payments of principal and interest on the principal amount
outstanding If the terms of the financial asset give rise to any other cash flows
or limit the cash flows in a manner inconsistent with payments representing
principal and interest the financial asset does not meet the condition in
paragraphs 412(b) and 412A(b) Whether the underlying assets are financial
assets or nonfinancial assets does not in itself affect this assessment
B4118 A contractual cash flow characteristic does not affect the classification of the
financial asset if it could have only a de minimis effect on the contractual cash
flows of the financial asset To make this determination an entity must
consider the possible effect of the contractual cash flow characteristic in each
reporting period and cumulatively over the life of the financial instrument In
addition if a contractual cash flow characteristic could have an effect on the
contractual cash flows that is more than de minimis (either in a single reporting
period or cumulatively) but that cash flow characteristic is not genuine it does
not affect the classification of a financial asset A cash flow characteristic is not
genuine if it affects the instrument’s contractual cash flows only on the
occurrence of an event that is extremely rare highly abnormal and very unlikely
to occur
B4119 In almost every lending transaction the creditor’s instrument is ranked relative
to the instruments of the debtor’s other creditors An instrument that is
subordinated to other instruments may have contractual cash flows that are
payments of principal and interest on the principal amount outstanding if the
debtor’s nonpayment is a breach of contract and the holder has a contractual
right to unpaid amounts of principal and interest on the principal amount
outstanding even in the event of the debtor’s bankruptcy For example a trade
receivable that ranks its creditor as a general creditor would qualify as having
payments of principal and interest on the principal amount outstanding This is
the case even if the debtor issued loans that are collateralised which in the
event of bankruptcy would give that loan holder priority over the claims of the
general creditor in respect of the collateral but does not affect the contractual
right of the general creditor to unpaid principal and other amounts due
Contractually linked instruments
B4120 In some types of transactions an issuer may prioritise payments to the holders
of financial assets using multiple contractually linked instruments that create
concentrations of credit risk (tranches) Each tranche has a subordination
ranking that specifies the order in which any cash flows generated by the issuer
are allocated to the tranche In such situations the holders of a tranche have
IFRS 9
IFRS FoundationA412the right to payments of principal and interest on the principal amount
outstanding only if the issuer generates sufficient cash flows to satisfy
higherranking tranches
B4121 In such transactions a tranche has cash flow characteristics that are payments
of principal and interest on the principal amount outstanding only if
(a) the contractual terms of the tranche being assessed for classification
(without looking through to the underlying pool of financial
instruments) give rise to cash flows that are solely payments of principal
and interest on the principal amount outstanding (eg the interest rate on
the tranche is not linked to a commodity index)
(b) the underlying pool of financial instruments has the cash flow
characteristics set out in paragraphs B4123 and B4124 and
(c) the exposure to credit risk in the underlying pool of financial
instruments inherent in the tranche is equal to or lower than the
exposure to credit risk of the underlying pool of financial instruments
(for example the credit rating of the tranche being assessed for
classification is equal to or higher than the credit rating that would
apply to a single tranche that funded the underlying pool of financial
instruments)
B4122 An entity must look through until it can identify the underlying pool of
instruments that are creating (instead of passing through) the cash flows This is
the underlying pool of financial instruments
B4123 The underlying pool must contain one or more instruments that have
contractual cash flows that are solely payments of principal and interest on the
principal amount outstanding
B4124 The underlying pool of instruments may also include instruments that
(a) reduce the cash flow variability of the instruments in paragraph B4123
and when combined with the instruments in paragraph B4123 result
in cash flows that are solely payments of principal and interest on the
principal amount outstanding (eg an interest rate cap or floor or a
contract that reduces the credit risk on some or all of the instruments in
paragraph B4123) or
(b) align the cash flows of the tranches with the cash flows of the pool of
underlying instruments in paragraph B4123 to address differences in
and only in
(i) whether the interest rate is fixed or floating
(ii) the currency in which the cash flows are denominated including
inflation in that currency or
(iii) the timing of the cash flows
B4125 If any instrument in the pool does not meet the conditions in either
paragraph B4123 or paragraph B4124 the condition in paragraph B4121(b) is
not met In performing this assessment a detailed instrumentbyinstrument
analysis of the pool may not be necessary However an entity must use
IFRS 9
IFRS Foundation A413judgement and perform sufficient analysis to determine whether the
instruments in the pool meet the conditions in paragraphs B4123–B4124 (See
also paragraph B4118 for guidance on contractual cash flow characteristics
that have only a de minimis effect)
B4126 If the holder cannot assess the conditions in paragraph B4121 at initial
recognition the tranche must be measured at fair value through profit or loss
If the underlying pool of instruments can change after initial recognition in
such a way that the pool may not meet the conditions in
paragraphs B4123–B4124 the tranche does not meet the conditions in
paragraph B4121 and must be measured at fair value through profit or loss
However if the underlying pool includes instruments that are collateralised by
assets that do not meet the conditions in paragraphs B4123–B4124 the ability
to take possession of such assets shall be disregarded for the purposes of
applying this paragraph unless the entity acquired the tranche with the
intention of controlling the collateral
Option to designate a financial asset or financial liability
as at fair value through profit or loss (Sections 41
and 42)
B4127 Subject to the conditions in paragraphs 415 and 422 this Standard allows an
entity to designate a financial asset a financial liability or a group of financial
instruments (financial assets financial liabilities or both) as at fair value
through profit or loss provided that doing so results in more relevant
information
B4128 The decision of an entity to designate a financial asset or financial liability as at
fair value through profit or loss is similar to an accounting policy choice
(although unlike an accounting policy choice it is not required to be applied
consistently to all similar transactions) When an entity has such a choice
paragraph 14(b) of IAS 8 requires the chosen policy to result in the financial
statements providing reliable and more relevant information about the effects of
transactions other events and conditions on the entity’s financial position
financial performance or cash flows For example in the case of designation of a
financial liability as at fair value through profit or loss paragraph 422 sets out
the two circumstances when the requirement for more relevant information
will be met Accordingly to choose such designation in accordance with
paragraph 422 the entity needs to demonstrate that it falls within one (or both)
of these two circumstances
Designation eliminates or significantly reduces an accounting
mismatch
B4129 Measurement of a financial asset or financial liability and classification of
recognised changes in its value are determined by the item’s classification and
whether the item is part of a designated hedging relationship Those
requirements can create a measurement or recognition inconsistency
(sometimes referred to as an accounting mismatch’) when for example in the
absence of designation as at fair value through profit or loss a financial asset
would be classified as subsequently measured at fair value through profit or loss
and a liability the entity considers related would be subsequently measured at
IFRS 9
IFRS FoundationA414amortised cost (with changes in fair value not recognised) In such
circumstances an entity may conclude that its financial statements would
provide more relevant information if both the asset and the liability were
measured as at fair value through profit or loss
B4130 The following examples show when this condition could be met In all cases an
entity may use this condition to designate financial assets or financial liabilities
as at fair value through profit or loss only if it meets the principle in
paragraph 415 or 422(a)
(a) an entity has liabilities under insurance contracts whose measurement
incorporates current information (as permitted by paragraph 24 of
IFRS 4) and financial assets that it considers to be related and that would
otherwise be measured at either fair value through other comprehensive
income or amortised cost
(b) an entity has financial assets financial liabilities or both that share a
risk such as interest rate risk and that gives rise to opposite changes in
fair value that tend to offset each other However only some of the
instruments would be measured at fair value through profit or loss (for
example those that are derivatives or are classified as held for trading)
It may also be the case that the requirements for hedge accounting are
not met because for example the requirements for hedge effectiveness
in paragraph 641 are not met
(c) an entity has financial assets financial liabilities or both that share a
risk such as interest rate risk that gives rise to opposite changes in fair
value that tend to offset each other and none of the financial assets or
financial liabilities qualifies for designation as a hedging instrument
because they are not measured at fair value through profit or loss
Furthermore in the absence of hedge accounting there is a significant
inconsistency in the recognition of gains and losses For example the
entity has financed a specified group of loans by issuing traded bonds
whose changes in fair value tend to offset each other If in addition the
entity regularly buys and sells the bonds but rarely if ever buys and sells
the loans reporting both the loans and the bonds at fair value through
profit or loss eliminates the inconsistency in the timing of the
recognition of the gains and losses that would otherwise result from
measuring them both at amortised cost and recognising a gain or loss
each time a bond is repurchased
B4131 In cases such as those described in the preceding paragraph to designate at
initial recognition the financial assets and financial liabilities not otherwise so
measured as at fair value through profit or loss may eliminate or significantly
reduce the measurement or recognition inconsistency and produce more
relevant information For practical purposes the entity need not enter into all
of the assets and liabilities giving rise to the measurement or recognition
inconsistency at exactly the same time A reasonable delay is permitted
provided that each transaction is designated as at fair value through profit or
loss at its initial recognition and at that time any remaining transactions are
expected to occur
IFRS 9
IFRS Foundation A415B4132 It would not be acceptable to designate only some of the financial assets and
financial liabilities giving rise to the inconsistency as at fair value through profit
or loss if to do so would not eliminate or significantly reduce the inconsistency
and would therefore not result in more relevant information However it would
be acceptable to designate only some of a number of similar financial assets or
similar financial liabilities if doing so achieves a significant reduction (and
possibly a greater reduction than other allowable designations) in the
inconsistency For example assume an entity has a number of similar financial
liabilities that sum to CU100 and a number of similar financial assets that sum
to CU50 but are measured on a different basis The entity may significantly
reduce the measurement inconsistency by designating at initial recognition all
of the assets but only some of the liabilities (for example individual liabilities
with a combined total of CU45) as at fair value through profit or loss However
because designation as at fair value through profit or loss can be applied only to
the whole of a financial instrument the entity in this example must designate
one or more liabilities in their entirety It could not designate either a
component of a liability (eg changes in value attributable to only one risk such
as changes in a benchmark interest rate) or a proportion (ie percentage) of a
liability
A group of financial liabilities or financial assets and financial
liabilities is managed and its performance is evaluated on a fair
value basis
B4133 An entity may manage and evaluate the performance of a group of financial
liabilities or financial assets and financial liabilities in such a way that
measuring that group at fair value through profit or loss results in more
relevant information The focus in this instance is on the way the entity
manages and evaluates performance instead of on the nature of its financial
instruments
B4134 For example an entity may use this condition to designate financial liabilities as
at fair value through profit or loss if it meets the principle in paragraph 422(b)
and the entity has financial assets and financial liabilities that share one or
more risks and those risks are managed and evaluated on a fair value basis in
accordance with a documented policy of asset and liability management An
example could be an entity that has issued structured products’ containing
multiple embedded derivatives and manages the resulting risks on a fair value
basis using a mix of derivative and nonderivative financial instruments
B4135 As noted above this condition relies on the way the entity manages and
evaluates performance of the group of financial instruments under
consideration Accordingly (subject to the requirement of designation at initial
recognition) an entity that designates financial liabilities as at fair value through
profit or loss on the basis of this condition shall so designate all eligible
financial liabilities that are managed and evaluated together
B4136 Documentation of the entity’s strategy need not be extensive but should be
sufficient to demonstrate compliance with paragraph 422(b) Such
documentation is not required for each individual item but may be on a
portfolio basis For example if the performance management system for a
department—as approved by the entity’s key management personnel—clearly
IFRS 9
IFRS FoundationA416demonstrates that its performance is evaluated on this basis no further
documentation is required to demonstrate compliance with paragraph 422(b)
Embedded derivatives (Section 43)
B431 When an entity becomes a party to a hybrid contract with a host that is not an
asset within the scope of this Standard paragraph 433 requires the entity to
identify any embedded derivative assess whether it is required to be separated
from the host contract and for those that are required to be separated measure
the derivatives at fair value at initial recognition and subsequently at fair value
through profit or loss
B432 If a host contract has no stated or predetermined maturity and represents a
residual interest in the net assets of an entity then its economic characteristics
and risks are those of an equity instrument and an embedded derivative would
need to possess equity characteristics related to the same entity to be regarded as
closely related If the host contract is not an equity instrument and meets the
definition of a financial instrument then its economic characteristics and risks
are those of a debt instrument
B433 An embedded nonoption derivative (such as an embedded forward or swap) is
separated from its host contract on the basis of its stated or implied substantive
terms so as to result in it having a fair value of zero at initial recognition An
embedded optionbased derivative (such as an embedded put call cap floor or
swaption) is separated from its host contract on the basis of the stated terms of
the option feature The initial carrying amount of the host instrument is the
residual amount after separating the embedded derivative
B434 Generally multiple embedded derivatives in a single hybrid contract are treated
as a single compound embedded derivative However embedded derivatives
that are classified as equity (see IAS 32 Financial Instruments Presentation) are
accounted for separately from those classified as assets or liabilities In addition
if a hybrid contract has more than one embedded derivative and those
derivatives relate to different risk exposures and are readily separable and
independent of each other they are accounted for separately from each other
B435 The economic characteristics and risks of an embedded derivative are not closely
related to the host contract (paragraph 433(a)) in the following examples In
these examples assuming the conditions in paragraph 433(b) and (c) are met
an entity accounts for the embedded derivative separately from the host
contract
(a) A put option embedded in an instrument that enables the holder to
require the issuer to reacquire the instrument for an amount of cash or
other assets that varies on the basis of the change in an equity or
commodity price or index is not closely related to a host debt
instrument
(b) An option or automatic provision to extend the remaining term to
maturity of a debt instrument is not closely related to the host debt
instrument unless there is a concurrent adjustment to the approximate
current market rate of interest at the time of the extension If an entity
issues a debt instrument and the holder of that debt instrument writes a
IFRS 9
IFRS Foundation A417call option on the debt instrument to a third party the issuer regards the
call option as extending the term to maturity of the debt instrument
provided the issuer can be required to participate in or facilitate the
remarketing of the debt instrument as a result of the call option being
exercised
(c) Equityindexed interest or principal payments embedded in a host debt
instrument or insurance contract—by which the amount of interest or
principal is indexed to the value of equity instruments—are not closely
related to the host instrument because the risks inherent in the host and
the embedded derivative are dissimilar
(d) Commodityindexed interest or principal payments embedded in a host
debt instrument or insurance contract—by which the amount of interest
or principal is indexed to the price of a commodity (such as gold)—are
not closely related to the host instrument because the risks inherent in
the host and the embedded derivative are dissimilar
(e) A call put or prepayment option embedded in a host debt contract or
host insurance contract is not closely related to the host contract unless
(i) the option’s exercise price is approximately equal on each
exercise date to the amortised cost of the host debt instrument or
the carrying amount of the host insurance contract or
(ii) the exercise price of a prepayment option reimburses the lender
for an amount up to the approximate present value of lost
interest for the remaining term of the host contract Lost interest
is the product of the principal amount prepaid multiplied by the
interest rate differential The interest rate differential is the
excess of the effective interest rate of the host contract over the
effective interest rate the entity would receive at the prepayment
date if it reinvested the principal amount prepaid in a similar
contract for the remaining term of the host contract
The assessment of whether the call or put option is closely related to the
host debt contract is made before separating the equity element of a
convertible debt instrument in accordance with IAS 32
(f) Credit derivatives that are embedded in a host debt instrument and
allow one party (the beneficiary’) to transfer the credit risk of a
particular reference asset which it may not own to another party (the
guarantor’) are not closely related to the host debt instrument Such
credit derivatives allow the guarantor to assume the credit risk
associated with the reference asset without directly owning it
B436 An example of a hybrid contract is a financial instrument that gives the holder a
right to put the financial instrument back to the issuer in exchange for an
amount of cash or other financial assets that varies on the basis of the change in
an equity or commodity index that may increase or decrease (a puttable
instrument’) Unless the issuer on initial recognition designates the puttable
instrument as a financial liability at fair value through profit or loss it is
required to separate an embedded derivative (ie the indexed principal payment)
under paragraph 433 because the host contract is a debt instrument under
IFRS 9
IFRS FoundationA418paragraph B432 and the indexed principal payment is not closely related to a
host debt instrument under paragraph B435(a) Because the principal payment
can increase and decrease the embedded derivative is a nonoption derivative
whose value is indexed to the underlying variable
B437 In the case of a puttable instrument that can be put back at any time for cash
equal to a proportionate share of the net asset value of an entity (such as units of
an openended mutual fund or some unitlinked investment products) the effect
of separating an embedded derivative and accounting for each component is to
measure the hybrid contract at the redemption amount that is payable at the
end of the reporting period if the holder exercised its right to put the
instrument back to the issuer
B438 The economic characteristics and risks of an embedded derivative are closely
related to the economic characteristics and risks of the host contract in the
following examples In these examples an entity does not account for the
embedded derivative separately from the host contract
(a) An embedded derivative in which the underlying is an interest rate or
interest rate index that can change the amount of interest that would
otherwise be paid or received on an interestbearing host debt contract or
insurance contract is closely related to the host contract unless the
hybrid contract can be settled in such a way that the holder would not
recover substantially all of its recognised investment or the embedded
derivative could at least double the holder’s initial rate of return on the
host contract and could result in a rate of return that is at least twice
what the market return would be for a contract with the same terms as
the host contract
(b) An embedded floor or cap on the interest rate on a debt contract or
insurance contract is closely related to the host contract provided the
cap is at or above the market rate of interest and the floor is at or below
the market rate of interest when the contract is issued and the cap or
floor is not leveraged in relation to the host contract Similarly
provisions included in a contract to purchase or sell an asset (eg a
commodity) that establish a cap and a floor on the price to be paid or
received for the asset are closely related to the host contract if both the
cap and floor were out of the money at inception and are not leveraged
(c) An embedded foreign currency derivative that provides a stream of
principal or interest payments that are denominated in a foreign
currency and is embedded in a host debt instrument (for example a dual
currency bond) is closely related to the host debt instrument Such a
derivative is not separated from the host instrument because IAS 21 The
Effects of Changes in Foreign Exchange Rates requires foreign currency gains
and losses on monetary items to be recognised in profit or loss
(d) An embedded foreign currency derivative in a host contract that is an
insurance contract or not a financial instrument (such as a contract for
the purchase or sale of a nonfinancial item where the price is
denominated in a foreign currency) is closely related to the host contract
provided it is not leveraged does not contain an option feature and
requires payments denominated in one of the following currencies
IFRS 9
IFRS Foundation A419(i) the functional currency of any substantial party to that contract
(ii) the currency in which the price of the related good or service that
is acquired or delivered is routinely denominated in commercial
transactions around the world (such as the US dollar for crude oil
transactions) or
(iii) a currency that is commonly used in contracts to purchase or sell
nonfinancial items in the economic environment in which the
transaction takes place (eg a relatively stable and liquid currency
that is commonly used in local business transactions or external
trade)
(e) An embedded prepayment option in an interestonly or principalonly
strip is closely related to the host contract provided the host contract
(i) initially resulted from separating the right to receive contractual cash
flows of a financial instrument that in and of itself did not contain an
embedded derivative and (ii) does not contain any terms not present in
the original host debt contract
(f) An embedded derivative in a host lease contract is closely related to the
host contract if the embedded derivative is (i) an inflationrelated index
such as an index of lease payments to a consumer price index (provided
that the lease is not leveraged and the index relates to inflation in the
entity’s own economic environment) (ii) variable lease payments based
on related sales or (iii) variable lease payments based on variable interest
rates
(g) A unitlinking feature embedded in a host financial instrument or host
insurance contract is closely related to the host instrument or host
contract if the unitdenominated payments are measured at current unit
values that reflect the fair values of the assets of the fund A unitlinking
feature is a contractual term that requires payments denominated in
units of an internal or external investment fund
(h) A derivative embedded in an insurance contract is closely related to the
host insurance contract if the embedded derivative and host insurance
contract are so interdependent that an entity cannot measure the
embedded derivative separately (ie without considering the host
contract)
Instruments containing embedded derivatives
B439 As noted in paragraph B431 when an entity becomes a party to a hybrid
contract with a host that is not an asset within the scope of this Standard and
with one or more embedded derivatives paragraph 433 requires the entity to
identify any such embedded derivative assess whether it is required to be
separated from the host contract and for those that are required to be
separated measure the derivatives at fair value at initial recognition and
subsequently These requirements can be more complex or result in less
reliable measures than measuring the entire instrument at fair value through
profit or loss For that reason this Standard permits the entire hybrid contract to
be designated as at fair value through profit or loss
IFRS 9
IFRS FoundationA420B4310 Such designation may be used whether paragraph 433 requires the embedded
derivatives to be separated from the host contract or prohibits such separation
However paragraph 435 would not justify designating the hybrid contract as at
fair value through profit or loss in the cases set out in paragraph 435(a) and (b)
because doing so would not reduce complexity or increase reliability
Reassessment of embedded derivatives
B4311 In accordance with paragraph 433 an entity shall assess whether an embedded
derivative is required to be separated from the host contract and accounted for
as a derivative when the entity first becomes a party to the contract Subsequent
reassessment is prohibited unless there is a change in the terms of the contract
that significantly modifies the cash flows that otherwise would be required
under the contract in which case reassessment is required An entity
determines whether a modification to cash flows is significant by considering
the extent to which the expected future cash flows associated with the
embedded derivative the host contract or both have changed and whether the
change is significant relative to the previously expected cash flows on the
contract
B4312 Paragraph B4311 does not apply to embedded derivatives in contracts acquired
in
(a) a business combination (as defined in IFRS 3 Business Combinations)
(b) a combination of entities or businesses under common control as
described in paragraphs B1–B4 of IFRS 3 or
(c) the formation of a joint venture as defined in IFRS 11 Joint Arrangements
or their possible reassessment at the date of acquisition3
Reclassification of financial assets (Section 44)
Reclassification of financial assets
B441 Paragraph 441 requires an entity to reclassify financial assets if the entity
changes its business model for managing those financial assets Such changes
are expected to be very infrequent Such changes are determined by the entity’s
senior management as a result of external or internal changes and must be
significant to the entity’s operations and demonstrable to external parties
Accordingly a change in an entity’s business model will occur only when an
entity either begins or ceases to perform an activity that is significant to its
operations for example when the entity has acquired disposed of or
terminated a business line Examples of a change in business model include the
following
(a) An entity has a portfolio of commercial loans that it holds to sell in the
short term The entity acquires a company that manages commercial
loans and has a business model that holds the loans in order to collect
the contractual cash flows The portfolio of commercial loans is no
3 IFRS 3 addresses the acquisition of contracts with embedded derivatives in a business combination
IFRS 9
IFRS Foundation A421longer for sale and the portfolio is now managed together with the
acquired commercial loans and all are held to collect the contractual
cash flows
(b) A financial services firm decides to shut down its retail mortgage
business That business no longer accepts new business and the financial
services firm is actively marketing its mortgage loan portfolio for sale
B442 A change in the objective of the entity’s business model must be effected before
the reclassification date For example if a financial services firm decides on
15 February to shut down its retail mortgage business and hence must reclassify
all affected financial assets on 1 April (ie the first day of the entity’s next
reporting period) the entity must not accept new retail mortgage business or
otherwise engage in activities consistent with its former business model after
15 February
B443 The following are not changes in business model
(a) a change in intention related to particular financial assets (even in
circumstances of significant changes in market conditions)
(b) the temporary disappearance of a particular market for financial assets
(c) a transfer of financial assets between parts of the entity with different
business models
Measurement (Chapter 5)
Initial measurement (Section 51)
B511 The fair value of a financial instrument at initial recognition is normally the
transaction price (ie the fair value of the consideration given or received see also
paragraph B512A and IFRS 13) However if part of the consideration given or
received is for something other than the financial instrument an entity shall
measure the fair value of the financial instrument For example the fair value
of a longterm loan or receivable that carries no interest can be measured as the
present value of all future cash receipts discounted using the prevailing market
rate(s) of interest for a similar instrument (similar as to currency term type of
interest rate and other factors) with a similar credit rating Any additional
amount lent is an expense or a reduction of income unless it qualifies for
recognition as some other type of asset
B512 If an entity originates a loan that bears an offmarket interest rate (eg 5 per cent
when the market rate for similar loans is 8 per cent) and receives an upfront fee
as compensation the entity recognises the loan at its fair value ie net of the fee
it receives
B512A The best evidence of the fair value of a financial instrument at initial
recognition is normally the transaction price (ie the fair value of the
consideration given or received see also IFRS 13) If an entity determines that
the fair value at initial recognition differs from the transaction price as
mentioned in paragraph 511A the entity shall account for that instrument at
that date as follows
IFRS 9
IFRS FoundationA422(a) at the measurement required by paragraph 511 if that fair value is
evidenced by a quoted price in an active market for an identical asset or
liability (ie a Level 1 input) or based on a valuation technique that uses
only data from observable markets An entity shall recognise the
difference between the fair value at initial recognition and the
transaction price as a gain or loss
(b) in all other cases at the measurement required by paragraph 511
adjusted to defer the difference between the fair value at initial
recognition and the transaction price After initial recognition the
entity shall recognise that deferred difference as a gain or loss only to the
extent that it arises from a change in a factor (including time) that
market participants would take into account when pricing the asset or
liability
Subsequent measurement (Sections 52 and 53)
B521 If a financial instrument that was previously recognised as a financial asset is
measured at fair value through profit or loss and its fair value decreases below
zero it is a financial liability measured in accordance with paragraph 421
However hybrid contracts with hosts that are assets within the scope of this
Standard are always measured in accordance with paragraph 432
B522 The following example illustrates the accounting for transaction costs on the
initial and subsequent measurement of a financial asset measured at fair value
with changes through other comprehensive income in accordance with either
paragraph 575 or 412A An entity acquires a financial asset for CU100 plus a
purchase commission of CU2 Initially the entity recognises the asset at CU102
The reporting period ends one day later when the quoted market price of the
asset is CU100 If the asset were sold a commission of CU3 would be paid On
that date the entity measures the asset at CU100 (without regard to the possible
commission on sale) and recognises a loss of CU2 in other comprehensive
income If the financial asset is measured at fair value through other
comprehensive income in accordance with paragraph 412A the transaction
costs are amortised to profit or loss using the effective interest method
B522A The subsequent measurement of a financial asset or financial liability and the
subsequent recognition of gains and losses described in paragraph B512A shall
be consistent with the requirements of this Standard
Investments in equity instruments and contracts on those
investments
B523 All investments in equity instruments and contracts on those instruments must
be measured at fair value However in limited circumstances cost may be an
appropriate estimate of fair value That may be the case if insufficient more
recent information is available to measure fair value or if there is a wide range
of possible fair value measurements and cost represents the best estimate of fair
value within that range
B524 Indicators that cost might not be representative of fair value include
(a) a significant change in the performance of the investee compared with
budgets plans or milestones
IFRS 9
IFRS Foundation A423(b) changes in expectation that the investee’s technical product milestones
will be achieved
(c) a significant change in the market for the investee’s equity or its
products or potential products
(d) a significant change in the global economy or the economic
environment in which the investee operates
(e) a significant change in the performance of comparable entities or in the
valuations implied by the overall market
(f) internal matters of the investee such as fraud commercial disputes
litigation changes in management or strategy
(g) evidence from external transactions in the investee’s equity either by
the investee (such as a fresh issue of equity) or by transfers of equity
instruments between third parties
B525 The list in paragraph B524 is not exhaustive An entity shall use all
information about the performance and operations of the investee that becomes
available after the date of initial recognition To the extent that any such
relevant factors exist they may indicate that cost might not be representative of
fair value In such cases the entity must measure fair value
B526 Cost is never the best estimate of fair value for investments in quoted equity
instruments (or contracts on quoted equity instruments)
Amortised cost measurement (Section 54)
Effective interest method
B541 In applying the effective interest method an entity identifies fees that are an
integral part of the effective interest rate of a financial instrument The
description of fees for financial services may not be indicative of the nature and
substance of the services provided Fees that are an integral part of the effective
interest rate of a financial instrument are treated as an adjustment to the
effective interest rate unless the financial instrument is measured at fair value
with the change in fair value being recognised in profit or loss In those cases
the fees are recognised as revenue or expense when the instrument is initially
recognised
B542 Fees that are an integral part of the effective interest rate of a financial
instrument include
(a) origination fees received by the entity relating to the creation or
acquisition of a financial asset Such fees may include compensation for
activities such as evaluating the borrower’s financial condition
evaluating and recording guarantees collateral and other security
arrangements negotiating the terms of the instrument preparing and
processing documents and closing the transaction These fees are an
integral part of generating an involvement with the resulting financial
instrument
IFRS 9
IFRS FoundationA424(b) commitment fees received by the entity to originate a loan when the
loan commitment is not measured in accordance with paragraph 421(a)
and it is probable that the entity will enter into a specific lending
arrangement These fees are regarded as compensation for an ongoing
involvement with the acquisition of a financial instrument If the
commitment expires without the entity making the loan the fee is
recognised as revenue on expiry
(c) origination fees paid on issuing financial liabilities measured at
amortised cost These fees are an integral part of generating an
involvement with a financial liability An entity distinguishes fees and
costs that are an integral part of the effective interest rate for the
financial liability from origination fees and transaction costs relating to
the right to provide services such as investment management services
B543 Fees that are not an integral part of the effective interest rate of a financial
instrument and are accounted for in accordance with IFRS 15 include
(a) fees charged for servicing a loan
(b) commitment fees to originate a loan when the loan commitment is not
measured in accordance with paragraph 421(a) and it is unlikely that a
specific lending arrangement will be entered into and
(c) loan syndication fees received by an entity that arranges a loan and
retains no part of the loan package for itself (or retains a part at the same
effective interest rate for comparable risk as other participants)
B544 When applying the effective interest method an entity generally amortises any
fees points paid or received transaction costs and other premiums or discounts
that are included in the calculation of the effective interest rate over the
expected life of the financial instrument However a shorter period is used if
this is the period to which the fees points paid or received transaction costs
premiums or discounts relate This will be the case when the variable to which
the fees points paid or received transaction costs premiums or discounts relate
is repriced to market rates before the expected maturity of the financial
instrument In such a case the appropriate amortisation period is the period to
the next such repricing date For example if a premium or discount on a
floatingrate financial instrument reflects the interest that has accrued on that
financial instrument since the interest was last paid or changes in the market
rates since the floating interest rate was reset to the market rates it will be
amortised to the next date when the floating interest is reset to market rates
This is because the premium or discount relates to the period to the next
interest reset date because at that date the variable to which the premium or
discount relates (ie interest rates) is reset to the market rates If however the
premium or discount results from a change in the credit spread over the floating
rate specified in the financial instrument or other variables that are not reset to
the market rates it is amortised over the expected life of the financial
instrument
B545 For floatingrate financial assets and floatingrate financial liabilities periodic
reestimation of cash flows to reflect the movements in the market rates of
interest alters the effective interest rate If a floatingrate financial asset or a
IFRS 9
IFRS Foundation A425floatingrate financial liability is recognised initially at an amount equal to the
principal receivable or payable on maturity reestimating the future interest
payments normally has no significant effect on the carrying amount of the asset
or the liability
B546 If an entity revises its estimates of payments or receipts (excluding modifications
in accordance with paragraph 543 and changes in estimates of expected credit
losses) it shall adjust the gross carrying amount of the financial asset or
amortised cost of a financial liability (or group of financial instruments) to
reflect actual and revised estimated contractual cash flows The entity
recalculates the gross carrying amount of the financial asset or amortised cost of
the financial liability as the present value of the estimated future contractual
cash flows that are discounted at the financial instrument’s original effective
interest rate (or creditadjusted effective interest rate for purchased or originated
creditimpaired financial assets) or when applicable the revised effective
interest rate calculated in accordance with paragraph 6510 The adjustment is
recognised in profit or loss as income or expense
B547 In some cases a financial asset is considered creditimpaired at initial
recognition because the credit risk is very high and in the case of a purchase it
is acquired at a deep discount An entity is required to include the initial
expected credit losses in the estimated cash flows when calculating the
creditadjusted effective interest rate for financial assets that are considered to
be purchased or originated creditimpaired at initial recognition However this
does not mean that a creditadjusted effective interest rate should be applied
solely because the financial asset has high credit risk at initial recognition
Transaction costs
B548 Transaction costs include fees and commission paid to agents (including
employees acting as selling agents) advisers brokers and dealers levies by
regulatory agencies and security exchanges and transfer taxes and duties
Transaction costs do not include debt premiums or discounts financing costs or
internal administrative or holding costs
Writeoff
B549 Writeoffs can relate to a financial asset in its entirety or to a portion of it For
example an entity plans to enforce the collateral on a financial asset and
expects to recover no more than 30 per cent of the financial asset from the
collateral If the entity has no reasonable prospects of recovering any further
cash flows from the financial asset it should write off the remaining 70 per cent
of the financial asset
Impairment (Section 55)
Collective and individual assessment basis
B551 In order to meet the objective of recognising lifetime expected credit losses for
significant increases in credit risk since initial recognition it may be necessary
to perform the assessment of significant increases in credit risk on a collective
basis by considering information that is indicative of significant increases in
credit risk on for example a group or subgroup of financial instruments This
IFRS 9
IFRS FoundationA426is to ensure that an entity meets the objective of recognising lifetime expected
credit losses when there are significant increases in credit risk even if evidence
of such significant increases in credit risk at the individual instrument level is
not yet available
B552 Lifetime expected credit losses are generally expected to be recognised before a
financial instrument becomes past due Typically credit risk increases
significantly before a financial instrument becomes past due or other lagging
borrowerspecific factors (for example a modification or restructuring) are
observed Consequently when reasonable and supportable information that is
more forwardlooking than past due information is available without undue cost
or effort it must be used to assess changes in credit risk
B553 However depending on the nature of the financial instruments and the credit
risk information available for particular groups of financial instruments an
entity may not be able to identify significant changes in credit risk for individual
financial instruments before the financial instrument becomes past due This
may be the case for financial instruments such as retail loans for which there is
little or no updated credit risk information that is routinely obtained and
monitored on an individual instrument until a customer breaches the
contractual terms If changes in the credit risk for individual financial
instruments are not captured before they become past due a loss allowance
based only on credit information at an individual financial instrument level
would not faithfully represent the changes in credit risk since initial
recognition
B554 In some circumstances an entity does not have reasonable and supportable
information that is available without undue cost or effort to measure lifetime
expected credit losses on an individual instrument basis In that case lifetime
expected credit losses shall be recognised on a collective basis that considers
comprehensive credit risk information This comprehensive credit risk
information must incorporate not only past due information but also all
relevant credit information including forwardlooking macroeconomic
information in order to approximate the result of recognising lifetime expected
credit losses when there has been a significant increase in credit risk since initial
recognition on an individual instrument level
B555 For the purpose of determining significant increases in credit risk and
recognising a loss allowance on a collective basis an entity can group financial
instruments on the basis of shared credit risk characteristics with the objective
of facilitating an analysis that is designed to enable significant increases in
credit risk to be identified on a timely basis The entity should not obscure this
information by grouping financial instruments with different risk
characteristics Examples of shared credit risk characteristics may include but
are not limited to the
(a) instrument type
(b) credit risk ratings
(c) collateral type
(d) date of initial recognition
IFRS 9
IFRS Foundation A427(e) remaining term to maturity
(f) industry
(g) geographical location of the borrower and
(h) the value of collateral relative to the financial asset if it has an impact on
the probability of a default occurring (for example nonrecourse loans in
some jurisdictions or loantovalue ratios)
B556 Paragraph 554 requires that lifetime expected credit losses are recognised on
all financial instruments for which there has been significant increases in credit
risk since initial recognition In order to meet this objective if an entity is not
able to group financial instruments for which the credit risk is considered to
have increased significantly since initial recognition based on shared credit risk
characteristics the entity should recognise lifetime expected credit losses on a
portion of the financial assets for which credit risk is deemed to have increased
significantly The aggregation of financial instruments to assess whether there
are changes in credit risk on a collective basis may change over time as new
information becomes available on groups of or individual financial
instruments
Timing of recognising lifetime expected credit losses
B557 The assessment of whether lifetime expected credit losses should be recognised
is based on significant increases in the likelihood or risk of a default occurring
since initial recognition (irrespective of whether a financial instrument has been
repriced to reflect an increase in credit risk) instead of on evidence of a financial
asset being creditimpaired at the reporting date or an actual default occurring
Generally there will be a significant increase in credit risk before a financial
asset becomes creditimpaired or an actual default occurs
B558 For loan commitments an entity considers changes in the risk of a default
occurring on the loan to which a loan commitment relates For financial
guarantee contracts an entity considers the changes in the risk that the
specified debtor will default on the contract
B559 The significance of a change in the credit risk since initial recognition depends
on the risk of a default occurring as at initial recognition Thus a given change
in absolute terms in the risk of a default occurring will be more significant for a
financial instrument with a lower initial risk of a default occurring compared to
a financial instrument with a higher initial risk of a default occurring
B5510 The risk of a default occurring on financial instruments that have comparable
credit risk is higher the longer the expected life of the instrument for example
the risk of a default occurring on an AAArated bond with an expected life of
10 years is higher than that on an AAArated bond with an expected life of
five years
B5511 Because of the relationship between the expected life and the risk of a default
occurring the change in credit risk cannot be assessed simply by comparing the
change in the absolute risk of a default occurring over time For example if the
risk of a default occurring for a financial instrument with an expected life of
10 years at initial recognition is identical to the risk of a default occurring on
IFRS 9
IFRS FoundationA428that financial instrument when its expected life in a subsequent period is only
five years that may indicate an increase in credit risk This is because the risk of
a default occurring over the expected life usually decreases as time passes if the
credit risk is unchanged and the financial instrument is closer to maturity
However for financial instruments that only have significant payment
obligations close to the maturity of the financial instrument the risk of a default
occurring may not necessarily decrease as time passes In such a case an entity
should also consider other qualitative factors that would demonstrate whether
credit risk has increased significantly since initial recognition
B5512 An entity may apply various approaches when assessing whether the credit risk
on a financial instrument has increased significantly since initial recognition or
when measuring expected credit losses An entity may apply different
approaches for different financial instruments An approach that does not
include an explicit probability of default as an input per se such as a credit loss
rate approach can be consistent with the requirements in this Standard
provided that an entity is able to separate the changes in the risk of a default
occurring from changes in other drivers of expected credit losses such as
collateral and considers the following when making the assessment
(a) the change in the risk of a default occurring since initial recognition
(b) the expected life of the financial instrument and
(c) reasonable and supportable information that is available without undue
cost or effort that may affect credit risk
B5513 The methods used to determine whether credit risk has increased significantly
on a financial instrument since initial recognition should consider the
characteristics of the financial instrument (or group of financial instruments)
and the default patterns in the past for comparable financial instruments
Despite the requirement in paragraph 559 for financial instruments for which
default patterns are not concentrated at a specific point during the expected life
of the financial instrument changes in the risk of a default occurring over the
next 12 months may be a reasonable approximation of the changes in the
lifetime risk of a default occurring In such cases an entity may use changes in
the risk of a default occurring over the next 12 months to determine whether
credit risk has increased significantly since initial recognition unless
circumstances indicate that a lifetime assessment is necessary
B5514 However for some financial instruments or in some circumstances it may not
be appropriate to use changes in the risk of a default occurring over the next
12 months to determine whether lifetime expected credit losses should be
recognised For example the change in the risk of a default occurring in the
next 12 months may not be a suitable basis for determining whether credit risk
has increased on a financial instrument with a maturity of more than
12 months when
(a) the financial instrument only has significant payment obligations
beyond the next 12 months
(b) changes in relevant macroeconomic or other creditrelated factors occur
that are not adequately reflected in the risk of a default occurring in the
next 12 months or
IFRS 9
IFRS Foundation A429(c) changes in creditrelated factors only have an impact on the credit risk of
the financial instrument (or have a more pronounced effect) beyond
12 months
Determining whether credit risk has increased significantly since
initial recognition
B5515 When determining whether the recognition of lifetime expected credit losses is
required an entity shall consider reasonable and supportable information that
is available without undue cost or effort and that may affect the credit risk on a
financial instrument in accordance with paragraph 5517(c) An entity need not
undertake an exhaustive search for information when determining whether
credit risk has increased significantly since initial recognition
B5516 Credit risk analysis is a multifactor and holistic analysis whether a specific
factor is relevant and its weight compared to other factors will depend on the
type of product characteristics of the financial instruments and the borrower as
well as the geographical region An entity shall consider reasonable and
supportable information that is available without undue cost or effort and that
is relevant for the particular financial instrument being assessed However
some factors or indicators may not be identifiable on an individual financial
instrument level In such a case the factors or indicators should be assessed for
appropriate portfolios groups of portfolios or portions of a portfolio of financial
instruments to determine whether the requirement in paragraph 553 for the
recognition of lifetime expected credit losses has been met
B5517 The following nonexhaustive list of information may be relevant in assessing
changes in credit risk
(a) significant changes in internal price indicators of credit risk as a result of
a change in credit risk since inception including but not limited to the
credit spread that would result if a particular financial instrument or
similar financial instrument with the same terms and the same
counterparty were newly originated or issued at the reporting date
(b) other changes in the rates or terms of an existing financial instrument
that would be significantly different if the instrument was newly
originated or issued at the reporting date (such as more stringent
covenants increased amounts of collateral or guarantees or higher
income coverage) because of changes in the credit risk of the financial
instrument since initial recognition
(c) significant changes in external market indicators of credit risk for a
particular financial instrument or similar financial instruments with the
same expected life Changes in market indicators of credit risk include
but are not limited to
(i) the credit spread
(ii) the credit default swap prices for the borrower
(iii) the length of time or the extent to which the fair value of a
financial asset has been less than its amortised cost and
IFRS 9
IFRS FoundationA430(iv) other market information related to the borrower such as
changes in the price of a borrower’s debt and equity instruments
(d) an actual or expected significant change in the financial instrument’s
external credit rating
(e) an actual or expected internal credit rating downgrade for the borrower
or decrease in behavioural scoring used to assess credit risk internally
Internal credit ratings and internal behavioural scoring are more reliable
when they are mapped to external ratings or supported by default
studies
(f) existing or forecast adverse changes in business financial or economic
conditions that are expected to cause a significant change in the
borrower’s ability to meet its debt obligations such as an actual or
expected increase in interest rates or an actual or expected significant
increase in unemployment rates
(g) an actual or expected significant change in the operating results of the
borrower Examples include actual or expected declining revenues or
margins increasing operating risks working capital deficiencies
decreasing asset quality increased balance sheet leverage liquidity
management problems or changes in the scope of business or
organisational structure (such as the discontinuance of a segment of the
business) that results in a significant change in the borrower’s ability to
meet its debt obligations
(h) significant increases in credit risk on other financial instruments of the
same borrower
(i) an actual or expected significant adverse change in the regulatory
economic or technological environment of the borrower that results in a
significant change in the borrower’s ability to meet its debt obligations
such as a decline in the demand for the borrower’s sales product because
of a shift in technology
(j) significant changes in the value of the collateral supporting the
obligation or in the quality of thirdparty guarantees or credit
enhancements which are expected to reduce the borrower’s economic
incentive to make scheduled contractual payments or to otherwise have
an effect on the probability of a default occurring For example if the
value of collateral declines because house prices decline borrowers in
some jurisdictions have a greater incentive to default on their
mortgages
(k) a significant change in the quality of the guarantee provided by a
shareholder (or an individual’s parents) if the shareholder (or parents)
have an incentive and financial ability to prevent default by capital or
cash infusion
(l) significant changes such as reductions in financial support from a
parent entity or other affiliate or an actual or expected significant
change in the quality of credit enhancement that are expected to reduce
the borrower’s economic incentive to make scheduled contractual
IFRS 9
IFRS Foundation A431payments Credit quality enhancements or support include the
consideration of the financial condition of the guarantor andor for
interests issued in securitisations whether subordinated interests are
expected to be capable of absorbing expected credit losses (for example
on the loans underlying the security)
(m) expected changes in the loan documentation including an expected
breach of contract that may lead to covenant waivers or amendments
interest payment holidays interest rate stepups requiring additional
collateral or guarantees or other changes to the contractual framework
of the instrument
(n) significant changes in the expected performance and behaviour of the
borrower including changes in the payment status of borrowers in the
group (for example an increase in the expected number or extent of
delayed contractual payments or significant increases in the expected
number of credit card borrowers who are expected to approach or exceed
their credit limit or who are expected to be paying the minimum
monthly amount)
(o) changes in the entity’s credit management approach in relation to the
financial instrument ie based on emerging indicators of changes in the
credit risk of the financial instrument the entity’s credit risk
management practice is expected to become more active or to be focused
on managing the instrument including the instrument becoming more
closely monitored or controlled or the entity specifically intervening
with the borrower
(p) past due information including the rebuttable presumption as set out in
paragraph 5511
B5518 In some cases the qualitative and nonstatistical quantitative information
available may be sufficient to determine that a financial instrument has met the
criterion for the recognition of a loss allowance at an amount equal to lifetime
expected credit losses That is the information does not need to flow through a
statistical model or credit ratings process in order to determine whether there
has been a significant increase in the credit risk of the financial instrument In
other cases an entity may need to consider other information including
information from its statistical models or credit ratings processes Alternatively
the entity may base the assessment on both types of information ie qualitative
factors that are not captured through the internal ratings process and a specific
internal rating category at the reporting date taking into consideration the
credit risk characteristics at initial recognition if both types of information are
relevant
More than 30 days past due rebuttable presumption
B5519 The rebuttable presumption in paragraph 5511 is not an absolute indicator
that lifetime expected credit losses should be recognised but is presumed to be
the latest point at which lifetime expected credit losses should be recognised
even when using forwardlooking information (including macroeconomic
factors on a portfolio level)
IFRS 9
IFRS FoundationA432B5520 An entity can rebut this presumption However it can do so only when it has
reasonable and supportable information available that demonstrates that even if
contractual payments become more than 30 days past due this does not
represent a significant increase in the credit risk of a financial instrument For
example when nonpayment was an administrative oversight instead of
resulting from financial difficulty of the borrower or the entity has access to
historical evidence that demonstrates that there is no correlation between
significant increases in the risk of a default occurring and financial assets on
which payments are more than 30 days past due but that evidence does identify
such a correlation when payments are more than 60 days past due
B5521 An entity cannot align the timing of significant increases in credit risk and the
recognition of lifetime expected credit losses to when a financial asset is
regarded as creditimpaired or an entity’s internal definition of default
Financial instruments that have low credit risk at the reporting date
B5522 The credit risk on a financial instrument is considered low for the purposes of
paragraph 5510 if the financial instrument has a low risk of default the
borrower has a strong capacity to meet its contractual cash flow obligations in
the near term and adverse changes in economic and business conditions in the
longer term may but will not necessarily reduce the ability of the borrower to
fulfil its contractual cash flow obligations Financial instruments are not
considered to have low credit risk when they are regarded as having a low risk of
loss simply because of the value of collateral and the financial instrument
without that collateral would not be considered low credit risk Financial
instruments are also not considered to have low credit risk simply because they
have a lower risk of default than the entity’s other financial instruments or
relative to the credit risk of the jurisdiction within which an entity operates
B5523 To determine whether a financial instrument has low credit risk an entity may
use its internal credit risk ratings or other methodologies that are consistent
with a globally understood definition of low credit risk and that consider the
risks and the type of financial instruments that are being assessed An external
rating of investment grade’ is an example of a financial instrument that may be
considered as having low credit risk However financial instruments are not
required to be externally rated to be considered to have low credit risk They
should however be considered to have low credit risk from a market
participant perspective taking into account all of the terms and conditions of
the financial instrument
B5524 Lifetime expected credit losses are not recognised on a financial instrument
simply because it was considered to have low credit risk in the previous
reporting period and is not considered to have low credit risk at the reporting
date In such a case an entity shall determine whether there has been a
significant increase in credit risk since initial recognition and thus whether
lifetime expected credit losses are required to be recognised in accordance with
paragraph 553
IFRS 9
IFRS Foundation A433Modifications
B5525 In some circumstances the renegotiation or modification of the contractual
cash flows of a financial asset can lead to the derecognition of the existing
financial asset in accordance with this Standard When the modification of a
financial asset results in the derecognition of the existing financial asset and the
subsequent recognition of the modified financial asset the modified asset is
considered a new’ financial asset for the purposes of this Standard
B5526 Accordingly the date of the modification shall be treated as the date of initial
recognition of that financial asset when applying the impairment requirements
to the modified financial asset This typically means measuring the loss
allowance at an amount equal to 12month expected credit losses until the
requirements for the recognition of lifetime expected credit losses in
paragraph 553 are met However in some unusual circumstances following a
modification that results in derecognition of the original financial asset there
may be evidence that the modified financial asset is creditimpaired at initial
recognition and thus the financial asset should be recognised as an originated
creditimpaired financial asset This might occur for example in a situation in
which there was a substantial modification of a distressed asset that resulted in
the derecognition of the original financial asset In such a case it may be
possible for the modification to result in a new financial asset which is credit
impaired at initial recognition
B5527 If the contractual cash flows on a financial asset have been renegotiated or
otherwise modified but the financial asset is not derecognised that financial
asset is not automatically considered to have lower credit risk An entity shall
assess whether there has been a significant increase in credit risk since initial
recognition on the basis of all reasonable and supportable information that is
available without undue cost or effort This includes historical and
forwardlooking information and an assessment of the credit risk over the
expected life of the financial asset which includes information about the
circumstances that led to the modification Evidence that the criteria for the
recognition of lifetime expected credit losses are no longer met may include a
history of uptodate and timely payment performance against the modified
contractual terms Typically a customer would need to demonstrate consistently
good payment behaviour over a period of time before the credit risk is
considered to have decreased For example a history of missed or incomplete
payments would not typically be erased by simply making one payment on time
following a modification of the contractual terms
Measurement of expected credit losses
Expected credit losses
B5528 Expected credit losses are a probabilityweighted estimate of credit losses (ie the
present value of all cash shortfalls) over the expected life of the financial
instrument A cash shortfall is the difference between the cash flows that are
due to an entity in accordance with the contract and the cash flows that the
entity expects to receive Because expected credit losses consider the amount
and timing of payments a credit loss arises even if the entity expects to be paid
in full but later than when contractually due
IFRS 9
IFRS FoundationA434B5529 For financial assets a credit loss is the present value of the difference between
(a) the contractual cash flows that are due to an entity under the contract
and
(b) the cash flows that the entity expects to receive
B5530 For undrawn loan commitments a credit loss is the present value of the
difference between
(a) the contractual cash flows that are due to the entity if the holder of the
loan commitment draws down the loan and
(b) the cash flows that the entity expects to receive if the loan is drawn
down
B5531 An entity’s estimate of expected credit losses on loan commitments shall be
consistent with its expectations of drawdowns on that loan commitment ie it
shall consider the expected portion of the loan commitment that will be drawn
down within 12 months of the reporting date when estimating 12month
expected credit losses and the expected portion of the loan commitment that
will be drawn down over the expected life of the loan commitment when
estimating lifetime expected credit losses
B5532 For a financial guarantee contract the entity is required to make payments only
in the event of a default by the debtor in accordance with the terms of the
instrument that is guaranteed Accordingly cash shortfalls are the expected
payments to reimburse the holder for a credit loss that it incurs less any
amounts that the entity expects to receive from the holder the debtor or any
other party If the asset is fully guaranteed the estimation of cash shortfalls for
a financial guarantee contract would be consistent with the estimations of cash
shortfalls for the asset subject to the guarantee
B5533 For a financial asset that is creditimpaired at the reporting date but that is not
a purchased or originated creditimpaired financial asset an entity shall
measure the expected credit losses as the difference between the asset’s gross
carrying amount and the present value of estimated future cash flows
discounted at the financial asset’s original effective interest rate Any
adjustment is recognised in profit or loss as an impairment gain or loss
B5534 When measuring a loss allowance for a lease receivable the cash flows used for
determining the expected credit losses should be consistent with the cash flows
used in measuring the lease receivable in accordance with IFRS 16 Leases
B5535 An entity may use practical expedients when measuring expected credit losses if
they are consistent with the principles in paragraph 5517 An example of a
practical expedient is the calculation of the expected credit losses on trade
receivables using a provision matrix The entity would use its historical credit
loss experience (adjusted as appropriate in accordance with paragraphs
B5551–B5552) for trade receivables to estimate the 12month expected credit
losses or the lifetime expected credit losses on the financial assets as relevant A
provision matrix might for example specify fixed provision rates depending on
the number of days that a trade receivable is past due (for example 1 per cent if
not past due 2 per cent if less than 30 days past due 3 per cent if more than
30 days but less than 90 days past due 20 per cent if 90–180 days past due etc)
IFRS 9
IFRS Foundation A435Depending on the diversity of its customer base the entity would use
appropriate groupings if its historical credit loss experience shows significantly
different loss patterns for different customer segments Examples of criteria
that might be used to group assets include geographical region product type
customer rating collateral or trade credit insurance and type of customer (such
as wholesale or retail)
Definition of default
B5536 Paragraph 559 requires that when determining whether the credit risk on a
financial instrument has increased significantly an entity shall consider the
change in the risk of a default occurring since initial recognition
B5537 When defining default for the purposes of determining the risk of a default
occurring an entity shall apply a default definition that is consistent with the
definition used for internal credit risk management purposes for the relevant
financial instrument and consider qualitative indicators (for example financial
covenants) when appropriate However there is a rebuttable presumption that
default does not occur later than when a financial asset is 90 days past due
unless an entity has reasonable and supportable information to demonstrate
that a more lagging default criterion is more appropriate The definition of
default used for these purposes shall be applied consistently to all financial
instruments unless information becomes available that demonstrates that
another default definition is more appropriate for a particular financial
instrument
Period over which to estimate expected credit losses
B5538 In accordance with paragraph 5519 the maximum period over which expected
credit losses shall be measured is the maximum contractual period over which
the entity is exposed to credit risk For loan commitments and financial
guarantee contracts this is the maximum contractual period over which an
entity has a present contractual obligation to extend credit
B5539 However in accordance with paragraph 5520 some financial instruments
include both a loan and an undrawn commitment component and the entity’s
contractual ability to demand repayment and cancel the undrawn commitment
does not limit the entity’s exposure to credit losses to the contractual notice
period For example revolving credit facilities such as credit cards and
overdraft facilities can be contractually withdrawn by the lender with as little
as one day’s notice However in practice lenders continue to extend credit for a
longer period and may only withdraw the facility after the credit risk of the
borrower increases which could be too late to prevent some or all of the
expected credit losses These financial instruments generally have the following
characteristics as a result of the nature of the financial instrument the way in
which the financial instruments are managed and the nature of the available
information about significant increases in credit risk
(a) the financial instruments do not have a fixed term or repayment
structure and usually have a short contractual cancellation period (for
example one day)
IFRS 9
IFRS FoundationA436(b) the contractual ability to cancel the contract is not enforced in the
normal daytoday management of the financial instrument and the
contract may only be cancelled when the entity becomes aware of an
increase in credit risk at the facility level and
(c) the financial instruments are managed on a collective basis
B5540 When determining the period over which the entity is expected to be exposed to
credit risk but for which expected credit losses would not be mitigated by the
entity’s normal credit risk management actions an entity should consider
factors such as historical information and experience about
(a) the period over which the entity was exposed to credit risk on similar
financial instruments
(b) the length of time for related defaults to occur on similar financial
instruments following a significant increase in credit risk and
(c) the credit risk management actions that an entity expects to take once
the credit risk on the financial instrument has increased such as the
reduction or removal of undrawn limits
Probabilityweighted outcome
B5541 The purpose of estimating expected credit losses is neither to estimate a
worstcase scenario nor to estimate the bestcase scenario Instead an estimate
of expected credit losses shall always reflect the possibility that a credit loss
occurs and the possibility that no credit loss occurs even if the most likely
outcome is no credit loss
B5542 Paragraph 5517(a) requires the estimate of expected credit losses to reflect an
unbiased and probabilityweighted amount that is determined by evaluating a
range of possible outcomes In practice this may not need to be a complex
analysis In some cases relatively simple modelling may be sufficient without
the need for a large number of detailed simulations of scenarios For example
the average credit losses of a large group of financial instruments with shared
risk characteristics may be a reasonable estimate of the probabilityweighted
amount In other situations the identification of scenarios that specify the
amount and timing of the cash flows for particular outcomes and the estimated
probability of those outcomes will probably be needed In those situations the
expected credit losses shall reflect at least two outcomes in accordance with
paragraph 5518
B5543 For lifetime expected credit losses an entity shall estimate the risk of a default
occurring on the financial instrument during its expected life 12month
expected credit losses are a portion of the lifetime expected credit losses and
represent the lifetime cash shortfalls that will result if a default occurs in the
12 months after the reporting date (or a shorter period if the expected life of a
financial instrument is less than 12 months) weighted by the probability of that
default occurring Thus 12month expected credit losses are neither the lifetime
expected credit losses that an entity will incur on financial instruments that it
predicts will default in the next 12 months nor the cash shortfalls that are
predicted over the next 12 months
IFRS 9
IFRS Foundation A437Time value of money
B5544 Expected credit losses shall be discounted to the reporting date not to the
expected default or some other date using the effective interest rate determined
at initial recognition or an approximation thereof If a financial instrument has
a variable interest rate expected credit losses shall be discounted using the
current effective interest rate determined in accordance with paragraph B545
B5545 For purchased or originated creditimpaired financial assets expected credit
losses shall be discounted using the creditadjusted effective interest rate
determined at initial recognition
B5546 Expected credit losses on lease receivables shall be discounted using the same
discount rate used in the measurement of the lease receivable in accordance
with IFRS 16
B5547 The expected credit losses on a loan commitment shall be discounted using the
effective interest rate or an approximation thereof that will be applied when
recognising the financial asset resulting from the loan commitment This is
because for the purpose of applying the impairment requirements a financial
asset that is recognised following a draw down on a loan commitment shall be
treated as a continuation of that commitment instead of as a new financial
instrument The expected credit losses on the financial asset shall therefore be
measured considering the initial credit risk of the loan commitment from the
date that the entity became a party to the irrevocable commitment
B5548 Expected credit losses on financial guarantee contracts or on loan commitments
for which the effective interest rate cannot be determined shall be discounted by
applying a discount rate that reflects the current market assessment of the time
value of money and the risks that are specific to the cash flows but only if and to
the extent that the risks are taken into account by adjusting the discount rate
instead of adjusting the cash shortfalls being discounted
Reasonable and supportable information
B5549 For the purpose of this Standard reasonable and supportable information is that
which is reasonably available at the reporting date without undue cost or effort
including information about past events current conditions and forecasts of
future economic conditions Information that is available for financial
reporting purposes is considered to be available without undue cost or effort
B5550 An entity is not required to incorporate forecasts of future conditions over the
entire expected life of a financial instrument The degree of judgement that is
required to estimate expected credit losses depends on the availability of
detailed information As the forecast horizon increases the availability of
detailed information decreases and the degree of judgement required to
estimate expected credit losses increases The estimate of expected credit losses
does not require a detailed estimate for periods that are far in the future—for
such periods an entity may extrapolate projections from available detailed
information
B5551 An entity need not undertake an exhaustive search for information but shall
consider all reasonable and supportable information that is available without
undue cost or effort and that is relevant to the estimate of expected credit losses
IFRS 9
IFRS FoundationA438including the effect of expected prepayments The information used shall
include factors that are specific to the borrower general economic conditions
and an assessment of both the current as well as the forecast direction of
conditions at the reporting date An entity may use various sources of data that
may be both internal (entityspecific) and external Possible data sources include
internal historical credit loss experience internal ratings credit loss experience
of other entities and external ratings reports and statistics Entities that have
no or insufficient sources of entityspecific data may use peer group experience
for the comparable financial instrument (or groups of financial instruments)
B5552 Historical information is an important anchor or base from which to measure
expected credit losses However an entity shall adjust historical data such as
credit loss experience on the basis of current observable data to reflect the
effects of the current conditions and its forecasts of future conditions that did
not affect the period on which the historical data is based and to remove the
effects of the conditions in the historical period that are not relevant to the
future contractual cash flows In some cases the best reasonable and
supportable information could be the unadjusted historical information
depending on the nature of the historical information and when it was
calculated compared to circumstances at the reporting date and the
characteristics of the financial instrument being considered Estimates of
changes in expected credit losses should reflect and be directionally consistent
with changes in related observable data from period to period (such as changes
in unemployment rates property prices commodity prices payment status or
other factors that are indicative of credit losses on the financial instrument or in
the group of financial instruments and in the magnitude of those changes) An
entity shall regularly review the methodology and assumptions used for
estimating expected credit losses to reduce any differences between estimates
and actual credit loss experience
B5553 When using historical credit loss experience in estimating expected credit
losses it is important that information about historical credit loss rates is
applied to groups that are defined in a manner that is consistent with the
groups for which the historical credit loss rates were observed Consequently
the method used shall enable each group of financial assets to be associated with
information about past credit loss experience in groups of financial assets with
similar risk characteristics and with relevant observable data that reflects
current conditions
B5554 Expected credit losses reflect an entity’s own expectations of credit losses
However when considering all reasonable and supportable information that is
available without undue cost or effort in estimating expected credit losses an
entity should also consider observable market information about the credit risk
of the particular financial instrument or similar financial instruments
Collateral
B5555 For the purposes of measuring expected credit losses the estimate of expected
cash shortfalls shall reflect the cash flows expected from collateral and other
credit enhancements that are part of the contractual terms and are not
recognised separately by the entity The estimate of expected cash shortfalls on
a collateralised financial instrument reflects the amount and timing of cash
IFRS 9
IFRS Foundation A439flows that are expected from foreclosure on the collateral less the costs of
obtaining and selling the collateral irrespective of whether foreclosure is
probable (ie the estimate of expected cash flows considers the probability of a
foreclosure and the cash flows that would result from it) Consequently any
cash flows that are expected from the realisation of the collateral beyond the
contractual maturity of the contract should be included in this analysis Any
collateral obtained as a result of foreclosure is not recognised as an asset that is
separate from the collateralised financial instrument unless it meets the
relevant recognition criteria for an asset in this or other Standards
Reclassification of financial assets (Section 56)
B561 If an entity reclassifies financial assets in accordance with paragraph 441
paragraph 561 requires that the reclassification is applied prospectively from
the reclassification date Both the amortised cost measurement category and the
fair value through other comprehensive income measurement category require
that the effective interest rate is determined at initial recognition Both of those
measurement categories also require that the impairment requirements are
applied in the same way Consequently when an entity reclassifies a financial
asset between the amortised cost measurement category and the fair value
through other comprehensive income measurement category
(a) the recognition of interest revenue will not change and therefore the
entity continues to use the same effective interest rate
(b) the measurement of expected credit losses will not change because both
measurement categories apply the same impairment approach However
if a financial asset is reclassified out of the fair value through other
comprehensive income measurement category and into the amortised
cost measurement category a loss allowance would be recognised as an
adjustment to the gross carrying amount of the financial asset from the
reclassification date If a financial asset is reclassified out of the
amortised cost measurement category and into the fair value through
other comprehensive income measurement category the loss allowance
would be derecognised (and thus would no longer be recognised as an
adjustment to the gross carrying amount) but instead would be
recognised as an accumulated impairment amount (of an equal amount)
in other comprehensive income and would be disclosed from the
reclassification date
B562 However an entity is not required to separately recognise interest revenue or
impairment gains or losses for a financial asset measured at fair value through
profit or loss Consequently when an entity reclassifies a financial asset out of
the fair value through profit or loss measurement category the effective interest
rate is determined on the basis of the fair value of the asset at the reclassification
date In addition for the purposes of applying Section 55 to the financial asset
from the reclassification date the date of the reclassification is treated as the
date of initial recognition
Gains and losses (Section 57)
B571 Paragraph 575 permits an entity to make an irrevocable election to present in
other comprehensive income changes in the fair value of an investment in an
IFRS 9
IFRS FoundationA440equity instrument that is not held for trading This election is made on an
instrumentbyinstrument (ie sharebyshare) basis Amounts presented in other
comprehensive income shall not be subsequently transferred to profit or loss
However the entity may transfer the cumulative gain or loss within equity
Dividends on such investments are recognised in profit or loss in accordance
with paragraph 576 unless the dividend clearly represents a recovery of part of
the cost of the investment
B571A Unless paragraph 415 applies paragraph 412A requires that a financial asset
is measured at fair value through other comprehensive income if 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 and the
asset is held in a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets This measurement category
recognises information in profit or loss as if the financial asset is measured at
amortised cost while the financial asset is measured in the statement of
financial position at fair value Gains or losses other than those that are
recognised in profit or loss in accordance with paragraphs 5710–5711 are
recognised in other comprehensive income When these financial assets are
derecognised cumulative gains or losses previously recognised in other
comprehensive income are reclassified to profit or loss This reflects the gain or
loss that would have been recognised in profit or loss upon derecognition if the
financial asset had been measured at amortised cost
B572 An entity applies IAS 21 to financial assets and financial liabilities that are
monetary items in accordance with IAS 21 and denominated in a foreign
currency IAS 21 requires any foreign exchange gains and losses on monetary
assets and monetary liabilities to be recognised in profit or loss An exception is
a monetary item that is designated as a hedging instrument in a cash flow hedge
(see paragraph 6511) a hedge of a net investment (see paragraph 6513) or a
fair value hedge of an equity instrument for which an entity has elected to
present changes in fair value in other comprehensive income in accordance with
paragraph 575 (see paragraph 658)
B572A For the purpose of recognising foreign exchange gains and losses under IAS 21 a
financial asset measured at fair value through other comprehensive income in
accordance with paragraph 412A is treated as a monetary item Accordingly
such a financial asset is treated as an asset measured at amortised cost in the
foreign currency Exchange differences on the amortised cost are recognised in
profit or loss and other changes in the carrying amount are recognised in
accordance with paragraph 5710
B573 Paragraph 575 permits an entity to make an irrevocable election to present in
other comprehensive income subsequent changes in the fair value of particular
investments in equity instruments Such an investment is not a monetary item
Accordingly the gain or loss that is presented in other comprehensive income in
accordance with paragraph 575 includes any related foreign exchange
component
B574 If there is a hedging relationship between a nonderivative monetary asset and a
nonderivative monetary liability changes in the foreign currency component of
those financial instruments are presented in profit or loss
IFRS 9
IFRS Foundation A441Liabilities designated as at fair value through profit or loss
B575 When an entity designates a financial liability as at fair value through profit or
loss it must determine whether presenting in other comprehensive income the
effects of changes in the liability’s credit risk would create or enlarge an
accounting mismatch in profit or loss An accounting mismatch would be
created or enlarged if presenting the effects of changes in the liability’s credit
risk in other comprehensive income would result in a greater mismatch in
profit or loss than if those amounts were presented in profit or loss
B576 To make that determination an entity must assess whether it expects that the
effects of changes in the liability’s credit risk will be offset in profit or loss by a
change in the fair value of another financial instrument measured at fair value
through profit or loss Such an expectation must be based on an economic
relationship between the characteristics of the liability and the characteristics of
the other financial instrument
B577 That determination is made at initial recognition and is not reassessed For
practical purposes the entity need not enter into all of the assets and liabilities
giving rise to an accounting mismatch at exactly the same time A reasonable
delay is permitted provided that any remaining transactions are expected to
occur An entity must apply consistently its methodology for determining
whether presenting in other comprehensive income the effects of changes in the
liability’s credit risk would create or enlarge an accounting mismatch in profit
or loss However an entity may use different methodologies when there are
different economic relationships between the characteristics of the liabilities
designated as at fair value through profit or loss and the characteristics of the
other financial instruments IFRS 7 requires an entity to provide qualitative
disclosures in the notes to the financial statements about its methodology for
making that determination
B578 If such a mismatch would be created or enlarged the entity is required to
present all changes in fair value (including the effects of changes in the credit
risk of the liability) in profit or loss If such a mismatch would not be created or
enlarged the entity is required to present the effects of changes in the liability’s
credit risk in other comprehensive income
B579 Amounts presented in other comprehensive income shall not be subsequently
transferred to profit or loss However the entity may transfer the cumulative
gain or loss within equity
B5710 The following example describes a situation in which an accounting mismatch
would be created in profit or loss if the effects of changes in the credit risk of the
liability were presented in other comprehensive income A mortgage bank
provides loans to customers and funds those loans by selling bonds with
matching characteristics (eg amount outstanding repayment profile term and
currency) in the market The contractual terms of the loan permit the mortgage
customer to prepay its loan (ie satisfy its obligation to the bank) by buying the
corresponding bond at fair value in the market and delivering that bond to the
mortgage bank As a result of that contractual prepayment right if the credit
quality of the bond worsens (and thus the fair value of the mortgage bank’s
liability decreases) the fair value of the mortgage bank’s loan asset also
IFRS 9
IFRS FoundationA442decreases The change in the fair value of the asset reflects the mortgage
customer’s contractual right to prepay the mortgage loan by buying the
underlying bond at fair value (which in this example has decreased) and
delivering the bond to the mortgage bank Consequently the effects of changes
in the credit risk of the liability (the bond) will be offset in profit or loss by a
corresponding change in the fair value of a financial asset (the loan) If the
effects of changes in the liability’s credit risk were presented in other
comprehensive income there would be an accounting mismatch in profit or loss
Consequently the mortgage bank is required to present all changes in fair value
of the liability (including the effects of changes in the liability’s credit risk) in
profit or loss
B5711 In the example in paragraph B5710 there is a contractual linkage between the
effects of changes in the credit risk of the liability and changes in the fair value
of the financial asset (ie as a result of the mortgage customer’s contractual right
to prepay the loan by buying the bond at fair value and delivering the bond to
the mortgage bank) However an accounting mismatch may also occur in the
absence of a contractual linkage
B5712 For the purposes of applying the requirements in paragraphs 577 and 578 an
accounting mismatch is not caused solely by the measurement method that an
entity uses to determine the effects of changes in a liability’s credit risk An
accounting mismatch in profit or loss would arise only when the effects of
changes in the liability’s credit risk (as defined in IFRS 7) are expected to be
offset by changes in the fair value of another financial instrument A mismatch
that arises solely as a result of the measurement method (ie because an entity
does not isolate changes in a liability’s credit risk from some other changes in its
fair value) does not affect the determination required by paragraphs 577 and
578 For example an entity may not isolate changes in a liability’s credit risk
from changes in liquidity risk If the entity presents the combined effect of both
factors in other comprehensive income a mismatch may occur because changes
in liquidity risk may be included in the fair value measurement of the entity’s
financial assets and the entire fair value change of those assets is presented in
profit or loss However such a mismatch is caused by measurement
imprecision not the offsetting relationship described in paragraph B576 and
therefore does not affect the determination required by paragraphs 577
and 578
The meaning of credit risk’ (paragraphs 577 and 578)
B5713 IFRS 7 defines credit risk as the risk that one party to a financial instrument will
cause a financial loss for the other party by failing to discharge an obligation’
The requirement in paragraph 577(a) relates to the risk that the issuer will fail
to perform on that particular liability It does not necessarily relate to the
creditworthiness of the issuer For example if an entity issues a collateralised
liability and a noncollateralised liability that are otherwise identical the credit
risk of those two liabilities will be different even though they are issued by the
same entity The credit risk on the collateralised liability will be less than the
credit risk of the noncollateralised liability The credit risk for a collateralised
liability may be close to zero
IFRS 9
IFRS Foundation A443B5714 For the purposes of applying the requirement in paragraph 577(a) credit risk is
different from assetspecific performance risk Assetspecific performance risk is
not related to the risk that an entity will fail to discharge a particular obligation
but instead it is related to the risk that a single asset or a group of assets will
perform poorly (or not at all)
B5715 The following are examples of assetspecific performance risk
(a) a liability with a unitlinking feature whereby the amount due to
investors is contractually determined on the basis of the performance of
specified assets The effect of that unitlinking feature on the fair value
of the liability is assetspecific performance risk not credit risk
(b) a liability issued by a structured entity with the following characteristics
The entity is legally isolated so the assets in the entity are ringfenced
solely for the benefit of its investors even in the event of bankruptcy
The entity enters into no other transactions and the assets in the entity
cannot be hypothecated Amounts are due to the entity’s investors only
if the ringfenced assets generate cash flows Thus changes in the fair
value of the liability primarily reflect changes in the fair value of the
assets The effect of the performance of the assets on the fair value of the
liability is assetspecific performance risk not credit risk
Determining the effects of changes in credit risk
B5716 For the purposes of applying the requirement in paragraph 577(a) an entity
shall determine the amount of change in the fair value of the financial liability
that is attributable to changes in the credit risk of that liability either
(a) as the amount of change in its fair value that is not attributable to
changes in market conditions that give rise to market risk (see
paragraphs B5717 and B5718) or
(b) using an alternative method the entity believes more faithfully
represents the amount of change in the liability’s fair value that is
attributable to changes in its credit risk
B5717 Changes in market conditions that give rise to market risk include changes in a
benchmark interest rate the price of another entity’s financial instrument a
commodity price a foreign exchange rate or an index of prices or rates
B5718 If the only significant relevant changes in market conditions for a liability are
changes in an observed (benchmark) interest rate the amount in
paragraph B5716(a) can be estimated as follows
(a) First the entity computes the liability’s internal rate of return at the
start of the period using the fair value of the liability and the liability’s
contractual cash flows at the start of the period It deducts from this rate
of return the observed (benchmark) interest rate at the start of the
period to arrive at an instrumentspecific component of the internal rate
of return
(b) Next the entity calculates the present value of the cash flows associated
with the liability using the liability’s contractual cash flows at the end of
the period and a discount rate equal to the sum of (i) the observed
IFRS 9
IFRS FoundationA444(benchmark) interest rate at the end of the period and (ii) the
instrumentspecific component of the internal rate of return as
determined in (a)
(c) The difference between the fair value of the liability at the end of the
period and the amount determined in (b) is the change in fair value that
is not attributable to changes in the observed (benchmark) interest rate
This is the amount to be presented in other comprehensive income in
accordance with paragraph 577(a)
B5719 The example in paragraph B5718 assumes that changes in fair value arising
from factors other than changes in the instrument’s credit risk or changes in
observed (benchmark) interest rates are not significant This method would not
be appropriate if changes in fair value arising from other factors are significant
In those cases an entity is required to use an alternative method that more
faithfully measures the effects of changes in the liability’s credit risk (see
paragraph B5716(b)) For example if the instrument in the example contains
an embedded derivative the change in fair value of the embedded derivative is
excluded in determining the amount to be presented in other comprehensive
income in accordance with paragraph 577(a)
B5720 As with all fair value measurements an entity’s measurement method for
determining the portion of the change in the liability’s fair value that is
attributable to changes in its credit risk must make maximum use of relevant
observable inputs and minimum use of unobservable inputs
Hedge accounting (Chapter 6)
Hedging instruments (Section 62)
Qualifying instruments
B621 Derivatives that are embedded in hybrid contracts but that are not separately
accounted for cannot be designated as separate hedging instruments
B622 An entity’s own equity instruments are not financial assets or financial
liabilities of the entity and therefore cannot be designated as hedging
instruments
B623 For hedges of foreign currency risk the foreign currency risk component of a
nonderivative financial instrument is determined in accordance with IAS 21
Written options
B624 This Standard does not restrict the circumstances in which a derivative that is
measured at fair value through profit or loss may be designated as a hedging
instrument except for some written options A written option does not qualify
as a hedging instrument unless it is designated as an offset to a purchased
option including one that is embedded in another financial instrument (for
example a written call option used to hedge a callable liability)
IFRS 9
IFRS Foundation A445Designation of hedging instruments
B625 For hedges other than hedges of foreign currency risk when an entity designates
a nonderivative financial asset or a nonderivative financial liability measured
at fair value through profit or loss as a hedging instrument it may only
designate the nonderivative financial instrument in its entirety or a proportion
of it
B626 A single hedging instrument may be designated as a hedging instrument of
more than one type of risk provided that there is a specific designation of the
hedging instrument and of the different risk positions as hedged items Those
hedged items can be in different hedging relationships
Hedged items (Section 63)
Qualifying items
B631 A firm commitment to acquire a business in a business combination cannot be a
hedged item except for foreign currency risk because the other risks being
hedged cannot be specifically identified and measured Those other risks are
general business risks
B632 An equity method investment cannot be a hedged item in a fair value hedge
This is because the equity method recognises in profit or loss the investor’s share
of the investee’s profit or loss instead of changes in the investment’s fair value
For a similar reason an investment in a consolidated subsidiary cannot be a
hedged item in a fair value hedge This is because consolidation recognises in
profit or loss the subsidiary’s profit or loss instead of changes in the
investment’s fair value A hedge of a net investment in a foreign operation is
different because it is a hedge of the foreign currency exposure not a fair value
hedge of the change in the value of the investment
B633 Paragraph 634 permits an entity to designate as hedged items aggregated
exposures that are a combination of an exposure and a derivative When
designating such a hedged item an entity assesses whether the aggregated
exposure combines an exposure with a derivative so that it creates a different
aggregated exposure that is managed as one exposure for a particular risk (or
risks) In that case the entity may designate the hedged item on the basis of the
aggregated exposure For example
(a) an entity may hedge a given quantity of highly probable coffee purchases
in 15 months’ time against price risk (based on US dollars) using a
15month futures contract for coffee The highly probable coffee
purchases and the futures contract for coffee in combination can be
viewed as a 15month fixedamount US dollar foreign currency risk
exposure for risk management purposes (ie like any fixedamount
US dollar cash outflow in 15 months’ time)
(b) an entity may hedge the foreign currency risk for the entire term of a
10year fixedrate debt denominated in a foreign currency However the
entity requires fixedrate exposure in its functional currency only for a
short to medium term (say two years) and floating rate exposure in its
functional currency for the remaining term to maturity At the end of
IFRS 9
IFRS FoundationA446each of the twoyear intervals (ie on a twoyear rolling basis) the entity
fixes the next two years’ interest rate exposure (if the interest level is
such that the entity wants to fix interest rates) In such a situation an
entity may enter into a 10year fixedtofloating crosscurrency interest
rate swap that swaps the fixedrate foreign currency debt into a
variablerate functional currency exposure This is overlaid with a
twoyear interest rate swap that—on the basis of the functional
currency—swaps variablerate debt into fixedrate debt In effect the
fixedrate foreign currency debt and the 10year fixedtofloating
crosscurrency interest rate swap in combination are viewed as a 10year
variablerate debt functional currency exposure for risk management
purposes
B634 When designating the hedged item on the basis of the aggregated exposure an
entity considers the combined effect of the items that constitute the aggregated
exposure for the purpose of assessing hedge effectiveness and measuring hedge
ineffectiveness However the items that constitute the aggregated exposure
remain accounted for separately This means that for example
(a) derivatives that are part of an aggregated exposure are recognised as
separate assets or liabilities measured at fair value and
(b) if a hedging relationship is designated between the items that constitute
the aggregated exposure the way in which a derivative is included as
part of an aggregated exposure must be consistent with the designation
of that derivative as the hedging instrument at the level of the
aggregated exposure For example if an entity excludes the forward
element of a derivative from its designation as the hedging instrument
for the hedging relationship between the items that constitute the
aggregated exposure it must also exclude the forward element when
including that derivative as a hedged item as part of the aggregated
exposure Otherwise the aggregated exposure shall include a derivative
either in its entirety or a proportion of it
B635 Paragraph 636 states that in consolidated financial statements the foreign
currency risk of a highly probable forecast intragroup transaction may qualify as
a hedged item in a cash flow hedge provided that the transaction is
denominated in a currency other than the functional currency of the entity
entering into that transaction and that the foreign currency risk will affect
consolidated profit or loss For this purpose an entity can be a parent
subsidiary associate joint arrangement or branch If the foreign currency risk
of a forecast intragroup transaction does not affect consolidated profit or loss
the intragroup transaction cannot qualify as a hedged item This is usually the
case for royalty payments interest payments or management charges between
members of the same group unless there is a related external transaction
However when the foreign currency risk of a forecast intragroup transaction
will affect consolidated profit or loss the intragroup transaction can qualify as a
hedged item An example is forecast sales or purchases of inventories between
members of the same group if there is an onward sale of the inventory to a party
external to the group Similarly a forecast intragroup sale of plant and
equipment from the group entity that manufactured it to a group entity that
IFRS 9
IFRS Foundation A447will use the plant and equipment in its operations may affect consolidated profit
or loss This could occur for example because the plant and equipment will be
depreciated by the purchasing entity and the amount initially recognised for the
plant and equipment may change if the forecast intragroup transaction is
denominated in a currency other than the functional currency of the
purchasing entity
B636 If a hedge of a forecast intragroup transaction qualifies for hedge accounting
any gain or loss is recognised in and taken out of other comprehensive income
in accordance with paragraph 6511 The relevant period or periods during
which the foreign currency risk of the hedged transaction affects profit or loss is
when it affects consolidated profit or loss
Designation of hedged items
B637 A component is a hedged item that is less than the entire item Consequently a
component reflects only some of the risks of the item of which it is a part or
reflects the risks only to some extent (for example when designating a
proportion of an item)
Risk components
B638 To be eligible for designation as a hedged item a risk component must be a
separately identifiable component of the financial or the nonfinancial item and
the changes in the cash flows or the fair value of the item attributable to
changes in that risk component must be reliably measurable
B639 When identifying what risk components qualify for designation as a hedged
item an entity assesses such risk components within the context of the
particular market structure to which the risk or risks relate and in which the
hedging activity takes place Such a determination requires an evaluation of the
relevant facts and circumstances which differ by risk and market
B6310 When designating risk components as hedged items an entity considers
whether the risk components are explicitly specified in a contract (contractually
specified risk components) or whether they are implicit in the fair value or the
cash flows of an item of which they are a part (noncontractually specified risk
components) Noncontractually specified risk components can relate to items
that are not a contract (for example forecast transactions) or contracts that do
not explicitly specify the component (for example a firm commitment that
includes only one single price instead of a pricing formula that references
different underlyings) For example
(a) Entity A has a longterm supply contract for natural gas that is priced
using a contractually specified formula that references commodities and
other factors (for example gas oil fuel oil and other components such as
transport charges) Entity A hedges the gas oil component in that supply
contract using a gas oil forward contract Because the gas oil component
is specified by the terms and conditions of the supply contract it is a
contractually specified risk component Hence because of the pricing
formula Entity A concludes that the gas oil price exposure is separately
identifiable At the same time there is a market for gas oil forward
contracts Hence Entity A concludes that the gas oil price exposure is
IFRS 9
IFRS FoundationA448reliably measurable Consequently the gas oil price exposure in the
supply contract is a risk component that is eligible for designation as a
hedged item
(b) Entity B hedges its future coffee purchases based on its production
forecast Hedging starts up to 15 months before delivery for part of the
forecast purchase volume Entity B increases the hedged volume over
time (as the delivery date approaches) Entity B uses two different types
of contracts to manage its coffee price risk
(i) exchangetraded coffee futures contracts and
(ii) coffee supply contracts for Arabica coffee from Colombia
delivered to a specific manufacturing site These contracts price
a tonne of coffee based on the exchangetraded coffee futures
contract price plus a fixed price differential plus a variable
logistics services charge using a pricing formula The coffee
supply contract is an executory contract in accordance with
which Entity B takes actual delivery of coffee
For deliveries that relate to the current harvest entering into the coffee
supply contracts allows Entity B to fix the price differential between the
actual coffee quality purchased (Arabica coffee from Colombia) and the
benchmark quality that is the underlying of the exchangetraded futures
contract However for deliveries that relate to the next harvest the
coffee supply contracts are not yet available so the price differential
cannot be fixed Entity B uses exchangetraded coffee futures contracts
to hedge the benchmark quality component of its coffee price risk for
deliveries that relate to the current harvest as well as the next harvest
Entity B determines that it is exposed to three different risks coffee price
risk reflecting the benchmark quality coffee price risk reflecting the
difference (spread) between the price for the benchmark quality coffee
and the particular Arabica coffee from Colombia that it actually receives
and the variable logistics costs For deliveries related to the current
harvest after Entity B enters into a coffee supply contract the coffee
price risk reflecting the benchmark quality is a contractually specified
risk component because the pricing formula includes an indexation to
the exchangetraded coffee futures contract price Entity B concludes
that this risk component is separately identifiable and reliably
measurable For deliveries related to the next harvest Entity B has not
yet entered into any coffee supply contracts (ie those deliveries are
forecast transactions) Hence the coffee price risk reflecting the
benchmark quality is a noncontractually specified risk component
Entity B’s analysis of the market structure takes into account how
eventual deliveries of the particular coffee that it receives are priced
Hence on the basis of this analysis of the market structure Entity B
concludes that the forecast transactions also involve the coffee price risk
that reflects the benchmark quality as a risk component that is
separately identifiable and reliably measurable even though it is not
contractually specified Consequently Entity B may designate hedging
IFRS 9
IFRS Foundation A449relationships on a risk components basis (for the coffee price risk that
reflects the benchmark quality) for coffee supply contracts as well as
forecast transactions
(c) Entity C hedges part of its future jet fuel purchases on the basis of its
consumption forecast up to 24 months before delivery and increases the
volume that it hedges over time Entity C hedges this exposure using
different types of contracts depending on the time horizon of the hedge
which affects the market liquidity of the derivatives For the longer time
horizons (12–24 months) Entity C uses crude oil contracts because only
these have sufficient market liquidity For time horizons of 6–12 months
Entity C uses gas oil derivatives because they are sufficiently liquid For
time horizons up to six months Entity C uses jet fuel contracts
Entity C’s analysis of the market structure for oil and oil products and its
evaluation of the relevant facts and circumstances is as follows
(i) Entity C operates in a geographical area in which Brent is the
crude oil benchmark Crude oil is a raw material benchmark that
affects the price of various refined oil products as their most
basic input Gas oil is a benchmark for refined oil products
which is used as a pricing reference for oil distillates more
generally This is also reflected in the types of derivative financial
instruments for the crude oil and refined oil products markets of
the environment in which Entity C operates such as
● the benchmark crude oil futures contract which is for
Brent crude oil
● the benchmark gas oil futures contract which is used as
the pricing reference for distillates—for example jet fuel
spread derivatives cover the price differential between jet
fuel and that benchmark gas oil and
● the benchmark gas oil crack spread derivative (ie the
derivative for the price differential between crude oil and
gas oil—a refining margin) which is indexed to Brent
crude oil
(ii) the pricing of refined oil products does not depend on which
particular crude oil is processed by a particular refinery because
those refined oil products (such as gas oil or jet fuel) are
standardised products
Hence Entity C concludes that the price risk of its jet fuel purchases
includes a crude oil price risk component based on Brent crude oil and a
gas oil price risk component even though crude oil and gas oil are not
specified in any contractual arrangement Entity C concludes that these
two risk components are separately identifiable and reliably measurable
even though they are not contractually specified Consequently Entity C
may designate hedging relationships for forecast jet fuel purchases on a
risk components basis (for crude oil or gas oil) This analysis also means
that if for example Entity C used crude oil derivatives based on West
IFRS 9
IFRS FoundationA450Texas Intermediate (WTI) crude oil changes in the price differential
between Brent crude oil and WTI crude oil would cause hedge
ineffectiveness
(d) Entity D holds a fixedrate debt instrument This instrument is issued in
an environment with a market in which a large variety of similar debt
instruments are compared by their spreads to a benchmark rate (for
example LIBOR) and variablerate instruments in that environment are
typically indexed to that benchmark rate Interest rate swaps are
frequently used to manage interest rate risk on the basis of that
benchmark rate irrespective of the spread of debt instruments to that
benchmark rate The price of fixedrate debt instruments varies directly
in response to changes in the benchmark rate as they happen Entity D
concludes that the benchmark rate is a component that can be
separately identified and reliably measured Consequently Entity D may
designate hedging relationships for the fixedrate debt instrument on a
risk component basis for the benchmark interest rate risk
B6311 When designating a risk component as a hedged item the hedge accounting
requirements apply to that risk component in the same way as they apply to
other hedged items that are not risk components For example the qualifying
criteria apply including that the hedging relationship must meet the hedge
effectiveness requirements and any hedge ineffectiveness must be measured
and recognised
B6312 An entity can also designate only changes in the cash flows or fair value of a
hedged item above or below a specified price or other variable (a onesided risk’)
The intrinsic value of a purchased option hedging instrument (assuming that it
has the same principal terms as the designated risk) but not its time value
reflects a onesided risk in a hedged item For example an entity can designate
the variability of future cash flow outcomes resulting from a price increase of a
forecast commodity purchase In such a situation the entity designates only
cash flow losses that result from an increase in the price above the specified
level The hedged risk does not include the time value of a purchased option
because the time value is not a component of the forecast transaction that
affects profit or loss
B6313 There is a rebuttable presumption that unless inflation risk is contractually
specified it is not separately identifiable and reliably measurable and hence
cannot be designated as a risk component of a financial instrument However
in limited cases it is possible to identify a risk component for inflation risk that
is separately identifiable and reliably measurable because of the particular
circumstances of the inflation environment and the relevant debt market
B6314 For example an entity issues debt in an environment in which inflationlinked
bonds have a volume and term structure that results in a sufficiently liquid
market that allows constructing a term structure of zerocoupon real interest
rates This means that for the respective currency inflation is a relevant factor
that is separately considered by the debt markets In those circumstances the
inflation risk component could be determined by discounting the cash flows of
the hedged debt instrument using the term structure of zerocoupon real
interest rates (ie in a manner similar to how a riskfree (nominal) interest rate
IFRS 9
IFRS Foundation A451component can be determined) Conversely in many cases an inflation risk
component is not separately identifiable and reliably measurable For example
an entity issues only nominal interest rate debt in an environment with a
market for inflationlinked bonds that is not sufficiently liquid to allow a term
structure of zerocoupon real interest rates to be constructed In this case the
analysis of the market structure and of the facts and circumstances does not
support the entity concluding that inflation is a relevant factor that is separately
considered by the debt markets Hence the entity cannot overcome the
rebuttable presumption that inflation risk that is not contractually specified is
not separately identifiable and reliably measurable Consequently an inflation
risk component would not be eligible for designation as the hedged item This
applies irrespective of any inflation hedging instrument that the entity has
actually entered into In particular the entity cannot simply impute the terms
and conditions of the actual inflation hedging instrument by projecting its
terms and conditions onto the nominal interest rate debt
B6315 A contractually specified inflation risk component of the cash flows of a
recognised inflationlinked bond (assuming that there is no requirement to
account for an embedded derivative separately) is separately identifiable and
reliably measurable as long as other cash flows of the instrument are not
affected by the inflation risk component
Components of a nominal amount
B6316 There are two types of components of nominal amounts that can be designated
as the hedged item in a hedging relationship a component that is a proportion
of an entire item or a layer component The type of component changes the
accounting outcome An entity shall designate the component for accounting
purposes consistently with its risk management objective
B6317 An example of a component that is a proportion is 50 per cent of the contractual
cash flows of a loan
B6318 A layer component may be specified from a defined but open population or
from a defined nominal amount Examples include
(a) part of a monetary transaction volume for example the next FC10 cash
flows from sales denominated in a foreign currency after the first FC20
in March 201X4
(b) a part of a physical volume for example the bottom layer measuring
5 million cubic metres of the natural gas stored in location XYZ
(c) a part of a physical or other transaction volume for example the first
100 barrels of the oil purchases in June 201X or the first 100 MWh of
electricity sales in June 201X or
(d) a layer from the nominal amount of the hedged item for example the
last CU80 million of a CU100 million firm commitment the bottom
layer of CU20 million of a CU100 million fixedrate bond or the top layer
4 In this Standard monetary amounts are denominated in currency units’ (CU) and foreign currency
units’ (FC)
IFRS 9
IFRS FoundationA452of CU30 million from a total amount of CU100 million of fixedrate debt
that can be prepaid at fair value (the defined nominal amount is
CU100 million)
B6319 If a layer component is designated in a fair value hedge an entity shall specify it
from a defined nominal amount To comply with the requirements for
qualifying fair value hedges an entity shall remeasure the hedged item for fair
value changes (ie remeasure the item for fair value changes attributable to the
hedged risk) The fair value hedge adjustment must be recognised in profit or
loss no later than when the item is derecognised Consequently it is necessary
to track the item to which the fair value hedge adjustment relates For a layer
component in a fair value hedge this requires an entity to track the nominal
amount from which it is defined For example in paragraph B6318(d) the total
defined nominal amount of CU100 million must be tracked in order to track the
bottom layer of CU20 million or the top layer of CU30 million
B6320 A layer component that includes a prepayment option is not eligible to be
designated as a hedged item in a fair value hedge if the prepayment option’s fair
value is affected by changes in the hedged risk unless the designated layer
includes the effect of the related prepayment option when determining the
change in the fair value of the hedged item
Relationship between components and the total cash flows of an item
B6321 If a component of the cash flows of a financial or a nonfinancial item is
designated as the hedged item that component must be less than or equal to the
total cash flows of the entire item However all of the cash flows of the entire
item may be designated as the hedged item and hedged for only one particular
risk (for example only for those changes that are attributable to changes in
LIBOR or a benchmark commodity price)
B6322 For example in the case of a financial liability whose effective interest rate is
below LIBOR an entity cannot designate
(a) a component of the liability equal to interest at LIBOR (plus the principal
amount in case of a fair value hedge) and
(b) a negative residual component
B6323 However in the case of a fixedrate financial liability whose effective interest
rate is (for example) 100 basis points below LIBOR an entity can designate as the
hedged item the change in the value of that entire liability (ie principal plus
interest at LIBOR minus 100 basis points) that is attributable to changes in
LIBOR If a fixedrate financial instrument is hedged some time after its
origination and interest rates have changed in the meantime the entity can
designate a risk component equal to a benchmark rate that is higher than the
contractual rate paid on the item The entity can do so provided that the
benchmark rate is less than the effective interest rate calculated on the
assumption that the entity had purchased the instrument on the day when it
first designates the hedged item For example assume that an entity originates
a fixedrate financial asset of CU100 that has an effective interest rate of 6 per
cent at a time when LIBOR is 4 per cent It begins to hedge that asset some time
later when LIBOR has increased to 8 per cent and the fair value of the asset has
IFRS 9
IFRS Foundation A453decreased to CU90 The entity calculates that if it had purchased the asset on the
date it first designates the related LIBOR interest rate risk as the hedged item
the effective yield of the asset based on its then fair value of CU90 would have
been 95 per cent Because LIBOR is less than this effective yield the entity can
designate a LIBOR component of 8 per cent that consists partly of the
contractual interest cash flows and partly of the difference between the current
fair value (ie CU90) and the amount repayable on maturity (ie CU100)
B6324 If a variablerate financial liability bears interest of (for example) threemonth
LIBOR minus 20 basis points (with a floor at zero basis points) an entity can
designate as the hedged item the change in the cash flows of that entire liability
(ie threemonth LIBOR minus 20 basis points—including the floor) that is
attributable to changes in LIBOR Hence as long as the threemonth LIBOR
forward curve for the remaining life of that liability does not fall below 20 basis
points the hedged item has the same cash flow variability as a liability that
bears interest at threemonth LIBOR with a zero or positive spread However if
the threemonth LIBOR forward curve for the remaining life of that liability (or a
part of it) falls below 20 basis points the hedged item has a lower cash flow
variability than a liability that bears interest at threemonth LIBOR with a zero
or positive spread
B6325 A similar example of a nonfinancial item is a specific type of crude oil from a
particular oil field that is priced off the relevant benchmark crude oil If an
entity sells that crude oil under a contract using a contractual pricing formula
that sets the price per barrel at the benchmark crude oil price minus CU10 with
a floor of CU15 the entity can designate as the hedged item the entire cash flow
variability under the sales contract that is attributable to the change in the
benchmark crude oil price However the entity cannot designate a component
that is equal to the full change in the benchmark crude oil price Hence as long
as the forward price (for each delivery) does not fall below CU25 the hedged
item has the same cash flow variability as a crude oil sale at the benchmark
crude oil price (or with a positive spread) However if the forward price for any
delivery falls below CU25 the hedged item has a lower cash flow variability than
a crude oil sale at the benchmark crude oil price (or with a positive spread)
Qualifying criteria for hedge accounting (Section 64)
Hedge effectiveness
B641 Hedge effectiveness is the extent to which changes in the fair value or the cash
flows of the hedging instrument offset changes in the fair value or the cash
flows of the hedged item (for example when the hedged item is a risk
component the relevant change in fair value or cash flows of an item is the one
that is attributable to the hedged risk) Hedge ineffectiveness is the extent to
which the changes in the fair value or the cash flows of the hedging instrument
are greater or less than those on the hedged item
B642 When designating a hedging relationship and on an ongoing basis an entity
shall analyse the sources of hedge ineffectiveness that are expected to affect the
hedging relationship during its term This analysis (including any updates in
IFRS 9
IFRS FoundationA454accordance with paragraph B6521 arising from rebalancing a hedging
relationship) is the basis for the entity’s assessment of meeting the hedge
effectiveness requirements
B643 For the avoidance of doubt the effects of replacing the original counterparty
with a clearing counterparty and making the associated changes as described in
paragraph 656 shall be reflected in the measurement of the hedging
instrument and therefore in the assessment of hedge effectiveness and the
measurement of hedge effectiveness
Economic relationship between the hedged item and the hedging
instrument
B644 The requirement that an economic relationship exists means that the hedging
instrument and the hedged item have values that generally move in the opposite
direction because of the same risk which is the hedged risk Hence there must
be an expectation that the value of the hedging instrument and the value of the
hedged item will systematically change in response to movements in either the
same underlying or underlyings that are economically related in such a way that
they respond in a similar way to the risk that is being hedged (for example Brent
and WTI crude oil)
B645 If the underlyings are not the same but are economically related there can be
situations in which the values of the hedging instrument and the hedged item
move in the same direction for example because the price differential between
the two related underlyings changes while the underlyings themselves do not
move significantly That is still consistent with an economic relationship
between the hedging instrument and the hedged item if the values of the
hedging instrument and the hedged item are still expected to typically move in
the opposite direction when the underlyings move
B646 The assessment of whether an economic relationship exists includes an analysis
of the possible behaviour of the hedging relationship during its term to
ascertain whether it can be expected to meet the risk management objective
The mere existence of a statistical correlation between two variables does not by
itself support a valid conclusion that an economic relationship exists
The effect of credit risk
B647 Because the hedge accounting model is based on a general notion of offset
between gains and losses on the hedging instrument and the hedged item
hedge effectiveness is determined not only by the economic relationship
between those items (ie the changes in their underlyings) but also by the effect of
credit risk on the value of both the hedging instrument and the hedged item
The effect of credit risk means that even if there is an economic relationship
between the hedging instrument and the hedged item the level of offset might
become erratic This can result from a change in the credit risk of either the
hedging instrument or the hedged item that is of such a magnitude that the
credit risk dominates the value changes that result from the economic
relationship (ie the effect of the changes in the underlyings) A level of
magnitude that gives rise to dominance is one that would result in the loss
(or gain) from credit risk frustrating the effect of changes in the underlyings on
IFRS 9
IFRS Foundation A455the value of the hedging instrument or the hedged item even if those changes
were significant Conversely if during a particular period there is little change
in the underlyings the fact that even small credit riskrelated changes in the
value of the hedging instrument or the hedged item might affect the value more
than the underlyings does not create dominance
B648 An example of credit risk dominating a hedging relationship is when an entity
hedges an exposure to commodity price risk using an uncollateralised
derivative If the counterparty to that derivative experiences a severe
deterioration in its credit standing the effect of the changes in the
counterparty’s credit standing might outweigh the effect of changes in the
commodity price on the fair value of the hedging instrument whereas changes
in the value of the hedged item depend largely on the commodity price changes
Hedge ratio
B649 In accordance with the hedge effectiveness requirements the hedge ratio of the
hedging relationship must be the same as that resulting from the quantity of the
hedged item that the entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that quantity of hedged item
Hence if an entity hedges less than 100 per cent of the exposure on an item
such as 85 per cent it shall designate the hedging relationship using a hedge
ratio that is the same as that resulting from 85 per cent of the exposure and the
quantity of the hedging instrument that the entity actually uses to hedge those
85 per cent Similarly if for example an entity hedges an exposure using a
nominal amount of 40 units of a financial instrument it shall designate the
hedging relationship using a hedge ratio that is the same as that resulting from
that quantity of 40 units (ie the entity must not use a hedge ratio based on a
higher quantity of units that it might hold in total or a lower quantity of units)
and the quantity of the hedged item that it actually hedges with those 40 units
B6410 However the designation of the hedging relationship using the same hedge
ratio as that resulting from the quantities of the hedged item and the hedging
instrument that the entity actually uses shall not reflect an imbalance between
the weightings of the hedged item and the hedging instrument that would in
turn create hedge ineffectiveness (irrespective of whether recognised or not) that
could result in an accounting outcome that would be inconsistent with the
purpose of hedge accounting Hence for the purpose of designating a hedging
relationship an entity must adjust the hedge ratio that results from the
quantities of the hedged item and the hedging instrument that the entity
actually uses if that is needed to avoid such an imbalance
B6411 Examples of relevant considerations in assessing whether an accounting
outcome is inconsistent with the purpose of hedge accounting are
(a) whether the intended hedge ratio is established to avoid recognising
hedge ineffectiveness for cash flow hedges or to achieve fair value hedge
adjustments for more hedged items with the aim of increasing the use of
fair value accounting but without offsetting fair value changes of the
hedging instrument and
IFRS 9
IFRS FoundationA456(b) whether there is a commercial reason for the particular weightings of
the hedged item and the hedging instrument even though that creates
hedge ineffectiveness For example an entity enters into and designates
a quantity of the hedging instrument that is not the quantity that it
determined as the best hedge of the hedged item because the standard
volume of the hedging instruments does not allow it to enter into that
exact quantity of hedging instrument (a lot size issue’) An example is
an entity that hedges 100 tonnes of coffee purchases with standard coffee
futures contracts that have a contract size of 37500 lbs (pounds) The
entity could only use either five or six contracts (equivalent to 850 and
1021 tonnes respectively) to hedge the purchase volume of 100 tonnes
In that case the entity designates the hedging relationship using the
hedge ratio that results from the number of coffee futures contracts that
it actually uses because the hedge ineffectiveness resulting from the
mismatch in the weightings of the hedged item and the hedging
instrument would not result in an accounting outcome that is
inconsistent with the purpose of hedge accounting
Frequency of assessing whether the hedge effectiveness
requirements are met
B6412 An entity shall assess at the inception of the hedging relationship and on an
ongoing basis whether a hedging relationship meets the hedge effectiveness
requirements At a minimum an entity shall perform the ongoing assessment
at each reporting date or upon a significant change in the circumstances
affecting the hedge effectiveness requirements whichever comes first The
assessment relates to expectations about hedge effectiveness and is therefore
only forwardlooking
Methods for assessing whether the hedge effectiveness
requirements are met
B6413 This Standard does not specify a method for assessing whether a hedging
relationship meets the hedge effectiveness requirements However an entity
shall use a method that captures the relevant characteristics of the hedging
relationship including the sources of hedge ineffectiveness Depending on those
factors the method can be a qualitative or a quantitative assessment
B6414 For example when the critical terms (such as the nominal amount maturity
and underlying) of the hedging instrument and the hedged item match or are
closely aligned it might be possible for an entity to conclude on the basis of a
qualitative assessment of those critical terms that the hedging instrument and
the hedged item have values that will generally move in the opposite direction
because of the same risk and hence that an economic relationship exists
between the hedged item and the hedging instrument (see paragraphs
B644–B646)
B6415 The fact that a derivative is in or out of the money when it is designated as a
hedging instrument does not in itself mean that a qualitative assessment is
inappropriate It depends on the circumstances whether hedge ineffectiveness
arising from that fact could have a magnitude that a qualitative assessment
would not adequately capture
IFRS 9
IFRS Foundation A457B6416 Conversely if the critical terms of the hedging instrument and the hedged item
are not closely aligned there is an increased level of uncertainty about the
extent of offset Consequently the hedge effectiveness during the term of the
hedging relationship is more difficult to predict In such a situation it might
only be possible for an entity to conclude on the basis of a quantitative
assessment that an economic relationship exists between the hedged item and
the hedging instrument (see paragraphs B644–B646) In some situations a
quantitative assessment might also be needed to assess whether the hedge ratio
used for designating the hedging relationship meets the hedge effectiveness
requirements (see paragraphs B649–B6411) An entity can use the same or
different methods for those two different purposes
B6417 If there are changes in circumstances that affect hedge effectiveness an entity
may have to change the method for assessing whether a hedging relationship
meets the hedge effectiveness requirements in order to ensure that the relevant
characteristics of the hedging relationship including the sources of hedge
ineffectiveness are still captured
B6418 An entity’s risk management is the main source of information to perform the
assessment of whether a hedging relationship meets the hedge effectiveness
requirements This means that the management information (or analysis) used
for decisionmaking purposes can be used as a basis for assessing whether a
hedging relationship meets the hedge effectiveness requirements
B6419 An entity’s documentation of the hedging relationship includes how it will
assess the hedge effectiveness requirements including the method or methods
used The documentation of the hedging relationship shall be updated for any
changes to the methods (see paragraph B6417)
Accounting for qualifying hedging relationships
(Section 65)
B651 An example of a fair value hedge is a hedge of exposure to changes in the fair
value of a fixedrate debt instrument arising from changes in interest rates
Such a hedge could be entered into by the issuer or by the holder
B652 The purpose of a cash flow hedge is to defer the gain or loss on the hedging
instrument to a period or periods in which the hedged expected future cash
flows affect profit or loss An example of a cash flow hedge is the use of a swap
to change floating rate debt (whether measured at amortised cost or fair value)
to fixedrate debt (ie a hedge of a future transaction in which the future cash
flows being hedged are the future interest payments) Conversely a forecast
purchase of an equity instrument that once acquired will be accounted for at
fair value through profit or loss is an example of an item that cannot be the
hedged item in a cash flow hedge because any gain or loss on the hedging
instrument that would be deferred could not be appropriately reclassified to
profit or loss during a period in which it would achieve offset For the same
reason a forecast purchase of an equity instrument that once acquired will be
accounted for at fair value with changes in fair value presented in other
comprehensive income also cannot be the hedged item in a cash flow hedge
B653 A hedge of a firm commitment (for example a hedge of the change in fuel price
relating to an unrecognised contractual commitment by an electric utility to
IFRS 9
IFRS FoundationA458purchase fuel at a fixed price) is a hedge of an exposure to a change in fair value
Accordingly such a hedge is a fair value hedge However in accordance with
paragraph 654 a hedge of the foreign currency risk of a firm commitment
could alternatively be accounted for as a cash flow hedge
Measurement of hedge ineffectiveness
B654 When measuring hedge ineffectiveness an entity shall consider the time value
of money Consequently the entity determines the value of the hedged item on
a present value basis and therefore the change in the value of the hedged item
also includes the effect of the time value of money
B655 To calculate the change in the value of the hedged item for the purpose of
measuring hedge ineffectiveness an entity may use a derivative that would have
terms that match the critical terms of the hedged item (this is commonly
referred to as a hypothetical derivative’) and for example for a hedge of a
forecast transaction would be calibrated using the hedged price (or rate) level
For example if the hedge was for a twosided risk at the current market level
the hypothetical derivative would represent a hypothetical forward contract
that is calibrated to a value of nil at the time of designation of the hedging
relationship If the hedge was for example for a onesided risk the hypothetical
derivative would represent the intrinsic value of a hypothetical option that at
the time of designation of the hedging relationship is at the money if the hedged
price level is the current market level or out of the money if the hedged price
level is above (or for a hedge of a long position below) the current market level
Using a hypothetical derivative is one possible way of calculating the change in
the value of the hedged item The hypothetical derivative replicates the hedged
item and hence results in the same outcome as if that change in value was
determined by a different approach Hence using a hypothetical derivative’ is
not a method in its own right but a mathematical expedient that can only be
used to calculate the value of the hedged item Consequently a hypothetical
derivative’ cannot be used to include features in the value of the hedged item
that only exist in the hedging instrument (but not in the hedged item) An
example is debt denominated in a foreign currency (irrespective of whether it is
fixedrate or variablerate debt) When using a hypothetical derivative to
calculate the change in the value of such debt or the present value of the
cumulative change in its cash flows the hypothetical derivative cannot simply
impute a charge for exchanging different currencies even though actual
derivatives under which different currencies are exchanged might include such
a charge (for example crosscurrency interest rate swaps)
B656 The change in the value of the hedged item determined using a hypothetical
derivative may also be used for the purpose of assessing whether a hedging
relationship meets the hedge effectiveness requirements
Rebalancing the hedging relationship and changes to the hedge
ratio
B657 Rebalancing refers to the adjustments made to the designated quantities of the
hedged item or the hedging instrument of an already existing hedging
relationship for the purpose of maintaining a hedge ratio that complies with the
hedge effectiveness requirements Changes to designated quantities of a hedged
IFRS 9
IFRS Foundation A459item or of a hedging instrument for a different purpose do not constitute
rebalancing for the purpose of this Standard
B658 Rebalancing is accounted for as a continuation of the hedging relationship in
accordance with paragraphs B659–B6521 On rebalancing the hedge
ineffectiveness of the hedging relationship is determined and recognised
immediately before adjusting the hedging relationship
B659 Adjusting the hedge ratio allows an entity to respond to changes in the
relationship between the hedging instrument and the hedged item that arise
from their underlyings or risk variables For example a hedging relationship in
which the hedging instrument and the hedged item have different but related
underlyings changes in response to a change in the relationship between those
two underlyings (for example different but related reference indices rates or
prices) Hence rebalancing allows the continuation of a hedging relationship in
situations in which the relationship between the hedging instrument and the
hedged item changes in a way that can be compensated for by adjusting the
hedge ratio
B6510 For example an entity hedges an exposure to Foreign Currency A using a
currency derivative that references Foreign Currency B and Foreign Currencies A
and B are pegged (ie their exchange rate is maintained within a band or at an
exchange rate set by a central bank or other authority) If the exchange rate
between Foreign Currency A and Foreign Currency B were changed (ie a new
band or rate was set) rebalancing the hedging relationship to reflect the new
exchange rate would ensure that the hedging relationship would continue to
meet the hedge effectiveness requirement for the hedge ratio in the new
circumstances In contrast if there was a default on the currency derivative
changing the hedge ratio could not ensure that the hedging relationship would
continue to meet that hedge effectiveness requirement Hence rebalancing does
not facilitate the continuation of a hedging relationship in situations in which
the relationship between the hedging instrument and the hedged item changes
in a way that cannot be compensated for by adjusting the hedge ratio
B6511 Not every change in the extent of offset between the changes in the fair value of
the hedging instrument and the hedged item’s fair value or cash flows
constitutes a change in the relationship between the hedging instrument and
the hedged item An entity analyses the sources of hedge ineffectiveness that it
expected to affect the hedging relationship during its term and evaluates
whether changes in the extent of offset are
(a) fluctuations around the hedge ratio which remains valid (ie continues
to appropriately reflect the relationship between the hedging
instrument and the hedged item) or
(b) an indication that the hedge ratio no longer appropriately reflects the
relationship between the hedging instrument and the hedged item
An entity performs this evaluation against the hedge effectiveness requirement
for the hedge ratio ie to ensure that the hedging relationship does not reflect an
imbalance between the weightings of the hedged item and the hedging
instrument that would create hedge ineffectiveness (irrespective of whether
IFRS 9
IFRS FoundationA460recognised or not) that could result in an accounting outcome that would be
inconsistent with the purpose of hedge accounting Hence this evaluation
requires judgement
B6512 Fluctuation around a constant hedge ratio (and hence the related hedge
ineffectiveness) cannot be reduced by adjusting the hedge ratio in response to
each particular outcome Hence in such circumstances the change in the
extent of offset is a matter of measuring and recognising hedge ineffectiveness
but does not require rebalancing
B6513 Conversely if changes in the extent of offset indicate that the fluctuation is
around a hedge ratio that is different from the hedge ratio that is currently used
for that hedging relationship or that there is a trend leading away from that
hedge ratio hedge ineffectiveness can be reduced by adjusting the hedge ratio
whereas retaining the hedge ratio would increasingly produce hedge
ineffectiveness Hence in such circumstances an entity must evaluate whether
the hedging relationship reflects an imbalance between the weightings of the
hedged item and the hedging instrument that would create hedge
ineffectiveness (irrespective of whether recognised or not) that could result in an
accounting outcome that would be inconsistent with the purpose of hedge
accounting If the hedge ratio is adjusted it also affects the measurement and
recognition of hedge ineffectiveness because on rebalancing the hedge
ineffectiveness of the hedging relationship must be determined and recognised
immediately before adjusting the hedging relationship in accordance with
paragraph B658
B6514 Rebalancing means that for hedge accounting purposes after the start of a
hedging relationship an entity adjusts the quantities of the hedging instrument
or the hedged item in response to changes in circumstances that affect the
hedge ratio of that hedging relationship Typically that adjustment should
reflect adjustments in the quantities of the hedging instrument and the hedged
item that it actually uses However an entity must adjust the hedge ratio that
results from the quantities of the hedged item or the hedging instrument that it
actually uses if
(a) the hedge ratio that results from changes to the quantities of the
hedging instrument or the hedged item that the entity actually uses
would reflect an imbalance that would create hedge ineffectiveness that
could result in an accounting outcome that would be inconsistent with
the purpose of hedge accounting or
(b) an entity would retain quantities of the hedging instrument and the
hedged item that it actually uses resulting in a hedge ratio that in new
circumstances would reflect an imbalance that would create hedge
ineffectiveness that could result in an accounting outcome that would be
inconsistent with the purpose of hedge accounting (ie an entity must not
create an imbalance by omitting to adjust the hedge ratio)
B6515 Rebalancing does not apply if the risk management objective for a hedging
relationship has changed Instead hedge accounting for that hedging
relationship shall be discontinued (despite that an entity might designate a new
IFRS 9
IFRS Foundation A461hedging relationship that involves the hedging instrument or hedged item of
the previous hedging relationship as described in paragraph B6528)
B6516 If a hedging relationship is rebalanced the adjustment to the hedge ratio can be
effected in different ways
(a) the weighting of the hedged item can be increased (which at the same
time reduces the weighting of the hedging instrument) by
(i) increasing the volume of the hedged item or
(ii) decreasing the volume of the hedging instrument
(b) the weighting of the hedging instrument can be increased (which at the
same time reduces the weighting of the hedged item) by
(i) increasing the volume of the hedging instrument or
(ii) decreasing the volume of the hedged item
Changes in volume refer to the quantities that are part of the hedging
relationship Hence decreases in volumes do not necessarily mean that the
items or transactions no longer exist or are no longer expected to occur but
that they are not part of the hedging relationship For example decreasing the
volume of the hedging instrument can result in the entity retaining a derivative
but only part of it might remain a hedging instrument of the hedging
relationship This could occur if the rebalancing could be effected only by
reducing the volume of the hedging instrument in the hedging relationship but
with the entity retaining the volume that is no longer needed In that case the
undesignated part of the derivative would be accounted for at fair value through
profit or loss (unless it was designated as a hedging instrument in a different
hedging relationship)
B6517 Adjusting the hedge ratio by increasing the volume of the hedged item does not
affect how the changes in the fair value of the hedging instrument are
measured The measurement of the changes in the value of the hedged item
related to the previously designated volume also remains unaffected However
from the date of rebalancing the changes in the value of the hedged item also
include the change in the value of the additional volume of the hedged item
These changes are measured starting from and by reference to the date of
rebalancing instead of the date on which the hedging relationship was
designated For example if an entity originally hedged a volume of 100 tonnes
of a commodity at a forward price of CU80 (the forward price at inception of the
hedging relationship) and added a volume of 10 tonnes on rebalancing when the
forward price was CU90 the hedged item after rebalancing would comprise two
layers 100 tonnes hedged at CU80 and 10 tonnes hedged at CU90
B6518 Adjusting the hedge ratio by decreasing the volume of the hedging instrument
does not affect how the changes in the value of the hedged item are measured
The measurement of the changes in the fair value of the hedging instrument
related to the volume that continues to be designated also remains unaffected
However from the date of rebalancing the volume by which the hedging
instrument was decreased is no longer part of the hedging relationship For
example if an entity originally hedged the price risk of a commodity using a
derivative volume of 100 tonnes as the hedging instrument and reduces that
IFRS 9
IFRS FoundationA462volume by 10 tonnes on rebalancing a nominal amount of 90 tonnes of the
hedging instrument volume would remain (see paragraph B6516 for the
consequences for the derivative volume (ie the 10 tonnes) that is no longer a part
of the hedging relationship)
B6519 Adjusting the hedge ratio by increasing the volume of the hedging instrument
does not affect how the changes in the value of the hedged item are measured
The measurement of the changes in the fair value of the hedging instrument
related to the previously designated volume also remains unaffected However
from the date of rebalancing the changes in the fair value of the hedging
instrument also include the changes in the value of the additional volume of the
hedging instrument The changes are measured starting from and by reference
to the date of rebalancing instead of the date on which the hedging relationship
was designated For example if an entity originally hedged the price risk of a
commodity using a derivative volume of 100 tonnes as the hedging instrument
and added a volume of 10 tonnes on rebalancing the hedging instrument after
rebalancing would comprise a total derivative volume of 110 tonnes The
change in the fair value of the hedging instrument is the total change in the fair
value of the derivatives that make up the total volume of 110 tonnes These
derivatives could (and probably would) have different critical terms such as
their forward rates because they were entered into at different points in time
(including the possibility of designating derivatives into hedging relationships
after their initial recognition)
B6520 Adjusting the hedge ratio by decreasing the volume of the hedged item does not
affect how the changes in the fair value of the hedging instrument are
measured The measurement of the changes in the value of the hedged item
related to the volume that continues to be designated also remains unaffected
However from the date of rebalancing the volume by which the hedged item
was decreased is no longer part of the hedging relationship For example if an
entity originally hedged a volume of 100 tonnes of a commodity at a forward
price of CU80 and reduces that volume by 10 tonnes on rebalancing the hedged
item after rebalancing would be 90 tonnes hedged at CU80 The 10 tonnes of the
hedged item that are no longer part of the hedging relationship would be
accounted for in accordance with the requirements for the discontinuation of
hedge accounting (see paragraphs 656–657 and B6522–B6528)
B6521 When rebalancing a hedging relationship an entity shall update its analysis of
the sources of hedge ineffectiveness that are expected to affect the hedging
relationship during its (remaining) term (see paragraph B642) The
documentation of the hedging relationship shall be updated accordingly
Discontinuation of hedge accounting
B6522 Discontinuation of hedge accounting applies prospectively from the date on
which the qualifying criteria are no longer met
B6523 An entity shall not dedesignate and thereby discontinue a hedging relationship
that
(a) still meets the risk management objective on the basis of which it
qualified for hedge accounting (ie the entity still pursues that risk
management objective) and
IFRS 9
IFRS Foundation A463(b) continues to meet all other qualifying criteria (after taking into account
any rebalancing of the hedging relationship if applicable)
B6524 For the purposes of this Standard an entity’s risk management strategy is
distinguished from its risk management objectives The risk management
strategy is established at the highest level at which an entity determines how it
manages its risk Risk management strategies typically identify the risks to
which the entity is exposed and set out how the entity responds to them A risk
management strategy is typically in place for a longer period and may include
some flexibility to react to changes in circumstances that occur while that
strategy is in place (for example different interest rate or commodity price levels
that result in a different extent of hedging) This is normally set out in a general
document that is cascaded down through an entity through policies containing
more specific guidelines In contrast the risk management objective for a
hedging relationship applies at the level of a particular hedging relationship It
relates to how the particular hedging instrument that has been designated is
used to hedge the particular exposure that has been designated as the hedged
item Hence a risk management strategy can involve many different hedging
relationships whose risk management objectives relate to executing that overall
risk management strategy For example
(a) an entity has a strategy of managing its interest rate exposure on debt
funding that sets ranges for the overall entity for the mix between
variablerate and fixedrate funding The strategy is to maintain between
20 per cent and 40 per cent of the debt at fixed rates The entity decides
from time to time how to execute this strategy (ie where it positions
itself within the 20 per cent to 40 per cent range for fixedrate interest
exposure) depending on the level of interest rates If interest rates are
low the entity fixes the interest for more debt than when interest rates
are high The entity’s debt is CU100 of variablerate debt of which CU30
is swapped into a fixedrate exposure The entity takes advantage of low
interest rates to issue an additional CU50 of debt to finance a major
investment which the entity does by issuing a fixedrate bond In the
light of the low interest rates the entity decides to set its fixed
interestrate exposure to 40 per cent of the total debt by reducing by
CU20 the extent to which it previously hedged its variablerate exposure
resulting in CU60 of fixedrate exposure In this situation the risk
management strategy itself remains unchanged However in contrast
the entity’s execution of that strategy has changed and this means that
for CU20 of variablerate exposure that was previously hedged the risk
management objective has changed (ie at the hedging relationship level)
Consequently in this situation hedge accounting must be discontinued
for CU20 of the previously hedged variablerate exposure This could
involve reducing the swap position by a CU20 nominal amount but
depending on the circumstances an entity might retain that swap
volume and for example use it for hedging a different exposure or it
might become part of a trading book Conversely if an entity instead
swapped a part of its new fixedrate debt into a variablerate exposure
hedge accounting would have to be continued for its previously hedged
variablerate exposure
IFRS 9
IFRS FoundationA464(b) some exposures result from positions that frequently change for
example the interest rate risk of an open portfolio of debt instruments
The addition of new debt instruments and the derecognition of debt
instruments continuously change that exposure (ie it is different from
simply running off a position that matures) This is a dynamic process in
which both the exposure and the hedging instruments used to manage it
do not remain the same for long Consequently an entity with such an
exposure frequently adjusts the hedging instruments used to manage
the interest rate risk as the exposure changes For example debt
instruments with 24 months’ remaining maturity are designated as the
hedged item for interest rate risk for 24 months The same procedure is
applied to other time buckets or maturity periods After a short period
of time the entity discontinues all some or a part of the previously
designated hedging relationships for maturity periods and designates
new hedging relationships for maturity periods on the basis of their size
and the hedging instruments that exist at that time The
discontinuation of hedge accounting in this situation reflects that those
hedging relationships are established in such a way that the entity looks
at a new hedging instrument and a new hedged item instead of the
hedging instrument and the hedged item that were designated
previously The risk management strategy remains the same but there is
no risk management objective that continues for those previously
designated hedging relationships which as such no longer exist In such
a situation the discontinuation of hedge accounting applies to the
extent to which the risk management objective has changed This
depends on the situation of an entity and could for example affect all or
only some hedging relationships of a maturity period or only part of a
hedging relationship
(c) an entity has a risk management strategy whereby it manages the
foreign currency risk of forecast sales and the resulting receivables
Within that strategy the entity manages the foreign currency risk as a
particular hedging relationship only up to the point of the recognition of
the receivable Thereafter the entity no longer manages the foreign
currency risk on the basis of that particular hedging relationship
Instead it manages together the foreign currency risk from receivables
payables and derivatives (that do not relate to forecast transactions that
are still pending) denominated in the same foreign currency For
accounting purposes this works as a natural’ hedge because the gains
and losses from the foreign currency risk on all of those items are
immediately recognised in profit or loss Consequently for accounting
purposes if the hedging relationship is designated for the period up to
the payment date it must be discontinued when the receivable is
recognised because the risk management objective of the original
hedging relationship no longer applies The foreign currency risk is now
managed within the same strategy but on a different basis Conversely if
an entity had a different risk management objective and managed the
foreign currency risk as one continuous hedging relationship specifically
for that forecast sales amount and the resulting receivable until the
settlement date hedge accounting would continue until that date
IFRS 9
IFRS Foundation A465B6525 The discontinuation of hedge accounting can affect
(a) a hedging relationship in its entirety or
(b) a part of a hedging relationship (which means that hedge accounting
continues for the remainder of the hedging relationship)
B6526 A hedging relationship is discontinued in its entirety when as a whole it ceases
to meet the qualifying criteria For example
(a) the hedging relationship no longer meets the risk management objective
on the basis of which it qualified for hedge accounting (ie the entity no
longer pursues that risk management objective)
(b) the hedging instrument or instruments have been sold or terminated (in
relation to the entire volume that was part of the hedging relationship)
or
(c) there is no longer an economic relationship between the hedged item
and the hedging instrument or the effect of credit risk starts to dominate
the value changes that result from that economic relationship
B6527 A part of a hedging relationship is discontinued (and hedge accounting
continues for its remainder) when only a part of the hedging relationship ceases
to meet the qualifying criteria For example
(a) on rebalancing of the hedging relationship the hedge ratio might be
adjusted in such a way that some of the volume of the hedged item is no
longer part of the hedging relationship (see paragraph B6520) hence
hedge accounting is discontinued only for the volume of the hedged
item that is no longer part of the hedging relationship or
(b) when the occurrence of some of the volume of the hedged item that is (or
is a component of) a forecast transaction is no longer highly probable
hedge accounting is discontinued only for the volume of the hedged
item whose occurrence is no longer highly probable However if an
entity has a history of having designated hedges of forecast transactions
and having subsequently determined that the forecast transactions are
no longer expected to occur the entity’s ability to predict forecast
transactions accurately is called into question when predicting similar
forecast transactions This affects the assessment of whether similar
forecast transactions are highly probable (see paragraph 633) and hence
whether they are eligible as hedged items
B6528 An entity can designate a new hedging relationship that involves the hedging
instrument or hedged item of a previous hedging relationship for which hedge
accounting was (in part or in its entirety) discontinued This does not constitute
a continuation of a hedging relationship but is a restart For example
(a) a hedging instrument experiences such a severe credit deterioration that
the entity replaces it with a new hedging instrument This means that
the original hedging relationship failed to achieve the risk management
objective and is hence discontinued in its entirety The new hedging
instrument is designated as the hedge of the same exposure that was
hedged previously and forms a new hedging relationship Hence the
IFRS 9
IFRS FoundationA466changes in the fair value or the cash flows of the hedged item are
measured starting from and by reference to the date of designation of
the new hedging relationship instead of the date on which the original
hedging relationship was designated
(b) a hedging relationship is discontinued before the end of its term The
hedging instrument in that hedging relationship can be designated as
the hedging instrument in another hedging relationship (for example
when adjusting the hedge ratio on rebalancing by increasing the volume
of the hedging instrument or when designating a whole new hedging
relationship)
Accounting for the time value of options
B6529 An option can be considered as being related to a time period because its time
value represents a charge for providing protection for the option holder over a
period of time However the relevant aspect for the purpose of assessing
whether an option hedges a transaction or timeperiod related hedged item are
the characteristics of that hedged item including how and when it affects profit
or loss Hence an entity shall assess the type of hedged item (see
paragraph 6515(a)) on the basis of the nature of the hedged item (regardless of
whether the hedging relationship is a cash flow hedge or a fair value hedge)
(a) the time value of an option relates to a transaction related hedged item if
the nature of the hedged item is a transaction for which the time value
has the character of costs of that transaction An example is when the
time value of an option relates to a hedged item that results in the
recognition of an item whose initial measurement includes transaction
costs (for example an entity hedges a commodity purchase whether it is
a forecast transaction or a firm commitment against the commodity
price risk and includes the transaction costs in the initial measurement
of the inventory) As a consequence of including the time value of the
option in the initial measurement of the particular hedged item the
time value affects profit or loss at the same time as that hedged item
Similarly an entity that hedges a sale of a commodity whether it is a
forecast transaction or a firm commitment would include the time
value of the option as part of the cost related to that sale (hence the time
value would be recognised in profit or loss in the same period as the
revenue from the hedged sale)
(b) the time value of an option relates to a timeperiod related hedged item
if the nature of the hedged item is such that the time value has the
character of a cost for obtaining protection against a risk over a
particular period of time (but the hedged item does not result in a
transaction that involves the notion of a transaction cost in accordance
with (a)) For example if commodity inventory is hedged against a fair
value decrease for six months using a commodity option with a
corresponding life the time value of the option would be allocated to
profit or loss (ie amortised on a systematic and rational basis) over that
sixmonth period Another example is a hedge of a net investment in a
IFRS 9
IFRS Foundation A467foreign operation that is hedged for 18 months using a foreignexchange
option which would result in allocating the time value of the option
over that 18month period
B6530 The characteristics of the hedged item including how and when the hedged
item affects profit or loss also affect the period over which the time value of an
option that hedges a timeperiod related hedged item is amortised which is
consistent with the period over which the option’s intrinsic value can affect
profit or loss in accordance with hedge accounting For example if an interest
rate option (a cap) is used to provide protection against increases in the interest
expense on a floating rate bond the time value of that cap is amortised to profit
or loss over the same period over which any intrinsic value of the cap would
affect profit or loss
(a) if the cap hedges increases in interest rates for the first three years out of
a total life of the floating rate bond of five years the time value of that
cap is amortised over the first three years or
(b) if the cap is a forward start option that hedges increases in interest rates
for years two and three out of a total life of the floating rate bond of five
years the time value of that cap is amortised during years two and three
B6531 The accounting for the time value of options in accordance with
paragraph 6515 also applies to a combination of a purchased and a written
option (one being a put option and one being a call option) that at the date of
designation as a hedging instrument has a net nil time value (commonly
referred to as a zerocost collar’) In that case an entity shall recognise any
changes in time value in other comprehensive income even though the
cumulative change in time value over the total period of the hedging
relationship is nil Hence if the time value of the option relates to
(a) a transaction related hedged item the amount of time value at the end
of the hedging relationship that adjusts the hedged item or that is
reclassified to profit or loss (see paragraph 6515(b)) would be nil
(b) a timeperiod related hedged item the amortisation expense related to
the time value is nil
B6532 The accounting for the time value of options in accordance with
paragraph 6515 applies only to the extent that the time value relates to the
hedged item (aligned time value) The time value of an option relates to the
hedged item if the critical terms of the option (such as the nominal amount life
and underlying) are aligned with the hedged item Hence if the critical terms of
the option and the hedged item are not fully aligned an entity shall determine
the aligned time value ie how much of the time value included in the premium
(actual time value) relates to the hedged item (and therefore should be treated in
accordance with paragraph 6515) An entity determines the aligned time value
using the valuation of the option that would have critical terms that perfectly
match the hedged item
B6533 If the actual time value and the aligned time value differ an entity shall
determine the amount that is accumulated in a separate component of equity in
accordance with paragraph 6515 as follows
IFRS 9
IFRS FoundationA468(a) if at inception of the hedging relationship the actual time value is
higher than the aligned time value the entity shall
(i) determine the amount that is accumulated in a separate
component of equity on the basis of the aligned time value and
(ii) account for the differences in the fair value changes between the
two time values in profit or loss
(b) if at inception of the hedging relationship the actual time value is lower
than the aligned time value the entity shall determine the amount that
is accumulated in a separate component of equity by reference to the
lower of the cumulative change in fair value of
(i) the actual time value and
(ii) the aligned time value
Any remainder of the change in fair value of the actual time value shall be
recognised in profit or loss
Accounting for the forward element of forward contracts and
foreign currency basis spreads of financial instruments
B6534 A forward contract can be considered as being related to a time period because
its forward element represents charges for a period of time (which is the tenor
for which it is determined) However the relevant aspect for the purpose of
assessing whether a hedging instrument hedges a transaction or timeperiod
related hedged item are the characteristics of that hedged item including how
and when it affects profit or loss Hence an entity shall assess the type of
hedged item (see paragraphs 6516 and 6515(a)) on the basis of the nature of
the hedged item (regardless of whether the hedging relationship is a cash flow
hedge or a fair value hedge)
(a) the forward element of a forward contract relates to a transaction related
hedged item if the nature of the hedged item is a transaction for which
the forward element has the character of costs of that transaction An
example is when the forward element relates to a hedged item that
results in the recognition of an item whose initial measurement includes
transaction costs (for example an entity hedges an inventory purchase
denominated in a foreign currency whether it is a forecast transaction
or a firm commitment against foreign currency risk and includes the
transaction costs in the initial measurement of the inventory) As a
consequence of including the forward element in the initial
measurement of the particular hedged item the forward element affects
profit or loss at the same time as that hedged item Similarly an entity
that hedges a sale of a commodity denominated in a foreign currency
against foreign currency risk whether it is a forecast transaction or a
firm commitment would include the forward element as part of the cost
that is related to that sale (hence the forward element would be
recognised in profit or loss in the same period as the revenue from the
hedged sale)
IFRS 9
IFRS Foundation A469(b) the forward element of a forward contract relates to a timeperiod
related hedged item if the nature of the hedged item is such that the
forward element has the character of a cost for obtaining protection
against a risk over a particular period of time (but the hedged item does
not result in a transaction that involves the notion of a transaction cost
in accordance with (a)) For example if commodity inventory is hedged
against changes in fair value for six months using a commodity forward
contract with a corresponding life the forward element of the forward
contract would be allocated to profit or loss (ie amortised on a systematic
and rational basis) over that sixmonth period Another example is a
hedge of a net investment in a foreign operation that is hedged for
18 months using a foreignexchange forward contract which would
result in allocating the forward element of the forward contract over
that 18month period
B6535 The characteristics of the hedged item including how and when the hedged
item affects profit or loss also affect the period over which the forward element
of a forward contract that hedges a timeperiod related hedged item is
amortised which is over the period to which the forward element relates For
example if a forward contract hedges the exposure to variability in threemonth
interest rates for a threemonth period that starts in six months’ time the
forward element is amortised during the period that spans months seven to
nine
B6536 The accounting for the forward element of a forward contract in accordance
with paragraph 6516 also applies if at the date on which the forward contract
is designated as a hedging instrument the forward element is nil In that case
an entity shall recognise any fair value changes attributable to the forward
element in other comprehensive income even though the cumulative fair value
change attributable to the forward element over the total period of the hedging
relationship is nil Hence if the forward element of a forward contract relates
to
(a) a transaction related hedged item the amount in respect of the forward
element at the end of the hedging relationship that adjusts the hedged
item or that is reclassified to profit or loss (see paragraphs 6515(b)
and 6516) would be nil
(b) a timeperiod related hedged item the amortisation amount related to
the forward element is nil
B6537 The accounting for the forward element of forward contracts in accordance with
paragraph 6516 applies only to the extent that the forward element relates to
the hedged item (aligned forward element) The forward element of a forward
contract relates to the hedged item if the critical terms of the forward contract
(such as the nominal amount life and underlying) are aligned with the hedged
item Hence if the critical terms of the forward contract and the hedged item
are not fully aligned an entity shall determine the aligned forward element
ie how much of the forward element included in the forward contract (actual
forward element) relates to the hedged item (and therefore should be treated in
accordance with paragraph 6516) An entity determines the aligned forward
IFRS 9
IFRS FoundationA470element using the valuation of the forward contract that would have critical
terms that perfectly match the hedged item
B6538 If the actual forward element and the aligned forward element differ an entity
shall determine the amount that is accumulated in a separate component of
equity in accordance with paragraph 6516 as follows
(a) if at inception of the hedging relationship the absolute amount of the
actual forward element is higher than that of the aligned forward
element the entity shall
(i) determine the amount that is accumulated in a separate
component of equity on the basis of the aligned forward element
and
(ii) account for the differences in the fair value changes between the
two forward elements in profit or loss
(b) if at inception of the hedging relationship the absolute amount of the
actual forward element is lower than that of the aligned forward
element the entity shall determine the amount that is accumulated in a
separate component of equity by reference to the lower of the
cumulative change in fair value of
(i) the absolute amount of the actual forward element and
(ii) the absolute amount of the aligned forward element
Any remainder of the change in fair value of the actual forward element shall be
recognised in profit or loss
B6539 When an entity separates the foreign currency basis spread from a financial
instrument and excludes it from the designation of that financial instrument as
the hedging instrument (see paragraph 624(b)) the application guidance in
paragraphs B6534–B6538 applies to the foreign currency basis spread in the
same manner as it is applied to the forward element of a forward contract
Hedge of a group of items (Section 66)
Hedge of a net position
Eligibility for hedge accounting and designation of a net position
B661 A net position is eligible for hedge accounting only if an entity hedges on a net
basis for risk management purposes Whether an entity hedges in this way is a
matter of fact (not merely of assertion or documentation) Hence an entity
cannot apply hedge accounting on a net basis solely to achieve a particular
accounting outcome if that would not reflect its risk management approach
Net position hedging must form part of an established risk management
strategy Normally this would be approved by key management personnel as
defined in IAS 24
B662 For example Entity A whose functional currency is its local currency has a firm
commitment to pay FC150000 for advertising expenses in nine months’ time
and a firm commitment to sell finished goods for FC150000 in 15 months’ time
Entity A enters into a foreign currency derivative that settles in nine months’
IFRS 9
IFRS Foundation A471time under which it receives FC100 and pays CU70 Entity A has no other
exposures to FC Entity A does not manage foreign currency risk on a net basis
Hence Entity A cannot apply hedge accounting for a hedging relationship
between the foreign currency derivative and a net position of FC100 (consisting
of FC150000 of the firm purchase commitment—ie advertising services—and
FC149900 (of the FC150000) of the firm sale commitment) for a ninemonth
period
B663 If Entity A did manage foreign currency risk on a net basis and did not enter into
the foreign currency derivative (because it increases its foreign currency risk
exposure instead of reducing it) then the entity would be in a natural hedged
position for nine months Normally this hedged position would not be reflected
in the financial statements because the transactions are recognised in different
reporting periods in the future The nil net position would be eligible for hedge
accounting only if the conditions in paragraph 666 are met
B664 When a group of items that constitute a net position is designated as a hedged
item an entity shall designate the overall group of items that includes the items
that can make up the net position An entity is not permitted to designate a
nonspecific abstract amount of a net position For example an entity has a
group of firm sale commitments in nine months’ time for FC100 and a group of
firm purchase commitments in 18 months’ time for FC120 The entity cannot
designate an abstract amount of a net position up to FC20 Instead it must
designate a gross amount of purchases and a gross amount of sales that together
give rise to the hedged net position An entity shall designate gross positions
that give rise to the net position so that the entity is able to comply with the
requirements for the accounting for qualifying hedging relationships
Application of the hedge effectiveness requirements to a hedge of a
net position
B665 When an entity determines whether the hedge effectiveness requirements of
paragraph 641(c) are met when it hedges a net position it shall consider the
changes in the value of the items in the net position that have a similar effect as
the hedging instrument in conjunction with the fair value change on the
hedging instrument For example an entity has a group of firm sale
commitments in nine months’ time for FC100 and a group of firm purchase
commitments in 18 months’ time for FC120 It hedges the foreign currency risk
of the net position of FC20 using a forward exchange contract for FC20 When
determining whether the hedge effectiveness requirements of paragraph 641(c)
are met the entity shall consider the relationship between
(a) the fair value change on the forward exchange contract together with
the foreign currency risk related changes in the value of the firm sale
commitments and
(b) the foreign currency risk related changes in the value of the firm
purchase commitments
B666 Similarly if in the example in paragraph B665 the entity had a nil net position
it would consider the relationship between the foreign currency risk related
changes in the value of the firm sale commitments and the foreign currency risk
IFRS 9
IFRS FoundationA472related changes in the value of the firm purchase commitments when
determining whether the hedge effectiveness requirements of paragraph 641(c)
are met
Cash flow hedges that constitute a net position
B667 When an entity hedges a group of items with offsetting risk positions (ie a net
position) the eligibility for hedge accounting depends on the type of hedge If
the hedge is a fair value hedge then the net position may be eligible as a hedged
item If however the hedge is a cash flow hedge then the net position can only
be eligible as a hedged item if it is a hedge of foreign currency risk and the
designation of that net position specifies the reporting period in which the
forecast transactions are expected to affect profit or loss and also specifies their
nature and volume
B668 For example an entity has a net position that consists of a bottom layer of FC100
of sales and a bottom layer of FC150 of purchases Both sales and purchases are
denominated in the same foreign currency In order to sufficiently specify the
designation of the hedged net position the entity specifies in the original
documentation of the hedging relationship that sales can be of Product A or
Product B and purchases can be of Machinery Type A Machinery Type B and Raw
Material A The entity also specifies the volumes of the transactions by each
nature The entity documents that the bottom layer of sales (FC100) is made up
of a forecast sales volume of the first FC70 of Product A and the first FC30 of
Product B If those sales volumes are expected to affect profit or loss in different
reporting periods the entity would include that in the documentation for
example the first FC70 from sales of Product A that are expected to affect profit
or loss in the first reporting period and the first FC30 from sales of Product B
that are expected to affect profit or loss in the second reporting period The
entity also documents that the bottom layer of the purchases (FC150) is made up
of purchases of the first FC60 of Machinery Type A the first FC40 of Machinery
Type B and the first FC50 of Raw Material A If those purchase volumes are
expected to affect profit or loss in different reporting periods the entity would
include in the documentation a disaggregation of the purchase volumes by the
reporting periods in which they are expected to affect profit or loss (similarly to
how it documents the sales volumes) For example the forecast transaction
would be specified as
(a) the first FC60 of purchases of Machinery Type A that are expected to
affect profit or loss from the third reporting period over the next
ten reporting periods
(b) the first FC40 of purchases of Machinery Type B that are expected to
affect profit or loss from the fourth reporting period over the next
20 reporting periods and
(c) the first FC50 of purchases of Raw Material A that are expected to be
received in the third reporting period and sold ie affect profit or loss in
that and the next reporting period
Specifying the nature of the forecast transaction volumes would include aspects
such as the depreciation pattern for items of property plant and equipment of
the same kind if the nature of those items is such that the depreciation pattern
IFRS 9
IFRS Foundation A473could vary depending on how the entity uses those items For example if the
entity uses items of Machinery Type A in two different production processes that
result in straightline depreciation over ten reporting periods and the units of
production method respectively its documentation of the forecast purchase
volume for Machinery Type A would disaggregate that volume by which of those
depreciation patterns will apply
B669 For a cash flow hedge of a net position the amounts determined in accordance
with paragraph 6511 shall include the changes in the value of the items in the
net position that have a similar effect as the hedging instrument in conjunction
with the fair value change on the hedging instrument However the changes in
the value of the items in the net position that have a similar effect as the
hedging instrument are recognised only once the transactions that they relate to
are recognised such as when a forecast sale is recognised as revenue For
example an entity has a group of highly probable forecast sales in nine months’
time for FC100 and a group of highly probable forecast purchases in 18 months’
time for FC120 It hedges the foreign currency risk of the net position of FC20
using a forward exchange contract for FC20 When determining the amounts
that are recognised in the cash flow hedge reserve in accordance with paragraph
6511(a)–6511(b) the entity compares
(a) the fair value change on the forward exchange contract together with
the foreign currency risk related changes in the value of the highly
probable forecast sales with
(b) the foreign currency risk related changes in the value of the highly
probable forecast purchases
However the entity recognises only amounts related to the forward exchange
contract until the highly probable forecast sales transactions are recognised in
the financial statements at which time the gains or losses on those forecast
transactions are recognised (ie the change in the value attributable to the
change in the foreign exchange rate between the designation of the hedging
relationship and the recognition of revenue)
B6610 Similarly if in the example the entity had a nil net position it would compare
the foreign currency risk related changes in the value of the highly probable
forecast sales with the foreign currency risk related changes in the value of the
highly probable forecast purchases However those amounts are recognised
only once the related forecast transactions are recognised in the financial
statements
Layers of groups of items designated as the hedged item
B6611 For the same reasons noted in paragraph B6319 designating layer components
of groups of existing items requires the specific identification of the nominal
amount of the group of items from which the hedged layer component is
defined
B6612 A hedging relationship can include layers from several different groups of items
For example in a hedge of a net position of a group of assets and a group of
IFRS 9
IFRS FoundationA474liabilities the hedging relationship can comprise in combination a layer
component of the group of assets and a layer component of the group of
liabilities
Presentation of hedging instrument gains or losses
B6613 If items are hedged together as a group in a cash flow hedge they might affect
different line items in the statement of profit or loss and other comprehensive
income The presentation of hedging gains or losses in that statement depends
on the group of items
B6614 If the group of items does not have any offsetting risk positions (for example a
group of foreign currency expenses that affect different line items in the
statement of profit or loss and other comprehensive income that are hedged for
foreign currency risk) then the reclassified hedging instrument gains or losses
shall be apportioned to the line items affected by the hedged items This
apportionment shall be done on a systematic and rational basis and shall not
result in the grossing up of the net gains or losses arising from a single hedging
instrument
B6615 If the group of items does have offsetting risk positions (for example a group of
sales and expenses denominated in a foreign currency hedged together for
foreign currency risk) then an entity shall present the hedging gains or losses in
a separate line item in the statement of profit or loss and other comprehensive
income Consider for example a hedge of the foreign currency risk of a net
position of foreign currency sales of FC100 and foreign currency expenses of
FC80 using a forward exchange contract for FC20 The gain or loss on the
forward exchange contract that is reclassified from the cash flow hedge reserve
to profit or loss (when the net position affects profit or loss) shall be presented in
a separate line item from the hedged sales and expenses Moreover if the sales
occur in an earlier period than the expenses the sales revenue is still measured
at the spot exchange rate in accordance with IAS 21 The related hedging gain or
loss is presented in a separate line item so that profit or loss reflects the effect of
hedging the net position with a corresponding adjustment to the cash flow
hedge reserve When the hedged expenses affect profit or loss in a later period
the hedging gain or loss previously recognised in the cash flow hedge reserve on
the sales is reclassified to profit or loss and presented as a separate line item
from those that include the hedged expenses which are measured at the spot
exchange rate in accordance with IAS 21
B6616 For some types of fair value hedges the objective of the hedge is not primarily to
offset the fair value change of the hedged item but instead to transform the cash
flows of the hedged item For example an entity hedges the fair value interest
rate risk of a fixedrate debt instrument using an interest rate swap The entity’s
hedge objective is to transform the fixedinterest cash flows into floating interest
cash flows This objective is reflected in the accounting for the hedging
relationship by accruing the net interest accrual on the interest rate swap in
profit or loss In the case of a hedge of a net position (for example a net position
of a fixedrate asset and a fixedrate liability) this net interest accrual must be
presented in a separate line item in the statement of profit or loss and other
comprehensive income This is to avoid the grossing up of a single instrument’s
net gains or losses into offsetting gross amounts and recognising them in
IFRS 9
IFRS Foundation A475different line items (for example this avoids grossing up a net interest receipt on
a single interest rate swap into gross interest revenue and gross interest
expense)
Effective date and transition (Chapter 7)
Transition (Section 72)
Financial assets held for trading
B721 At the date of initial application of this Standard an entity must determine
whether the objective of the entity’s business model for managing any of its
financial assets meets the condition in paragraph 412(a) or the condition in
paragraph 412A(a) or if a financial asset is eligible for the election in
paragraph 575 For that purpose an entity shall determine whether financial
assets meet the definition of held for trading as if the entity had purchased the
assets at the date of initial application
Impairment
B722 On transition an entity should seek to approximate the credit risk on initial
recognition by considering all reasonable and supportable information that is
available without undue cost or effort An entity is not required to undertake an
exhaustive search for information when determining at the date of transition
whether there have been significant increases in credit risk since initial
recognition If an entity is unable to make this determination without undue
cost or effort paragraph 7220 applies
B723 In order to determine the loss allowance on financial instruments initially
recognised (or loan commitments or financial guarantee contracts to which the
entity became a party to the contract) prior to the date of initial application
both on transition and until the derecognition of those items an entity shall
consider information that is relevant in determining or approximating the
credit risk at initial recognition In order to determine or approximate the
initial credit risk an entity may consider internal and external information
including portfolio information in accordance with paragraphs B551–B556
B724 An entity with little historical information may use information from internal
reports and statistics (that may have been generated when deciding whether to
launch a new product) information about similar products or peer group
experience for comparable financial instruments if relevant
Definitions (Appendix A)
Derivatives
BA1 Typical examples of derivatives are futures and forward swap and option
contracts A derivative usually has a notional amount which is an amount of
currency a number of shares a number of units of weight or volume or other
units specified in the contract However a derivative instrument does not
require the holder or writer to invest or receive the notional amount at the
inception of the contract Alternatively a derivative could require a fixed
IFRS 9
IFRS FoundationA476payment or payment of an amount that can change (but not proportionally with
a change in the underlying) as a result of some future event that is unrelated to
a notional amount For example a contract may require a fixed payment of
CU1000 if sixmonth LIBOR increases by 100 basis points Such a contract is a
derivative even though a notional amount is not specified
BA2 The definition of a derivative in this Standard includes contracts that are settled
gross by delivery of the underlying item (eg a forward contract to purchase a
fixed rate debt instrument) An entity may have a contract to buy or sell a
nonfinancial item that can be settled net in cash or another financial
instrument or by exchanging financial instruments (eg a contract to buy or sell a
commodity at a fixed price at a future date) Such a contract is within the scope
of this Standard unless it was entered into and continues to be held for the
purpose of delivery of a nonfinancial item in accordance with the entity’s
expected purchase sale or usage requirements However this Standard applies
to such contracts for an entity’s expected purchase sale or usage requirements if
the entity makes a designation in accordance with paragraph 25 (see
paragraphs 24–27)
BA3 One of the defining characteristics of a derivative is that it has an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors
An option contract meets that definition because the premium is less than the
investment that would be required to obtain the underlying financial
instrument to which the option is linked A currency swap that requires an
initial exchange of different currencies of equal fair values meets the definition
because it has a zero initial net investment
BA4 A regular way purchase or sale gives rise to a fixed price commitment between
trade date and settlement date that meets the definition of a derivative
However because of the short duration of the commitment it is not recognised
as a derivative financial instrument Instead this Standard provides for special
accounting for such regular way contracts (see paragraphs 312 and
B313–B316)
BA5 The definition of a derivative refers to nonfinancial variables that are not
specific to a party to the contract These include an index of earthquake losses
in a particular region and an index of temperatures in a particular city
Nonfinancial variables specific to a party to the contract include the occurrence
or nonoccurrence of a fire that damages or destroys an asset of a party to the
contract A change in the fair value of a nonfinancial asset is specific to the
owner if the fair value reflects not only changes in market prices for such assets
(a financial variable) but also the condition of the specific nonfinancial asset
held (a nonfinancial variable) For example if a guarantee of the residual value
of a specific car exposes the guarantor to the risk of changes in the car’s physical
condition the change in that residual value is specific to the owner of the car
Financial assets and liabilities held for trading
BA6 Trading generally reflects active and frequent buying and selling and financial
instruments held for trading generally are used with the objective of generating
a profit from shortterm fluctuations in price or dealer’s margin
IFRS 9
IFRS Foundation A477BA7 Financial liabilities held for trading include
(a) derivative liabilities that are not accounted for as hedging instruments
(b) obligations to deliver financial assets borrowed by a short seller (ie an
entity that sells financial assets it has borrowed and does not yet own)
(c) financial liabilities that are incurred with an intention to repurchase
them in the near term (eg a quoted debt instrument that the issuer may
buy back in the near term depending on changes in its fair value) and
(d) financial liabilities that are part of a portfolio of identified financial
instruments that are managed together and for which there is evidence
of a recent pattern of shortterm profittaking
BA8 The fact that a liability is used to fund trading activities does not in itself make
that liability one that is held for trading
IFRS 9
IFRS FoundationA478Appendix C
Amendments to other Standards
This appendix describes the amendments to other Standards that the IASB made when it finalised
IFRS 9 (2014) An entity shall apply the amendments for annual periods beginning on or after
1 January 2018 If an entity applies IFRS 9 for an earlier period these amendments shall be applied
for that earlier period
*****
The amendments contained in this appendix when this Standard was issued in 2014 have been
incorporated into the text of the relevant Standards included in this volume
IFRS 9
IFRS Foundation A479IFRS Standard 10
Consolidated Financial Statements
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 27
Consolidated Financial Statements and Accounting for Investments in Subsidiaries which had
originally been issued by the International Accounting Standards Committee in April 1989
IAS 27 replaced most of IAS 3 Consolidated Financial Statements (issued in June 1976)
In December 2003 the Board amended and renamed IAS 27 with a new title—Consolidated
and Separate Financial Statements The amended IAS 27 also incorporated the guidance
contained in two related Interpretations (SIC12 ConsolidationSpecial Purpose Entities and
SIC33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership Interests)
In May 2011 the Board issued IFRS 10 Consolidated Financial Statements to replace IAS 27
IFRS 12 Disclosure of Interests in Other Entities also issued in May 2011 replaced the disclosure
requirements in IAS 27 IFRS 10 incorporates the guidance contained in two related
Interpretations (SIC12 ConsolidationSpecial Purpose Entities and SIC33 Consolidation)
In June 2012 IFRS 10 was amended by Consolidated Financial Statements Joint Arrangements and
Disclosure of Interests in Other Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and
IFRS 12) These amendments clarified the transition guidance in IFRS 10 Furthermore
these amendments provided additional transition relief in IFRS 10 limiting the
requirement to present adjusted comparative information to only the annual period
immediately preceding the first annual period for which IFRS 10 is applied
In October 2012 IFRS 10 was amended by Investment Entities (Amendments to IFRS 10 IFRS 12
and IAS 27) which defined an investment entity and introduced an exception to
consolidating particular subsidiaries for investment entities It also introduced the
requirement that an investment entity measures those subsidiaries at fair value through
profit or loss in accordance with IFRS 9 Financial Instruments in its consolidated and
separate financial statements In addition the amendments introduced new disclosure
requirements for investment entities in IFRS 12 and IAS 27
In September 2014 IFRS 10 was amended by Sale or Contribution of Assets between an Investor and
its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) which addressed the
conflicting accounting requirements for the sale or contribution of assets to a joint venture
or associate The effective date of this amendment was deferred in December 2015 to a date
to be determine by Effective Date of Amendments to IFRS 10 and IAS 28
In December 2014 IFRS 10 was amended by Investment Entities Applying the Consolidation
Exception (Amendments to IFRS 10 IFRS 12 and IAS 28) These amendments clarified which
subsidiaries of an investment entity should be consolidated instead of being measured at
fair value through profit or loss The amendments also clarified that the exemption from
presenting consolidated financial statements continues to apply to subsidiaries of an
investment entity that are themselves parent entities This is so even if that subsidiary is
measured at fair value through profit or loss by the higher level investment entity parent
In December 2015 the mandatory effective date of the above amendments were indefinitely
deferred by the Change of Effective Date of Amendments to IFRS 10 and IAS 28
IFRS 10
IFRS Foundation A481CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 10
CONSOLIDATED FINANCIAL STATEMENTS
OBJECTIVE 1
Meeting the objective 2
SCOPE 4
CONTROL 5
Power 10
Returns 15
Link between power and returns 17
ACCOUNTING REQUIREMENTS 19
Noncontrolling interests 22
Loss of control 25
DETERMINING WHETHER AN ENTITY IS AN INVESTMENT ENTITY 27
INVESTMENT ENTITIES EXCEPTION TO CONSOLIDATION 31
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 10 ISSUED IN MAY 2011
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 10
Consolidated Financial Statements Joint Arrangements and Disclosure of
Interests in other Entities Transition Guidance (Amendments to IFRS 10
IFRS 11 and IFRS 12) issued in June 2012
Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in
October 2012
Sale or Contribution of Assets between an Investor and its Associate or Joint
Venture (Amendments to IFRS 10 and IAS 28) issued in September 2014
Investment Entities Applying the Consolidation Exception (Amendments to
IFRS 10 IFRS 12 and IAS 28) issued in December 2014
Effective Date of Amendments to IFRS 10 and IAS 28 issued in
December 2015
BASIS FOR CONCLUSIONS
APPENDICES
Previous Board approvals and dissenting opinions
IFRS 10
IFRS FoundationA482Amendments to the Basis for Conclusions on other IFRSs
AMENDMENTS TO THE GUIDANCE ON OTHER IFRSs
ILLUSTRATIVE EXAMPLES
IFRS 10
IFRS Foundation A483International Financial Reporting Standard 10 Consolidated Financial Statements (IFRS 10) is
set out in paragraphs 1–33 and Appendices A–D All the paragraphs have equal
authority Paragraphs in bold type state the main principles Terms defined in
Appendix A are in italics the first time they appear in the Standard Definitions of other
terms are given in the Glossary for International Financial Reporting Standards IFRS 10
should be read in the context of its objective and the Basis for Conclusions the Preface to
International Financial Reporting Standards and the Conceptual Framework for Financial
Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance
IFRS 10
IFRS FoundationA484Introduction
IN1 IFRS 10 Consolidated Financial Statements establishes principles for the presentation
and preparation of consolidated financial statements when an entity controls
one or more other entities
IN2 The IFRS supersedes IAS 27 Consolidated and Separate Financial Statements and SIC12
Consolidation—Special Purpose Entities and is effective for annual periods beginning
on or after 1 January 2013 Earlier application is permitted
Reasons for issuing the IFRS
IN3 The Board added a project on consolidation to its agenda to deal with divergence
in practice in applying IAS 27 and SIC12 For example entities varied in their
application of the control concept in circumstances in which a reporting entity
controls another entity but holds less than a majority of the voting rights of the
entity and in circumstances involving agency relationships
IN4 In addition a perceived conflict of emphasis between IAS 27 and SIC12 had led
to inconsistent application of the concept of control IAS 27 required the
consolidation of entities that are controlled by a reporting entity and it defined
control as the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities SIC12 which interpreted the
requirements of IAS 27 in the context of special purpose entities placed greater
emphasis on risks and rewards
IN5 The global financial crisis that started in 2007 highlighted the lack of
transparency about the risks to which investors were exposed from their
involvement with off balance sheet vehicles’ (such as securitisation vehicles)
including those that they had set up or sponsored As a result the G20 leaders
the Financial Stability Board and others asked the Board to review the
accounting and disclosure requirements for such off balance sheet vehicles’
Main features of the IFRS
IN6 The IFRS requires an entity that is a parent to present consolidated financial
statements A limited exemption is available to some entities
General requirements
IN7 The IFRS defines the principle of control and establishes control as the basis for
determining which entities are consolidated in the consolidated financial
statements The IFRS also sets out the accounting requirements for the
preparation of consolidated financial statements
IN7A Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 introduced an exception to the principle that all subsidiaries shall be
consolidated The amendments define an investment entity and require a
parent that is an investment entity to measure its investments in particular
subsidiaries at fair value through profit or loss in accordance with IFRS 9
IFRS 10
IFRS Foundation A485Financial Instruments1 instead of consolidating those subsidiaries in its
consolidated and separate financial statements In addition the amendments
introduce new disclosure requirements related to investment entities in IFRS 12
Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements
IN8 An investor controls an investee when it is exposed or has rights to variable
returns from its involvement with the investee and has the ability to affect those
returns through its power over the investee Thus the principle of control sets
out the following three elements of control
(a) power over the investee
(b) exposure or rights to variable returns from involvement with the
investee and
(c) the ability to use power over the investee to affect the amount of the
investor’s returns
IN9 The IFRS sets out requirements on how to apply the control principle
(a) in circumstances when voting rights or similar rights give an investor
power including situations where the investor holds less than a majority
of voting rights and in circumstances involving potential voting rights
(b) in circumstances when an investee is designed so that voting rights are
not the dominant factor in deciding who controls the investee such as
when any voting rights relate to administrative tasks only and the
relevant activities are directed by means of contractual arrangements
(c) in circumstances involving agency relationships
(d) in circumstances when the investor has control over specified assets of
an investee
IN10 The IFRS requires an investor to reassess whether it controls an investee if facts
and circumstances indicate that there are changes to one or more of the three
elements of control
IN11 When preparing consolidated financial statements an entity must use uniform
accounting policies for reporting like transactions and other events in similar
circumstances Intragroup balances and transactions must be eliminated
Noncontrolling interests in subsidiaries must be presented in the consolidated
statement of financial position within equity separately from the equity of the
owners of the parent
IN12 The disclosure requirements for interests in subsidiaries are specified in IFRS 12
1 Paragraph C7 of IFRS 10 Consolidated Financial Statements states If an entity applies this IFRS but does
not yet apply IFRS 9 any reference in this IFRS to IFRS 9 shall be read as a reference to IAS 39
Financial Instruments Recognition and Measurement
IFRS 10
IFRS FoundationA486International Financial Reporting Standard 10
Consolidated Financial Statements
Objective
1 The objective of this IFRS is to establish principles for the presentation and
preparation of consolidated financial statements when an entity controls one or
more other entities
Meeting the objective
2 To meet the objective in paragraph 1 this IFRS
(a) requires an entity (the parent) that controls one or more other entities
(subsidiaries) to present consolidated financial statements
(b) defines the principle of control and establishes control as the basis for
consolidation
(c) sets out how to apply the principle of control to identify whether an
investor controls an investee and therefore must consolidate the
investee
(d) sets out the accounting requirements for the preparation of consolidated
financial statements and
(e) defines an investment entity and sets out an exception to consolidating
particular subsidiaries of an investment entity
3 This IFRS does not deal with the accounting requirements for business
combinations and their effect on consolidation including goodwill arising on a
business combination (see IFRS 3 Business Combinations)
Scope
4 An entity that is a parent shall present consolidated financial statements This
IFRS applies to all entities except as follows
(a) a parent need not present consolidated financial statements if it meets
all the following conditions
(i) it is a whollyowned subsidiary or is a partiallyowned subsidiary
of another entity and all its other owners including those not
otherwise entitled to vote have been informed about and do not
object to the parent not presenting consolidated financial
statements
(ii) its debt or equity instruments are not traded in a public market
(a domestic or foreign stock exchange or an overthecounter
market including local and regional markets)
IFRS 10
IFRS Foundation A487(iii) it did not file nor is it in the process of filing its financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments
in a public market and
(iv) its ultimate or any intermediate parent produces financial
statements that are available for public use and comply with
IFRSs in which subsidiaries are consolidated or are measured at
fair value through profit or loss in accordance with this IFRS
(b) [deleted]
(c) [deleted]
4A This IFRS does not apply to postemployment benefit plans or other longterm
employee benefit plans to which IAS 19 Employee Benefits applies
4B A parent that is an investment entity shall not present consolidated financial
statements if it is required in accordance with paragraph 31 of this IFRS to
measure all of its subsidiaries at fair value through profit or loss
Control
5 An investor regardless of the nature of its involvement with an entity (the
investee) shall determine whether it is a parent by assessing whether it
controls the investee
6 An investor controls an investee when it is exposed or has rights to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee
7 Thus an investor controls an investee if and only if the investor has all
the following
(a) power over the investee (see paragraphs 10–14)
(b) exposure or rights to variable returns from its involvement with
the investee (see paragraphs 15 and 16) and
(c) the ability to use its power over the investee to affect the amount
of the investor’s returns (see paragraphs 17 and 18)
8 An investor shall consider all facts and circumstances when assessing whether it
controls an investee The investor shall reassess whether it controls an investee
if facts and circumstances indicate that there are changes to one or more of the
three elements of control listed in paragraph 7 (see paragraphs B80–B85)
9 Two or more investors collectively control an investee when they must act
together to direct the relevant activities In such cases because no investor can
direct the activities without the cooperation of the others no investor
individually controls the investee Each investor would account for its interest
in the investee in accordance with the relevant IFRSs such as IFRS 11 Joint
Arrangements IAS 28 Investments in Associates and Joint Ventures or IFRS 9 Financial
Instruments
IFRS 10
IFRS FoundationA488Power
10 An investor has power over an investee when the investor has existing rights
that give it the current ability to direct the relevant activities ie the activities that
significantly affect the investee’s returns
11 Power arises from rights Sometimes assessing power is straightforward such as
when power over an investee is obtained directly and solely from the voting
rights granted by equity instruments such as shares and can be assessed by
considering the voting rights from those shareholdings In other cases the
assessment will be more complex and require more than one factor to be
considered for example when power results from one or more contractual
arrangements
12 An investor with the current ability to direct the relevant activities has power
even if its rights to direct have yet to be exercised Evidence that the investor has
been directing relevant activities can help determine whether the investor has
power but such evidence is not in itself conclusive in determining whether the
investor has power over an investee
13 If two or more investors each have existing rights that give them the unilateral
ability to direct different relevant activities the investor that has the current
ability to direct the activities that most significantly affect the returns of the
investee has power over the investee
14 An investor can have power over an investee even if other entities have existing
rights that give them the current ability to participate in the direction of the
relevant activities for example when another entity has significant influence
However an investor that holds only protective rights does not have power over
an investee (see paragraphs B26–B28) and consequently does not control the
investee
Returns
15 An investor is exposed or has rights to variable returns from its involvement
with the investee when the investor’s returns from its involvement have the
potential to vary as a result of the investee’s performance The investor’s returns
can be only positive only negative or both positive and negative
16 Although only one investor can control an investee more than one party can
share in the returns of an investee For example holders of noncontrolling
interests can share in the profits or distributions of an investee
Link between power and returns
17 An investor controls an investee if the investor not only has power over the
investee and exposure or rights to variable returns from its involvement with
the investee but also has the ability to use its power to affect the investor’s
returns from its involvement with the investee
18 Thus an investor with decisionmaking rights shall determine whether it is a
principal or an agent An investor that is an agent in accordance with
paragraphs B58–B72 does not control an investee when it exercises
decisionmaking rights delegated to it
IFRS 10
IFRS Foundation A489Accounting requirements
19 A parent shall prepare consolidated financial statements using uniform
accounting policies for like transactions and other events in similar
circumstances
20 Consolidation of an investee shall begin from the date the investor obtains
control of the investee and cease when the investor loses control of the investee
21 Paragraphs B86–B93 set out guidance for the preparation of consolidated
financial statements
Noncontrolling interests
22 A parent shall present noncontrolling interests in the consolidated statement of
financial position within equity separately from the equity of the owners of the
parent
23 Changes in a parent’s ownership interest in a subsidiary that do not result in the
parent losing control of the subsidiary are equity transactions (ie transactions
with owners in their capacity as owners)
24 Paragraphs B94–B96 set out guidance for the accounting for noncontrolling
interests in consolidated financial statements
Loss of control
25 If a parent loses control of a subsidiary the parent
(a) derecognises the assets and liabilities of the former subsidiary from the
consolidated statement of financial position
(b) recognises any investment retained in the former subsidiary and
subsequently accounts for it and for any amounts owed by or to the
former subsidiary in accordance with relevant IFRSs That retained
interest is remeasured as described in paragraphs B98(b)(iii) and B99A
The remeasured value at the date that control is lost shall be regarded as
the fair value on initial recognition of a financial asset in accordance
with IFRS 9 or the cost on initial recognition of an investment in an
associate or joint venture if applicable
(c) recognises the gain or loss associated with the loss of control attributable
to the former controlling interest as specified in paragraphs B98–B99A
26 Paragraphs B97–B99A set out guidance for the accounting for the loss of control
of a subsidiary
Determining whether an entity is an investment entity
27 A parent shall determine whether it is an investment entity An
investment entity is an entity that
(a) obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management services
IFRS 10
IFRS FoundationA490(b) commits to its investor(s) that its business purpose is to invest
funds solely for returns from capital appreciation investment
income or both and
(c) measures and evaluates the performance of substantially all of its
investments on a fair value basis
Paragraphs B85A–B85M provide related application guidance
28 In assessing whether it meets the definition described in paragraph 27 an entity
shall consider whether it has the following typical characteristics of an
investment entity
(a) it has more than one investment (see paragraphs B85O–B85P)
(b) it has more than one investor (see paragraphs B85Q–B85S)
(c) it has investors that are not related parties of the entity (see paragraphs
B85T–B85U) and
(d) it has ownership interests in the form of equity or similar interests (see
paragraphs B85V–B85W)
The absence of any of these typical characteristics does not necessarily disqualify
an entity from being classified as an investment entity An investment entity
that does not have all of these typical characteristics provides additional
disclosure required by paragraph 9A of IFRS 12 Disclosure of Interests in Other
Entities
29 If facts and circumstances indicate that there are changes to one or more of the
three elements that make up the definition of an investment entity as described
in paragraph 27 or the typical characteristics of an investment entity as
described in paragraph 28 a parent shall reassess whether it is an investment
entity
30 A parent that either ceases to be an investment entity or becomes an investment
entity shall account for the change in its status prospectively from the date at
which the change in status occurred (see paragraphs B100–B101)
Investment entities exception to consolidation
31 Except as described in paragraph 32 an investment entity shall not
consolidate its subsidiaries or apply IFRS 3 when it obtains control of
another entity Instead an investment entity shall measure an
investment in a subsidiary at fair value through profit or loss in
accordance with IFRS 92
32 Notwithstanding the requirement in paragraph 31 if an investment entity has a
subsidiary that is not itself an investment entity and whose main purpose and
activities are providing services that relate to the investment entity’s investment
activities (see paragraphs B85C–B85E) it shall consolidate that subsidiary in
2 Paragraph C7 of IFRS 10 Consolidated Financial Statements states If an entity applies this IFRS but does
not yet apply IFRS 9 any reference in this IFRS to IFRS 9 shall be read as a reference to IAS 39
Financial Instruments Recognition and Measurement
IFRS 10
IFRS Foundation A491accordance with paragraphs 19–26 of this IFRS and apply the requirements of
IFRS 3 to the acquisition of any such subsidiary
33 A parent of an investment entity shall consolidate all entities that it controls
including those controlled through an investment entity subsidiary unless the
parent itself is an investment entity
IFRS 10
IFRS FoundationA492Appendix A
Defined terms
This appendix is an integral part of the IFRS
consolidated financial
statements
The financial statements of a group in which the assets
liabilities equity income expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic
entity
control of an investee An investor controls an investee when the investor is exposed or
has rights to variable returns from its involvement with the
investee and has the ability to affect those returns through its
power over the investee
decision maker An entity with decisionmaking rights that is either a principal or
an agent for other parties
group A parent and its subsidiaries
investment entity An entity that
(a) obtains funds from one or more investors for the purpose
of providing those investor(s) with investment
management services
(b) commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation
investment income or both and
(c) measures and evaluates the performance of substantially
all of its investments on a fair value basis
noncontrolling interest Equity in a subsidiary not attributable directly or indirectly to a
parent
parent An entity that controls one or more entities
power Existing rights that give the current ability to direct the relevant
activities
protective rights Rights designed to protect the interest of the party holding those
rights without giving that party power over the entity to which
those rights relate
relevant activities For the purpose of this IFRS relevant activities are activities of
the investee that significantly affect the investee’s returns
removal rights Rights to deprive the decision maker of its decisionmaking
authority
subsidiary An entity that is controlled by another entity
The following terms are defined in IFRS 11 IFRS 12 Disclosure of Interests in Other Entities
IAS 28 (as amended in 2011) or IAS 24 Related Party Disclosures and are used in this IFRS with
the meanings specified in those IFRSs
● associate
IFRS 10
IFRS Foundation A493● interest in another entity
● joint venture
● key management personnel
● related party
● significant influence
IFRS 10
IFRS FoundationA494Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–33 and
has the same authority as the other parts of the IFRS
B1 The examples in this appendix portray hypothetical situations Although some
aspects of the examples may be present in actual fact patterns all facts and
circumstances of a particular fact pattern would need to be evaluated when
applying IFRS 10
Assessing control
B2 To determine whether it controls an investee an investor shall assess whether it
has all the following
(a) power over the investee
(b) exposure or rights to variable returns from its involvement with the
investee and
(c) the ability to use its power over the investee to affect the amount of the
investor’s returns
B3 Consideration of the following factors may assist in making that determination
(a) the purpose and design of the investee (see paragraphs B5–B8)
(b) what the relevant activities are and how decisions about those activities
are made (see paragraphs B11–B13)
(c) whether the rights of the investor give it the current ability to direct the
relevant activities (see paragraphs B14–B54)
(d) whether the investor is exposed or has rights to variable returns from
its involvement with the investee (see paragraphs B55–B57) and
(e) whether the investor has the ability to use its power over the investee to
affect the amount of the investor’s returns (see paragraphs B58–B72)
B4 When assessing control of an investee an investor shall consider the nature of
its relationship with other parties (see paragraphs B73–B75)
Purpose and design of an investee
B5 When assessing control of an investee an investor shall consider the purpose
and design of the investee in order to identify the relevant activities how
decisions about the relevant activities are made who has the current ability to
direct those activities and who receives returns from those activities
B6 When an investee’s purpose and design are considered it may be clear that an
investee is controlled by means of equity instruments that give the holder
proportionate voting rights such as ordinary shares in the investee In this case
in the absence of any additional arrangements that alter decisionmaking the
assessment of control focuses on which party if any is able to exercise voting
rights sufficient to determine the investee’s operating and financing policies
IFRS 10
IFRS Foundation A495(see paragraphs B34–B50) In the most straightforward case the investor that
holds a majority of those voting rights in the absence of any other factors
controls the investee
B7 To determine whether an investor controls an investee in more complex cases it
may be necessary to consider some or all of the other factors in paragraph B3
B8 An investee may be designed so that voting rights are not the dominant factor in
deciding who controls the investee such as when any voting rights relate to
administrative tasks only and the relevant activities are directed by means of
contractual arrangements In such cases an investor’s consideration of the
purpose and design of the investee shall also include consideration of the risks
to which the investee was designed to be exposed the risks it was designed to
pass on to the parties involved with the investee and whether the investor is
exposed to some or all of those risks Consideration of the risks includes not
only the downside risk but also the potential for upside
Power
B9 To have power over an investee an investor must have existing rights that give it
the current ability to direct the relevant activities For the purpose of assessing
power only substantive rights and rights that are not protective shall be
considered (see paragraphs B22–B28)
B10 The determination about whether an investor has power depends on the
relevant activities the way decisions about the relevant activities are made and
the rights the investor and other parties have in relation to the investee
Relevant activities and direction of relevant activities
B11 For many investees a range of operating and financing activities significantly
affect their returns Examples of activities that depending on the
circumstances can be relevant activities include but are not limited to
(a) selling and purchasing of goods or services
(b) managing financial assets during their life (including upon default)
(c) selecting acquiring or disposing of assets
(d) researching and developing new products or processes and
(e) determining a funding structure or obtaining funding
B12 Examples of decisions about relevant activities include but are not limited to
(a) establishing operating and capital decisions of the investee including
budgets and
(b) appointing and remunerating an investee’s key management personnel
or service providers and terminating their services or employment
B13 In some situations activities both before and after a particular set of
circumstances arises or event occurs may be relevant activities When two or
more investors have the current ability to direct relevant activities and those
activities occur at different times the investors shall determine which investor
is able to direct the activities that most significantly affect those returns
IFRS 10
IFRS FoundationA496consistently with the treatment of concurrent decisionmaking rights (see
paragraph 13) The investors shall reconsider this assessment over time if
relevant facts or circumstances change
Application examples
Example 1
Two investors form an investee to develop and market a medical product
One investor is responsible for developing and obtaining regulatory approval
of the medical product—that responsibility includes having the unilateral
ability to make all decisions relating to the development of the product and
to obtaining regulatory approval Once the regulator has approved the
product the other investor will manufacture and market it—this investor has
the unilateral ability to make all decisions about the manufacture and
marketing of the product If all the activities—developing and obtaining
regulatory approval as well as manufacturing and marketing of the medical
product—are relevant activities each investor needs to determine whether it
is able to direct the activities that most significantly affect the investee’s
returns Accordingly each investor needs to consider whether developing
and obtaining regulatory approval or the manufacturing and marketing of
the medical product is the activity that most significantly affects the
investee’s returns and whether it is able to direct that activity In
determining which investor has power the investors would consider
(a) the purpose and design of the investee
(b) the factors that determine the profit margin revenue and value of
the investee as well as the value of the medical product
(c) the effect on the investee’s returns resulting from each investor’s
decisionmaking authority with respect to the factors in (b) and
(d) the investors’ exposure to variability of returns
In this particular example the investors would also consider
(e) the uncertainty of and effort required in obtaining regulatory
approval (considering the investor’s record of successfully developing
and obtaining regulatory approval of medical products) and
(f) which investor controls the medical product once the development
phase is successful
continued
IFRS 10
IFRS Foundation A497continued
Application examples
Example 2
An investment vehicle (the investee) is created and financed with a debt
instrument held by an investor (the debt investor) and equity instruments
held by a number of other investors The equity tranche is designed to
absorb the first losses and to receive any residual return from the investee
One of the equity investors who holds 30 per cent of the equity is also the
asset manager The investee uses its proceeds to purchase a portfolio of
financial assets exposing the investee to the credit risk associated with the
possible default of principal and interest payments of the assets The
transaction is marketed to the debt investor as an investment with minimal
exposure to the credit risk associated with the possible default of the assets
in the portfolio because of the nature of these assets and because the equity
tranche is designed to absorb the first losses of the investee The returns of
the investee are significantly affected by the management of the investee’s
asset portfolio which includes decisions about the selection acquisition and
disposal of the assets within portfolio guidelines and the management upon
default of any portfolio assets All those activities are managed by the asset
manager until defaults reach a specified proportion of the portfolio value
(ie when the value of the portfolio is such that the equity tranche of the
investee has been consumed) From that time a thirdparty trustee manages
the assets according to the instructions of the debt investor Managing the
investee’s asset portfolio is the relevant activity of the investee The asset
manager has the ability to direct the relevant activities until defaulted assets
reach the specified proportion of the portfolio value the debt investor has
the ability to direct the relevant activities when the value of defaulted assets
surpasses that specified proportion of the portfolio value The asset manager
and the debt investor each need to determine whether they are able to direct
the activities that most significantly affect the investee’s returns including
considering the purpose and design of the investee as well as each party’s
exposure to variability of returns
Rights that give an investor power over an investee
B14 Power arises from rights To have power over an investee an investor must have
existing rights that give the investor the current ability to direct the relevant
activities The rights that may give an investor power can differ between
investees
B15 Examples of rights that either individually or in combination can give an
investor power include but are not limited to
(a) rights in the form of voting rights (or potential voting rights) of an
investee (see paragraphs B34–B50)
(b) rights to appoint reassign or remove members of an investee’s key
management personnel who have the ability to direct the relevant
activities
IFRS 10
IFRS FoundationA498(c) rights to appoint or remove another entity that directs the relevant
activities
(d) rights to direct the investee to enter into or veto any changes to
transactions for the benefit of the investor and
(e) other rights (such as decisionmaking rights specified in a management
contract) that give the holder the ability to direct the relevant activities
B16 Generally when an investee has a range of operating and financing activities
that significantly affect the investee’s returns and when substantive
decisionmaking with respect to these activities is required continuously it will
be voting or similar rights that give an investor power either individually or in
combination with other arrangements
B17 When voting rights cannot have a significant effect on an investee’s returns
such as when voting rights relate to administrative tasks only and contractual
arrangements determine the direction of the relevant activities the investor
needs to assess those contractual arrangements in order to determine whether it
has rights sufficient to give it power over the investee To determine whether an
investor has rights sufficient to give it power the investor shall consider the
purpose and design of the investee (see paragraphs B5–B8) and the requirements
in paragraphs B51–B54 together with paragraphs B18–B20
B18 In some circumstances it may be difficult to determine whether an investor’s
rights are sufficient to give it power over an investee In such cases to enable
the assessment of power to be made the investor shall consider evidence of
whether it has the practical ability to direct the relevant activities unilaterally
Consideration is given but is not limited to the following which when
considered together with its rights and the indicators in paragraphs B19 and
B20 may provide evidence that the investor’s rights are sufficient to give it
power over the investee
(a) The investor can without having the contractual right to do so appoint
or approve the investee’s key management personnel who have the
ability to direct the relevant activities
(b) The investor can without having the contractual right to do so direct
the investee to enter into or can veto any changes to significant
transactions for the benefit of the investor
(c) The investor can dominate either the nominations process for electing
members of the investee’s governing body or the obtaining of proxies
from other holders of voting rights
(d) The investee’s key management personnel are related parties of the
investor (for example the chief executive officer of the investee and the
chief executive officer of the investor are the same person)
(e) The majority of the members of the investee’s governing body are related
parties of the investor
B19 Sometimes there will be indications that the investor has a special relationship
with the investee which suggests that the investor has more than a passive
interest in the investee The existence of any individual indicator or a
IFRS 10
IFRS Foundation A499particular combination of indicators does not necessarily mean that the power
criterion is met However having more than a passive interest in the investee
may indicate that the investor has other related rights sufficient to give it power
or provide evidence of existing power over an investee For example the
following suggests that the investor has more than a passive interest in the
investee and in combination with other rights may indicate power
(a) The investee’s key management personnel who have the ability to direct
the relevant activities are current or previous employees of the investor
(b) The investee’s operations are dependent on the investor such as in the
following situations
(i) The investee depends on the investor to fund a significant
portion of its operations
(ii) The investor guarantees a significant portion of the investee’s
obligations
(iii) The investee depends on the investor for critical services
technology supplies or raw materials
(iv) The investor controls assets such as licences or trademarks that
are critical to the investee’s operations
(v) The investee depends on the investor for key management
personnel such as when the investor’s personnel have specialised
knowledge of the investee’s operations
(c) A significant portion of the investee’s activities either involve or are
conducted on behalf of the investor
(d) The investor’s exposure or rights to returns from its involvement with
the investee is disproportionately greater than its voting or other similar
rights For example there may be a situation in which an investor is
entitled or exposed to more than half of the returns of the investee but
holds less than half of the voting rights of the investee
B20 The greater an investor’s exposure or rights to variability of returns from its
involvement with an investee the greater is the incentive for the investor to
obtain rights sufficient to give it power Therefore having a large exposure to
variability of returns is an indicator that the investor may have power However
the extent of the investor’s exposure does not in itself determine whether an
investor has power over the investee
B21 When the factors set out in paragraph B18 and the indicators set out in
paragraphs B19 and B20 are considered together with an investor’s rights
greater weight shall be given to the evidence of power described in
paragraph B18
Substantive rights
B22 An investor in assessing whether it has power considers only substantive rights
relating to an investee (held by the investor and others) For a right to be
substantive the holder must have the practical ability to exercise that right
IFRS 10
IFRS FoundationA500B23 Determining whether rights are substantive requires judgement taking into
account all facts and circumstances Factors to consider in making that
determination include but are not limited to
(a) Whether there are any barriers (economic or otherwise) that prevent the
holder (or holders) from exercising the rights Examples of such barriers
include but are not limited to
(i) financial penalties and incentives that would prevent (or deter)
the holder from exercising its rights
(ii) an exercise or conversion price that creates a financial barrier
that would prevent (or deter) the holder from exercising its
rights
(iii) terms and conditions that make it unlikely that the rights would
be exercised for example conditions that narrowly limit the
timing of their exercise
(iv) the absence of an explicit reasonable mechanism in the
founding documents of an investee or in applicable laws or
regulations that would allow the holder to exercise its rights
(v) the inability of the holder of the rights to obtain the information
necessary to exercise its rights
(vi) operational barriers or incentives that would prevent (or deter)
the holder from exercising its rights (eg the absence of other
managers willing or able to provide specialised services or
provide the services and take on other interests held by the
incumbent manager)
(vii) legal or regulatory requirements that prevent the holder from
exercising its rights (eg where a foreign investor is prohibited
from exercising its rights)
(b) When the exercise of rights requires the agreement of more than one
party or when the rights are held by more than one party whether a
mechanism is in place that provides those parties with the practical
ability to exercise their rights collectively if they choose to do so The
lack of such a mechanism is an indicator that the rights may not be
substantive The more parties that are required to agree to exercise the
rights the less likely it is that those rights are substantive However a
board of directors whose members are independent of the decision
maker may serve as a mechanism for numerous investors to act
collectively in exercising their rights Therefore removal rights
exercisable by an independent board of directors are more likely to be
substantive than if the same rights were exercisable individually by a
large number of investors
(c) Whether the party or parties that hold the rights would benefit from the
exercise of those rights For example the holder of potential voting
rights in an investee (see paragraphs B47–B50) shall consider the exercise
or conversion price of the instrument The terms and conditions of
potential voting rights are more likely to be substantive when the
IFRS 10
IFRS Foundation A501instrument is in the money or the investor would benefit for other
reasons (eg by realising synergies between the investor and the investee)
from the exercise or conversion of the instrument
B24 To be substantive rights also need to be exercisable when decisions about the
direction of the relevant activities need to be made Usually to be substantive
the rights need to be currently exercisable However sometimes rights can be
substantive even though the rights are not currently exercisable
Application examples
Example 3
The investee has annual shareholder meetings at which decisions to direct
the relevant activities are made The next scheduled shareholders’ meeting is
in eight months However shareholders that individually or collectively
hold at least 5 per cent of the voting rights can call a special meeting to
change the existing policies over the relevant activities but a requirement to
give notice to the other shareholders means that such a meeting cannot be
held for at least 30 days Policies over the relevant activities can be changed
only at special or scheduled shareholders’ meetings This includes the
approval of material sales of assets as well as the making or disposing of
significant investments
The above fact pattern applies to examples 3A–3D described below Each
example is considered in isolation
Example 3A
An investor holds a majority of the voting rights in the investee The
investor’s voting rights are substantive because the investor is able to make
decisions about the direction of the relevant activities when they need to be
made The fact that it takes 30 days before the investor can exercise its
voting rights does not stop the investor from having the current ability to
direct the relevant activities from the moment the investor acquires the
shareholding
Example 3B
An investor is party to a forward contract to acquire the majority of shares in
the investee The forward contract’s settlement date is in 25 days The
existing shareholders are unable to change the existing policies over the
relevant activities because a special meeting cannot be held for at least
30 days at which point the forward contract will have been settled Thus
the investor has rights that are essentially equivalent to the majority
shareholder in example 3A above (ie the investor holding the forward
contract can make decisions about the direction of the relevant activities
when they need to be made) The investor’s forward contract is a substantive
right that gives the investor the current ability to direct the relevant
activities even before the forward contract is settled
continued
IFRS 10
IFRS FoundationA502continued
Application examples
Example 3C
An investor holds a substantive option to acquire the majority of shares in
the investee that is exercisable in 25 days and is deeply in the money The
same conclusion would be reached as in example 3B
Example 3D
An investor is party to a forward contract to acquire the majority of shares in
the investee with no other related rights over the investee The forward
contract’s settlement date is in six months In contrast to the examples
above the investor does not have the current ability to direct the relevant
activities The existing shareholders have the current ability to direct the
relevant activities because they can change the existing policies over the
relevant activities before the forward contract is settled
B25 Substantive rights exercisable by other parties can prevent an investor from
controlling the investee to which those rights relate Such substantive rights do
not require the holders to have the ability to initiate decisions As long as the
rights are not merely protective (see paragraphs B26–B28) substantive rights
held by other parties may prevent the investor from controlling the investee
even if the rights give the holders only the current ability to approve or block
decisions that relate to the relevant activities
Protective rights
B26 In evaluating whether rights give an investor power over an investee the
investor shall assess whether its rights and rights held by others are protective
rights Protective rights relate to fundamental changes to the activities of an
investee or apply in exceptional circumstances However not all rights that
apply in exceptional circumstances or are contingent on events are protective
(see paragraphs B13 and B53)
B27 Because protective rights are designed to protect the interests of their holder
without giving that party power over the investee to which those rights relate
an investor that holds only protective rights cannot have power or prevent
another party from having power over an investee (see paragraph 14)
B28 Examples of protective rights include but are not limited to
(a) a lender’s right to restrict a borrower from undertaking activities that
could significantly change the credit risk of the borrower to the
detriment of the lender
(b) the right of a party holding a noncontrolling interest in an investee to
approve capital expenditure greater than that required in the ordinary
course of business or to approve the issue of equity or debt instruments
(c) the right of a lender to seize the assets of a borrower if the borrower fails
to meet specified loan repayment conditions
IFRS 10
IFRS Foundation A503Franchises
B29 A franchise agreement for which the investee is the franchisee often gives the
franchisor rights that are designed to protect the franchise brand Franchise
agreements typically give franchisors some decisionmaking rights with respect
to the operations of the franchisee
B30 Generally franchisors’ rights do not restrict the ability of parties other than the
franchisor to make decisions that have a significant effect on the franchisee’s
returns Nor do the rights of the franchisor in franchise agreements necessarily
give the franchisor the current ability to direct the activities that significantly
affect the franchisee’s returns
B31 It is necessary to distinguish between having the current ability to make
decisions that significantly affect the franchisee’s returns and having the ability
to make decisions that protect the franchise brand The franchisor does not
have power over the franchisee if other parties have existing rights that give
them the current ability to direct the relevant activities of the franchisee
B32 By entering into the franchise agreement the franchisee has made a unilateral
decision to operate its business in accordance with the terms of the franchise
agreement but for its own account
B33 Control over such fundamental decisions as the legal form of the franchisee and
its funding structure may be determined by parties other than the franchisor
and may significantly affect the returns of the franchisee The lower the level of
financial support provided by the franchisor and the lower the franchisor’s
exposure to variability of returns from the franchisee the more likely it is that
the franchisor has only protective rights
Voting rights
B34 Often an investor has the current ability through voting or similar rights to
direct the relevant activities An investor considers the requirements in this
section (paragraphs B35–B50) if the relevant activities of an investee are directed
through voting rights
Power with a majority of the voting rights
B35 An investor that holds more than half of the voting rights of an investee has
power in the following situations unless paragraph B36 or paragraph B37
applies
(a) the relevant activities are directed by a vote of the holder of the majority
of the voting rights or
(b) a majority of the members of the governing body that directs the
relevant activities are appointed by a vote of the holder of the majority of
the voting rights
Majority of the voting rights but no power
B36 For an investor that holds more than half of the voting rights of an investee to
have power over an investee the investor’s voting rights must be substantive in
accordance with paragraphs B22–B25 and must provide the investor with the
IFRS 10
IFRS FoundationA504current ability to direct the relevant activities which often will be through
determining operating and financing policies If another entity has existing
rights that provide that entity with the right to direct the relevant activities and
that entity is not an agent of the investor the investor does not have power over
the investee
B37 An investor does not have power over an investee even though the investor
holds the majority of the voting rights in the investee when those voting rights
are not substantive For example an investor that has more than half of the
voting rights in an investee cannot have power if the relevant activities are
subject to direction by a government court administrator receiver liquidator
or regulator
Power without a majority of the voting rights
B38 An investor can have power even if it holds less than a majority of the voting
rights of an investee An investor can have power with less than a majority of
the voting rights of an investee for example through
(a) a contractual arrangement between the investor and other vote holders
(see paragraph B39)
(b) rights arising from other contractual arrangements (see paragraph B40)
(c) the investor’s voting rights (see paragraphs B41–B45)
(d) potential voting rights (see paragraphs B47–B50) or
(e) a combination of (a)–(d)
Contractual arrangement with other vote holders
B39 A contractual arrangement between an investor and other vote holders can give
the investor the right to exercise voting rights sufficient to give the investor
power even if the investor does not have voting rights sufficient to give it power
without the contractual arrangement However a contractual arrangement
might ensure that the investor can direct enough other vote holders on how to
vote to enable the investor to make decisions about the relevant activities
Rights from other contractual arrangements
B40 Other decisionmaking rights in combination with voting rights can give an
investor the current ability to direct the relevant activities For example the
rights specified in a contractual arrangement in combination with voting rights
may be sufficient to give an investor the current ability to direct the
manufacturing processes of an investee or to direct other operating or financing
activities of an investee that significantly affect the investee’s returns However
in the absence of any other rights economic dependence of an investee on the
investor (such as relations of a supplier with its main customer) does not lead to
the investor having power over the investee
The investor’s voting rights
B41 An investor with less than a majority of the voting rights has rights that are
sufficient to give it power when the investor has the practical ability to direct
the relevant activities unilaterally
IFRS 10
IFRS Foundation A505B42 When assessing whether an investor’s voting rights are sufficient to give it
power an investor considers all facts and circumstances including
(a) the size of the investor’s holding of voting rights relative to the size and
dispersion of holdings of the other vote holders noting that
(i) the more voting rights an investor holds the more likely the
investor is to have existing rights that give it the current ability
to direct the relevant activities
(ii) the more voting rights an investor holds relative to other vote
holders the more likely the investor is to have existing rights
that give it the current ability to direct the relevant activities
(iii) the more parties that would need to act together to outvote the
investor the more likely the investor is to have existing rights
that give it the current ability to direct the relevant activities
(b) potential voting rights held by the investor other vote holders or other
parties (see paragraphs B47–B50)
(c) rights arising from other contractual arrangements (see paragraph B40)
and
(d) any additional facts and circumstances that indicate the investor has or
does not have the current ability to direct the relevant activities at the
time that decisions need to be made including voting patterns at
previous shareholders’ meetings
B43 When the direction of relevant activities is determined by majority vote and an
investor holds significantly more voting rights than any other vote holder or
organised group of vote holders and the other shareholdings are widely
dispersed it may be clear after considering the factors listed in paragraph
B42(a)–(c) alone that the investor has power over the investee
Application examples
Example 4
An investor acquires 48 per cent of the voting rights of an investee The
remaining voting rights are held by thousands of shareholders none
individually holding more than 1 per cent of the voting rights None of the
shareholders has any arrangements to consult any of the others or make
collective decisions When assessing the proportion of voting rights to
acquire on the basis of the relative size of the other shareholdings the
investor determined that a 48 per cent interest would be sufficient to give it
control In this case on the basis of the absolute size of its holding and the
relative size of the other shareholdings the investor concludes that it has a
sufficiently dominant voting interest to meet the power criterion without the
need to consider any other evidence of power
continued
IFRS 10
IFRS FoundationA506continued
Application examples
Example 5
Investor A holds 40 per cent of the voting rights of an investee and twelve
other investors each hold 5 per cent of the voting rights of the investee A
shareholder agreement grants investor A the right to appoint remove and
set the remuneration of management responsible for directing the relevant
activities To change the agreement a twothirds majority vote of the
shareholders is required In this case investor A concludes that the absolute
size of the investor’s holding and the relative size of the other shareholdings
alone are not conclusive in determining whether the investor has rights
sufficient to give it power However investor A determines that its
contractual right to appoint remove and set the remuneration of
management is sufficient to conclude that it has power over the investee
The fact that investor A might not have exercised this right or the likelihood
of investor A exercising its right to select appoint or remove management
shall not be considered when assessing whether investor A has power
B44 In other situations it may be clear after considering the factors listed in
paragraph B42(a)–(c) alone that an investor does not have power
Application example
Example 6
Investor A holds 45 per cent of the voting rights of an investee Two other
investors each hold 26 per cent of the voting rights of the investee The
remaining voting rights are held by three other shareholders each holding
1 per cent There are no other arrangements that affect decisionmaking In
this case the size of investor A’s voting interest and its size relative to the
other shareholdings are sufficient to conclude that investor A does not have
power Only two other investors would need to cooperate to be able to
prevent investor A from directing the relevant activities of the investee
B45 However the factors listed in paragraph B42(a)–(c) alone may not be conclusive
If an investor having considered those factors is unclear whether it has power
it shall consider additional facts and circumstances such as whether other
shareholders are passive in nature as demonstrated by voting patterns at
previous shareholders’ meetings This includes the assessment of the factors set
out in paragraph B18 and the indicators in paragraphs B19 and B20 The fewer
voting rights the investor holds and the fewer parties that would need to act
together to outvote the investor the more reliance would be placed on the
additional facts and circumstances to assess whether the investor’s rights are
sufficient to give it power When the facts and circumstances in paragraphs
B18–B20 are considered together with the investor’s rights greater weight shall
be given to the evidence of power in paragraph B18 than to the indicators of
power in paragraphs B19 and B20
IFRS 10
IFRS Foundation A507Application examples
Example 7
An investor holds 45 per cent of the voting rights of an investee Eleven
other shareholders each hold 5 per cent of the voting rights of the investee
None of the shareholders has contractual arrangements to consult any of the
others or make collective decisions In this case the absolute size of the
investor’s holding and the relative size of the other shareholdings alone are
not conclusive in determining whether the investor has rights sufficient to
give it power over the investee Additional facts and circumstances that may
provide evidence that the investor has or does not have power shall be
considered
Example 8
An investor holds 35 per cent of the voting rights of an investee Three other
shareholders each hold 5 per cent of the voting rights of the investee The
remaining voting rights are held by numerous other shareholders none
individually holding more than 1 per cent of the voting rights None of the
shareholders has arrangements to consult any of the others or make
collective decisions Decisions about the relevant activities of the investee
require the approval of a majority of votes cast at relevant shareholders’
meetings—75 per cent of the voting rights of the investee have been cast at
recent relevant shareholders’ meetings In this case the active participation
of the other shareholders at recent shareholders’ meetings indicates that the
investor would not have the practical ability to direct the relevant activities
unilaterally regardless of whether the investor has directed the relevant
activities because a sufficient number of other shareholders voted in the
same way as the investor
B46 If it is not clear having considered the factors listed in paragraph B42(a)–(d) that
the investor has power the investor does not control the investee
Potential voting rights
B47 When assessing control an investor considers its potential voting rights as well
as potential voting rights held by other parties to determine whether it has
power Potential voting rights are rights to obtain voting rights of an investee
such as those arising from convertible instruments or options including
forward contracts Those potential voting rights are considered only if the rights
are substantive (see paragraphs B22–B25)
B48 When considering potential voting rights an investor shall consider the purpose
and design of the instrument as well as the purpose and design of any other
involvement the investor has with the investee This includes an assessment of
the various terms and conditions of the instrument as well as the investor’s
apparent expectations motives and reasons for agreeing to those terms and
conditions
B49 If the investor also has voting or other decisionmaking rights relating to the
investee’s activities the investor assesses whether those rights in combination
with potential voting rights give the investor power
IFRS 10
IFRS FoundationA508B50 Substantive potential voting rights alone or in combination with other rights
can give an investor the current ability to direct the relevant activities For
example this is likely to be the case when an investor holds 40 per cent of the
voting rights of an investee and in accordance with paragraph B23 holds
substantive rights arising from options to acquire a further 20 per cent of the
voting rights
Application examples
Example 9
Investor A holds 70 per cent of the voting rights of an investee Investor B
has 30 per cent of the voting rights of the investee as well as an option to
acquire half of investor A’s voting rights The option is exercisable for the
next two years at a fixed price that is deeply out of the money (and is
expected to remain so for that twoyear period) Investor A has been
exercising its votes and is actively directing the relevant activities of the
investee In such a case investor A is likely to meet the power criterion
because it appears to have the current ability to direct the relevant activities
Although investor B has currently exercisable options to purchase additional
voting rights (that if exercised would give it a majority of the voting rights
in the investee) the terms and conditions associated with those options are
such that the options are not considered substantive
Example 10
Investor A and two other investors each hold a third of the voting rights of
an investee The investee’s business activity is closely related to investor A
In addition to its equity instruments investor A also holds debt instruments
that are convertible into ordinary shares of the investee at any time for a
fixed price that is out of the money (but not deeply out of the money) If the
debt were converted investor A would hold 60 per cent of the voting rights
of the investee Investor A would benefit from realising synergies if the debt
instruments were converted into ordinary shares Investor A has power over
the investee because it holds voting rights of the investee together with
substantive potential voting rights that give it the current ability to direct
the relevant activities
Power when voting or similar rights do not have a significant
effect on the investee’s returns
B51 In assessing the purpose and design of an investee (see paragraphs B5–B8) an
investor shall consider the involvement and decisions made at the investee’s
inception as part of its design and evaluate whether the transaction terms and
features of the involvement provide the investor with rights that are sufficient
to give it power Being involved in the design of an investee alone is not
sufficient to give an investor control However involvement in the design may
indicate that the investor had the opportunity to obtain rights that are sufficient
to give it power over the investee
B52 In addition an investor shall consider contractual arrangements such as call
rights put rights and liquidation rights established at the investee’s inception
IFRS 10
IFRS Foundation A509When these contractual arrangements involve activities that are closely related
to the investee then these activities are in substance an integral part of the
investee’s overall activities even though they may occur outside the legal
boundaries of the investee Therefore explicit or implicit decisionmaking
rights embedded in contractual arrangements that are closely related to the
investee need to be considered as relevant activities when determining power
over the investee
B53 For some investees relevant activities occur only when particular circumstances
arise or events occur The investee may be designed so that the direction of its
activities and its returns are predetermined unless and until those particular
circumstances arise or events occur In this case only the decisions about the
investee’s activities when those circumstances or events occur can significantly
affect its returns and thus be relevant activities The circumstances or events
need not have occurred for an investor with the ability to make those decisions
to have power The fact that the right to make decisions is contingent on
circumstances arising or an event occurring does not in itself make those rights
protective
Application examples
Example 11
An investee’s only business activity as specified in its founding documents is
to purchase receivables and service them on a daytoday basis for its
investors The servicing on a daytoday basis includes the collection and
passing on of principal and interest payments as they fall due Upon default
of a receivable the investee automatically puts the receivable to an investor
as agreed separately in a put agreement between the investor and the
investee The only relevant activity is managing the receivables upon default
because it is the only activity that can significantly affect the investee’s
returns Managing the receivables before default is not a relevant activity
because it does not require substantive decisions to be made that could
significantly affect the investee’s returns—the activities before default are
predetermined and amount only to collecting cash flows as they fall due and
passing them on to investors Therefore only the investor’s right to manage
the assets upon default should be considered when assessing the overall
activities of the investee that significantly affect the investee’s returns
In this example the design of the investee ensures that the investor has
decisionmaking authority over the activities that significantly affect the
returns at the only time that such decisionmaking authority is required
The terms of the put agreement are integral to the overall transaction and
the establishment of the investee Therefore the terms of the put agreement
together with the founding documents of the investee lead to the conclusion
that the investor has power over the investee even though the investor takes
ownership of the receivables only upon default and manages the defaulted
receivables outside the legal boundaries of the investee
continued
IFRS 10
IFRS FoundationA510continued
Application examples
Example 12
The only assets of an investee are receivables When the purpose and design
of the investee are considered it is determined that the only relevant activity
is managing the receivables upon default The party that has the ability to
manage the defaulting receivables has power over the investee irrespective
of whether any of the borrowers have defaulted
B54 An investor may have an explicit or implicit commitment to ensure that an
investee continues to operate as designed Such a commitment may increase the
investor’s exposure to variability of returns and thus increase the incentive for
the investor to obtain rights sufficient to give it power Therefore a commitment
to ensure that an investee operates as designed may be an indicator that the
investor has power but does not by itself give an investor power nor does it
prevent another party from having power
Exposure or rights to variable returns from an investee
B55 When assessing whether an investor has control of an investee the investor
determines whether it is exposed or has rights to variable returns from its
involvement with the investee
B56 Variable returns are returns that are not fixed and have the potential to vary as
a result of the performance of an investee Variable returns can be only positive
only negative or both positive and negative (see paragraph 15) An investor
assesses whether returns from an investee are variable and how variable those
returns are on the basis of the substance of the arrangement and regardless of
the legal form of the returns For example an investor can hold a bond with
fixed interest payments The fixed interest payments are variable returns for the
purpose of this IFRS because they are subject to default risk and they expose the
investor to the credit risk of the issuer of the bond The amount of variability
(ie how variable those returns are) depends on the credit risk of the bond
Similarly fixed performance fees for managing an investee’s assets are variable
returns because they expose the investor to the performance risk of the investee
The amount of variability depends on the investee’s ability to generate sufficient
income to pay the fee
B57 Examples of returns include
(a) dividends other distributions of economic benefits from an investee (eg
interest from debt securities issued by the investee) and changes in the
value of the investor’s investment in that investee
(b) remuneration for servicing an investee’s assets or liabilities fees and
exposure to loss from providing credit or liquidity support residual
interests in the investee’s assets and liabilities on liquidation of that
investee tax benefits and access to future liquidity that an investor has
from its involvement with an investee
IFRS 10
IFRS Foundation A511(c) returns that are not available to other interest holders For example an
investor might use its assets in combination with the assets of the
investee such as combining operating functions to achieve economies of
scale cost savings sourcing scarce products gaining access to
proprietary knowledge or limiting some operations or assets to enhance
the value of the investor’s other assets
Link between power and returns
Delegated power
B58 When an investor with decisionmaking rights (a decision maker) assesses
whether it controls an investee it shall determine whether it is a principal or an
agent An investor shall also determine whether another entity with
decisionmaking rights is acting as an agent for the investor An agent is a party
primarily engaged to act on behalf and for the benefit of another party or parties
(the principal(s)) and therefore does not control the investee when it exercises its
decisionmaking authority (see paragraphs 17 and 18) Thus sometimes a
principal’s power may be held and exercisable by an agent but on behalf of the
principal A decision maker is not an agent simply because other parties can
benefit from the decisions that it makes
B59 An investor may delegate its decisionmaking authority to an agent on some
specific issues or on all relevant activities When assessing whether it controls
an investee the investor shall treat the decisionmaking rights delegated to its
agent as held by the investor directly In situations where there is more than
one principal each of the principals shall assess whether it has power over the
investee by considering the requirements in paragraphs B5–B54 Paragraphs
B60–B72 provide guidance on determining whether a decision maker is an agent
or a principal
B60 A decision maker shall consider the overall relationship between itself the
investee being managed and other parties involved with the investee in
particular all the factors below in determining whether it is an agent
(a) the scope of its decisionmaking authority over the investee (paragraphs
B62 and B63)
(b) the rights held by other parties (paragraphs B64–B67)
(c) the remuneration to which it is entitled in accordance with the
remuneration agreement(s) (paragraphs B68–B70)
(d) the decision maker’s exposure to variability of returns from other
interests that it holds in the investee (paragraphs B71 and B72)
Different weightings shall be applied to each of the factors on the basis of
particular facts and circumstances
B61 Determining whether a decision maker is an agent requires an evaluation of all
the factors listed in paragraph B60 unless a single party holds substantive rights
to remove the decision maker (removal rights) and can remove the decision
maker without cause (see paragraph B65)
IFRS 10
IFRS FoundationA512The scope of the decisionmaking authority
B62 The scope of a decision maker’s decisionmaking authority is evaluated by
considering
(a) the activities that are permitted according to the decisionmaking
agreement(s) and specified by law and
(b) the discretion that the decision maker has when making decisions about
those activities
B63 A decision maker shall consider the purpose and design of the investee the risks
to which the investee was designed to be exposed the risks it was designed to
pass on to the parties involved and the level of involvement the decision maker
had in the design of an investee For example if a decision maker is significantly
involved in the design of the investee (including in determining the scope of
decisionmaking authority) that involvement may indicate that the decision
maker had the opportunity and incentive to obtain rights that result in the
decision maker having the ability to direct the relevant activities
Rights held by other parties
B64 Substantive rights held by other parties may affect the decision maker’s ability
to direct the relevant activities of an investee Substantive removal or other
rights may indicate that the decision maker is an agent
B65 When a single party holds substantive removal rights and can remove the
decision maker without cause this in isolation is sufficient to conclude that
the decision maker is an agent If more than one party holds such rights (and no
individual party can remove the decision maker without the agreement of other
parties) those rights are not in isolation conclusive in determining that a
decision maker acts primarily on behalf and for the benefit of others In
addition the greater the number of parties required to act together to exercise
rights to remove a decision maker and the greater the magnitude of and
variability associated with the decision maker’s other economic interests
(ie remuneration and other interests) the less the weighting that shall be placed
on this factor
B66 Substantive rights held by other parties that restrict a decision maker’s
discretion shall be considered in a similar manner to removal rights when
evaluating whether the decision maker is an agent For example a decision
maker that is required to obtain approval from a small number of other parties
for its actions is generally an agent (See paragraphs B22–B25 for additional
guidance on rights and whether they are substantive)
B67 Consideration of the rights held by other parties shall include an assessment of
any rights exercisable by an investee’s board of directors (or other governing
body) and their effect on the decisionmaking authority (see paragraph B23(b))
Remuneration
B68 The greater the magnitude of and variability associated with the decision
maker’s remuneration relative to the returns expected from the activities of the
investee the more likely the decision maker is a principal
IFRS 10
IFRS Foundation A513B69 In determining whether it is a principal or an agent the decision maker shall
also consider whether the following conditions exist
(a) The remuneration of the decision maker is commensurate with the
services provided
(b) The remuneration agreement includes only terms conditions or
amounts that are customarily present in arrangements for similar
services and level of skills negotiated on an arm’s length basis
B70 A decision maker cannot be an agent unless the conditions set out in
paragraph B69(a) and (b) are present However meeting those conditions in
isolation is not sufficient to conclude that a decision maker is an agent
Exposure to variability of returns from other interests
B71 A decision maker that holds other interests in an investee (eg investments in the
investee or provides guarantees with respect to the performance of the investee)
shall consider its exposure to variability of returns from those interests in
assessing whether it is an agent Holding other interests in an investee indicates
that the decision maker may be a principal
B72 In evaluating its exposure to variability of returns from other interests in the
investee a decision maker shall consider the following
(a) the greater the magnitude of and variability associated with its
economic interests considering its remuneration and other interests in
aggregate the more likely the decision maker is a principal
(b) whether its exposure to variability of returns is different from that of the
other investors and if so whether this might influence its actions For
example this might be the case when a decision maker holds
subordinated interests in or provides other forms of credit enhancement
to an investee
The decision maker shall evaluate its exposure relative to the total variability of
returns of the investee This evaluation is made primarily on the basis of returns
expected from the activities of the investee but shall not ignore the decision
maker’s maximum exposure to variability of returns of the investee through
other interests that the decision maker holds
IFRS 10
IFRS FoundationA514Application examples
Example 13
A decision maker (fund manager) establishes markets and manages a
publicly traded regulated fund according to narrowly defined parameters set
out in the investment mandate as required by its local laws and regulations
The fund was marketed to investors as an investment in a diversified
portfolio of equity securities of publicly traded entities Within the defined
parameters the fund manager has discretion about the assets in which to
invest The fund manager has made a 10 per cent pro rata investment in the
fund and receives a marketbased fee for its services equal to 1 per cent of the
net asset value of the fund The fees are commensurate with the services
provided The fund manager does not have any obligation to fund losses
beyond its 10 per cent investment The fund is not required to establish and
has not established an independent board of directors The investors do not
hold any substantive rights that would affect the decisionmaking authority
of the fund manager but can redeem their interests within particular limits
set by the fund
Although operating within the parameters set out in the investment
mandate and in accordance with the regulatory requirements the fund
manager has decisionmaking rights that give it the current ability to direct
the relevant activities of the fund—the investors do not hold substantive
rights that could affect the fund manager’s decisionmaking authority The
fund manager receives a marketbased fee for its services that is
commensurate with the services provided and has also made a pro rata
investment in the fund The remuneration and its investment expose the
fund manager to variability of returns from the activities of the fund without
creating exposure that is of such significance that it indicates that the fund
manager is a principal
In this example consideration of the fund manager’s exposure to variability
of returns from the fund together with its decisionmaking authority within
restricted parameters indicates that the fund manager is an agent Thus the
fund manager concludes that it does not control the fund
Example 14
A decision maker establishes markets and manages a fund that provides
investment opportunities to a number of investors The decision maker
(fund manager) must make decisions in the best interests of all investors and
in accordance with the fund’s governing agreements Nonetheless the fund
manager has wide decisionmaking discretion The fund manager receives a
marketbased fee for its services equal to 1 per cent of assets under
management and 20 per cent of all the fund’s profits if a specified profit
level is achieved The fees are commensurate with the services provided
continued
IFRS 10
IFRS Foundation A515continued
Application examples
Although it must make decisions in the best interests of all investors the
fund manager has extensive decisionmaking authority to direct the relevant
activities of the fund The fund manager is paid fixed and
performancerelated fees that are commensurate with the services provided
In addition the remuneration aligns the interests of the fund manager with
those of the other investors to increase the value of the fund without
creating exposure to variability of returns from the activities of the fund that
is of such significance that the remuneration when considered in isolation
indicates that the fund manager is a principal
The above fact pattern and analysis applies to examples 14A–14C described
below Each example is considered in isolation
Example 14A
The fund manager also has a 2 per cent investment in the fund that aligns
its interests with those of the other investors The fund manager does not
have any obligation to fund losses beyond its 2 per cent investment The
investors can remove the fund manager by a simple majority vote but only
for breach of contract
The fund manager’s 2 per cent investment increases its exposure to
variability of returns from the activities of the fund without creating
exposure that is of such significance that it indicates that the fund manager
is a principal The other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for
breach of contract In this example although the fund manager has
extensive decisionmaking authority and is exposed to variability of returns
from its interest and remuneration the fund manager’s exposure indicates
that the fund manager is an agent Thus the fund manager concludes that
it does not control the fund
Example 14B
The fund manager has a more substantial pro rata investment in the fund
but does not have any obligation to fund losses beyond that investment The
investors can remove the fund manager by a simple majority vote but only
for breach of contract
continued
IFRS 10
IFRS FoundationA516continued
Application examples
In this example the other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for
breach of contract Although the fund manager is paid fixed and
performancerelated fees that are commensurate with the services provided
the combination of the fund manager’s investment together with its
remuneration could create exposure to variability of returns from the
activities of the fund that is of such significance that it indicates that the
fund manager is a principal The greater the magnitude of and variability
associated with the fund manager’s economic interests (considering its
remuneration and other interests in aggregate) the more emphasis the fund
manager would place on those economic interests in the analysis and the
more likely the fund manager is a principal
For example having considered its remuneration and the other factors the
fund manager might consider a 20 per cent investment to be sufficient to
conclude that it controls the fund However in different circumstances (ie if
the remuneration or other factors are different) control may arise when the
level of investment is different
Example 14C
The fund manager has a 20 per cent pro rata investment in the fund but
does not have any obligation to fund losses beyond its 20 per cent
investment The fund has a board of directors all of whose members are
independent of the fund manager and are appointed by the other investors
The board appoints the fund manager annually If the board decided not to
renew the fund manager’s contract the services performed by the fund
manager could be performed by other managers in the industry
Although the fund manager is paid fixed and performancerelated fees that
are commensurate with the services provided the combination of the fund
manager’s 20 per cent investment together with its remuneration creates
exposure to variability of returns from the activities of the fund that is of
such significance that it indicates that the fund manager is a principal
However the investors have substantive rights to remove the fund
manager—the board of directors provides a mechanism to ensure that the
investors can remove the fund manager if they decide to do so
In this example the fund manager places greater emphasis on the
substantive removal rights in the analysis Thus although the fund manager
has extensive decisionmaking authority and is exposed to variability of
returns of the fund from its remuneration and investment the substantive
rights held by the other investors indicate that the fund manager is an agent
Thus the fund manager concludes that it does not control the fund
continued
IFRS 10
IFRS Foundation A517continued
Application examples
Example 15
An investee is created to purchase a portfolio of fixed rate assetbacked
securities funded by fixed rate debt instruments and equity instruments
The equity instruments are designed to provide first loss protection to the
debt investors and receive any residual returns of the investee The
transaction was marketed to potential debt investors as an investment in a
portfolio of assetbacked securities with exposure to the credit risk associated
with the possible default of the issuers of the assetbacked securities in the
portfolio and to the interest rate risk associated with the management of the
portfolio On formation the equity instruments represent 10 per cent of the
value of the assets purchased A decision maker (the asset manager) manages
the active asset portfolio by making investment decisions within the
parameters set out in the investee’s prospectus For those services the asset
manager receives a marketbased fixed fee (ie 1 per cent of assets under
management) and performancerelated fees (ie 10 per cent of profits) if the
investee’s profits exceed a specified level The fees are commensurate with
the services provided The asset manager holds 35 per cent of the equity in
the investee The remaining 65 per cent of the equity and all the debt
instruments are held by a large number of widely dispersed unrelated third
party investors The asset manager can be removed without cause by a
simple majority decision of the other investors
The asset manager is paid fixed and performancerelated fees that are
commensurate with the services provided The remuneration aligns the
interests of the fund manager with those of the other investors to increase
the value of the fund The asset manager has exposure to variability of
returns from the activities of the fund because it holds 35 per cent of the
equity and from its remuneration
Although operating within the parameters set out in the investee’s
prospectus the asset manager has the current ability to make investment
decisions that significantly affect the investee’s returns—the removal rights
held by the other investors receive little weighting in the analysis because
those rights are held by a large number of widely dispersed investors In this
example the asset manager places greater emphasis on its exposure to
variability of returns of the fund from its equity interest which is
subordinate to the debt instruments Holding 35 per cent of the equity
creates subordinated exposure to losses and rights to returns of the investee
which are of such significance that it indicates that the asset manager is a
principal Thus the asset manager concludes that it controls the investee
continued
IFRS 10
IFRS FoundationA518continued
Application examples
Example 16
A decision maker (the sponsor) sponsors a multiseller conduit which issues
shortterm debt instruments to unrelated third party investors The
transaction was marketed to potential investors as an investment in a
portfolio of highly rated mediumterm assets with minimal exposure to the
credit risk associated with the possible default by the issuers of the assets in
the portfolio Various transferors sell high quality mediumterm asset
portfolios to the conduit Each transferor services the portfolio of assets that
it sells to the conduit and manages receivables on default for a marketbased
servicing fee Each transferor also provides first loss protection against credit
losses from its asset portfolio through overcollateralisation of the assets
transferred to the conduit The sponsor establishes the terms of the conduit
and manages the operations of the conduit for a marketbased fee The fee is
commensurate with the services provided The sponsor approves the sellers
permitted to sell to the conduit approves the assets to be purchased by the
conduit and makes decisions about the funding of the conduit The sponsor
must act in the best interests of all investors
The sponsor is entitled to any residual return of the conduit and also
provides credit enhancement and liquidity facilities to the conduit The
credit enhancement provided by the sponsor absorbs losses of up to 5 per
cent of all of the conduit’s assets after losses are absorbed by the transferors
The liquidity facilities are not advanced against defaulted assets The
investors do not hold substantive rights that could affect the decisionmaking
authority of the sponsor
Even though the sponsor is paid a marketbased fee for its services that is
commensurate with the services provided the sponsor has exposure to
variability of returns from the activities of the conduit because of its rights
to any residual returns of the conduit and the provision of credit
enhancement and liquidity facilities (ie the conduit is exposed to liquidity
risk by using shortterm debt instruments to fund mediumterm assets) Even
though each of the transferors has decisionmaking rights that affect the
value of the assets of the conduit the sponsor has extensive decisionmaking
authority that gives it the current ability to direct the activities that most
significantly affect the conduit’s returns (ie the sponsor established the terms
of the conduit has the right to make decisions about the assets (approving
the assets purchased and the transferors of those assets) and the funding of
the conduit (for which new investment must be found on a regular basis))
The right to residual returns of the conduit and the provision of credit
enhancement and liquidity facilities expose the sponsor to variability of
returns from the activities of the conduit that is different from that of the
other investors Accordingly that exposure indicates that the sponsor is a
principal and thus the sponsor concludes that it controls the conduit The
sponsor’s obligation to act in the best interest of all investors does not
prevent the sponsor from being a principal
IFRS 10
IFRS Foundation A519Relationship with other parties
B73 When assessing control an investor shall consider the nature of its relationship
with other parties and whether those other parties are acting on the investor’s
behalf (ie they are de facto agents’) The determination of whether other parties
are acting as de facto agents requires judgement considering not only the
nature of the relationship but also how those parties interact with each other
and the investor
B74 Such a relationship need not involve a contractual arrangement A party is a de
facto agent when the investor has or those that direct the activities of the
investor have the ability to direct that party to act on the investor’s behalf In
these circumstances the investor shall consider its de facto agent’s
decisionmaking rights and its indirect exposure or rights to variable returns
through the de facto agent together with its own when assessing control of an
investee
B75 The following are examples of such other parties that by the nature of their
relationship might act as de facto agents for the investor
(a) the investor’s related parties
(b) a party that received its interest in the investee as a contribution or loan
from the investor
(c) a party that has agreed not to sell transfer or encumber its interests in
the investee without the investor’s prior approval (except for situations
in which the investor and the other party have the right of prior
approval and the rights are based on mutually agreed terms by willing
independent parties)
(d) a party that cannot finance its operations without subordinated
financial support from the investor
(e) an investee for which the majority of the members of its governing body
or for which its key management personnel are the same as those of the
investor
(f) a party that has a close business relationship with the investor such as
the relationship between a professional service provider and one of its
significant clients
Control of specified assets
B76 An investor shall consider whether it treats a portion of an investee as a deemed
separate entity and if so whether it controls the deemed separate entity
B77 An investor shall treat a portion of an investee as a deemed separate entity if and
only if the following condition is satisfied
Specified assets of the investee (and related credit enhancements if any)
are the only source of payment for specified liabilities of or specified
other interests in the investee Parties other than those with the
specified liability do not have rights or obligations related to the
specified assets or to residual cash flows from those assets In substance
none of the returns from the specified assets can be used by the
IFRS 10
IFRS FoundationA520remaining investee and none of the liabilities of the deemed separate
entity are payable from the assets of the remaining investee Thus in
substance all the assets liabilities and equity of that deemed separate
entity are ringfenced from the overall investee Such a deemed separate
entity is often called a silo’
B78 When the condition in paragraph B77 is satisfied an investor shall identify the
activities that significantly affect the returns of the deemed separate entity and
how those activities are directed in order to assess whether it has power over
that portion of the investee When assessing control of the deemed separate
entity the investor shall also consider whether it has exposure or rights to
variable returns from its involvement with that deemed separate entity and the
ability to use its power over that portion of the investee to affect the amount of
the investor’s returns
B79 If the investor controls the deemed separate entity the investor shall consolidate
that portion of the investee In that case other parties exclude that portion of
the investee when assessing control of and in consolidating the investee
Continuous assessment
B80 An investor shall reassess whether it controls an investee if facts and
circumstances indicate that there are changes to one or more of the three
elements of control listed in paragraph 7
B81 If there is a change in how power over an investee can be exercised that change
must be reflected in how an investor assesses its power over an investee For
example changes to decisionmaking rights can mean that the relevant
activities are no longer directed through voting rights but instead other
agreements such as contracts give another party or parties the current ability
to direct the relevant activities
B82 An event can cause an investor to gain or lose power over an investee without
the investor being involved in that event For example an investor can gain
power over an investee because decisionmaking rights held by another party or
parties that previously prevented the investor from controlling an investee have
lapsed
B83 An investor also considers changes affecting its exposure or rights to variable
returns from its involvement with an investee For example an investor that has
power over an investee can lose control of an investee if the investor ceases to be
entitled to receive returns or to be exposed to obligations because the investor
would fail to satisfy paragraph 7(b) (eg if a contract to receive
performancerelated fees is terminated)
B84 An investor shall consider whether its assessment that it acts as an agent or a
principal has changed Changes in the overall relationship between the investor
and other parties can mean that an investor no longer acts as an agent even
though it has previously acted as an agent and vice versa For example if
changes to the rights of the investor or of other parties occur the investor shall
reconsider its status as a principal or an agent
B85 An investor’s initial assessment of control or its status as a principal or an agent
would not change simply because of a change in market conditions (eg a change
IFRS 10
IFRS Foundation A521in the investee’s returns driven by market conditions) unless the change in
market conditions changes one or more of the three elements of control listed in
paragraph 7 or changes the overall relationship between a principal and an
agent
Determining whether an entity is an investment entity
B85A An entity shall consider all facts and circumstances when assessing whether it is
an investment entity including its purpose and design An entity that possesses
the three elements of the definition of an investment entity set out in
paragraph 27 is an investment entity Paragraphs B85B–B85M describe the
elements of the definition in more detail
Business purpose
B85B The definition of an investment entity requires that the purpose of the entity is
to invest solely for capital appreciation investment income (such as dividends
interest or rental income) or both Documents that indicate what the entity’s
investment objectives are such as the entity’s offering memorandum
publications distributed by the entity and other corporate or partnership
documents will typically provide evidence of an investment entity’s business
purpose Further evidence may include the manner in which the entity presents
itself to other parties (such as potential investors or potential investees) for
example an entity may present its business as providing mediumterm
investment for capital appreciation In contrast an entity that presents itself as
an investor whose objective is to jointly develop produce or market products
with its investees has a business purpose that is inconsistent with the business
purpose of an investment entity because the entity will earn returns from the
development production or marketing activity as well as from its investments
(see paragraph B85I)
B85C An investment entity may provide investmentrelated services (eg investment
advisory services investment management investment support and
administrative services) either directly or through a subsidiary to third parties
as well as to its investors even if those activities are substantial to the entity
subject to the entity continuing to meet the definition of an investment entity
B85D An investment entity may also participate in the following investmentrelated
activities either directly or through a subsidiary if these activities are
undertaken to maximise the investment return (capital appreciation or
investment income) from its investees and do not represent a separate
substantial business activity or a separate substantial source of income to the
investment entity
(a) providing management services and strategic advice to an investee and
(b) providing financial support to an investee such as a loan capital
commitment or guarantee
B85E If an investment entity has a subsidiary that is not itself an investment entity
and whose main purpose and activities are providing investmentrelated services
or activities that relate to the investment entity’s investment activities such as
those described in paragraphs B85C–B85D to the entity or other parties it shall
IFRS 10
IFRS FoundationA522consolidate that subsidiary in accordance with paragraph 32 If the subsidiary
that provides the investmentrelated services or activities is itself an investment
entity the investment entity parent shall measure that subsidiary at fair value
through profit or loss in accordance with paragraph 31
Exit strategies
B85F An entity’s investment plans also provide evidence of its business purpose One
feature that differentiates an investment entity from other entities is that an
investment entity does not plan to hold its investments indefinitely it holds
them for a limited period Because equity investments and nonfinancial asset
investments have the potential to be held indefinitely an investment entity
shall have an exit strategy documenting how the entity plans to realise capital
appreciation from substantially all of its equity investments and nonfinancial
asset investments An investment entity shall also have an exit strategy for any
debt instruments that have the potential to be held indefinitely for example
perpetual debt investments The entity need not document specific exit
strategies for each individual investment but shall identify different potential
strategies for different types or portfolios of investments including a
substantive time frame for exiting the investments Exit mechanisms that are
only put in place for default events such as a breach of contract or
nonperformance are not considered exit strategies for the purpose of this
assessment
B85G Exit strategies can vary by type of investment For investments in private equity
securities examples of exit strategies include an initial public offering a private
placement a trade sale of a business distributions (to investors) of ownership
interests in investees and sales of assets (including the sale of an investee’s assets
followed by a liquidation of the investee) For equity investments that are traded
in a public market examples of exit strategies include selling the investment in
a private placement or in a public market For real estate investments an
example of an exit strategy includes the sale of the real estate through
specialised property dealers or the open market
B85H An investment entity may have an investment in another investment entity that
is formed in connection with the entity for legal regulatory tax or similar
business reasons In this case the investment entity investor need not have an
exit strategy for that investment provided that the investment entity investee
has appropriate exit strategies for its investments
Earnings from investments
B85I An entity is not investing solely for capital appreciation investment income or
both if the entity or another member of the group containing the entity (ie the
group that is controlled by the investment entity’s ultimate parent) obtains or
has the objective of obtaining other benefits from the entity’s investments that
are not available to other parties that are not related to the investee Such
benefits include
(a) the acquisition use exchange or exploitation of the processes assets or
technology of an investee This would include the entity or another
group member having disproportionate or exclusive rights to acquire
IFRS 10
IFRS Foundation A523assets technology products or services of any investee for example by
holding an option to purchase an asset from an investee if the asset’s
development is deemed successful
(b) joint arrangements (as defined in IFRS 11) or other agreements between
the entity or another group member and an investee to develop
produce market or provide products or services
(c) financial guarantees or assets provided by an investee to serve as
collateral for borrowing arrangements of the entity or another group
member (however an investment entity would still be able to use an
investment in an investee as collateral for any of its borrowings)
(d) an option held by a related party of the entity to purchase from that
entity or another group member an ownership interest in an investee of
the entity
(e) except as described in paragraph B85J transactions between the entity or
another group member and an investee that
(i) are on terms that are unavailable to entities that are not related
parties of either the entity another group member or the
investee
(ii) are not at fair value or
(iii) represent a substantial portion of the investee’s or the entity’s
business activity including business activities of other group
entities
B85J An investment entity may have a strategy to invest in more than one investee in
the same industry market or geographical area in order to benefit from
synergies that increase the capital appreciation and investment income from
those investees Notwithstanding paragraph B85I(e) an entity is not disqualified
from being classified as an investment entity merely because such investees
trade with each other
Fair value measurement
B85K An essential element of the definition of an investment entity is that it measures
and evaluates the performance of substantially all of its investments on a fair
value basis because using fair value results in more relevant information than
for example consolidating its subsidiaries or using the equity method for its
interests in associates or joint ventures In order to demonstrate that it meets
this element of the definition an investment entity
(a) provides investors with fair value information and measures
substantially all of its investments at fair value in its financial statements
whenever fair value is required or permitted in accordance with IFRSs
and
(b) reports fair value information internally to the entity’s key management
personnel (as defined in IAS 24) who use fair value as the primary
measurement attribute to evaluate the performance of substantially all
of its investments and to make investment decisions
IFRS 10
IFRS FoundationA524B85L In order to meet the requirement in B85K(a) an investment entity would
(a) elect to account for any investment property using the fair value model
in IAS 40 Investment Property
(b) elect the exemption from applying the equity method in IAS 28 for its
investments in associates and joint ventures and
(c) measure its financial assets at fair value using the requirements in
IFRS 9
B85M An investment entity may have some noninvestment assets such as a head
office property and related equipment and may also have financial liabilities
The fair value measurement element of the definition of an investment entity in
paragraph 27(c) applies to an investment entity’s investments Accordingly an
investment entity need not measure its noninvestment assets or its liabilities at
fair value
Typical characteristics of an investment entity
B85N In determining whether it meets the definition of an investment entity an
entity shall consider whether it displays the typical characteristics of one (see
paragraph 28) The absence of one or more of these typical characteristics does
not necessarily disqualify an entity from being classified as an investment entity
but indicates that additional judgement is required in determining whether the
entity is an investment entity
More than one investment
B85O An investment entity typically holds several investments to diversify its risk and
maximise its returns An entity may hold a portfolio of investments directly or
indirectly for example by holding a single investment in another investment
entity that itself holds several investments
B85P There may be times when the entity holds a single investment However
holding a single investment does not necessarily prevent an entity from meeting
the definition of an investment entity For example an investment entity may
hold only a single investment when the entity
(a) is in its startup period and has not yet identified suitable investments
and therefore has not yet executed its investment plan to acquire
several investments
(b) has not yet made other investments to replace those it has disposed of
(c) is established to pool investors’ funds to invest in a single investment
when that investment is unobtainable by individual investors (eg when
the required minimum investment is too high for an individual
investor) or
(d) is in the process of liquidation
More than one investor
B85Q Typically an investment entity would have several investors who pool their
funds to gain access to investment management services and investment
opportunities that they might not have had access to individually Having
IFRS 10
IFRS Foundation A525several investors would make it less likely that the entity or other members of
the group containing the entity would obtain benefits other than capital
appreciation or investment income (see paragraph B85I)
B85R Alternatively an investment entity may be formed by or for a single investor
that represents or supports the interests of a wider group of investors (eg a
pension fund government investment fund or family trust)
B85S There may also be times when the entity temporarily has a single investor For
example an investment entity may have only a single investor when the entity
(a) is within its initial offering period which has not expired and the entity
is actively identifying suitable investors
(b) has not yet identified suitable investors to replace ownership interests
that have been redeemed or
(c) is in the process of liquidation
Unrelated investors
B85T Typically an investment entity has several investors that are not related parties
(as defined in IAS 24) of the entity or other members of the group containing the
entity Having unrelated investors would make it less likely that the entity or
other members of the group containing the entity would obtain benefits other
than capital appreciation or investment income (see paragraph B85I)
B85U However an entity may still qualify as an investment entity even though its
investors are related to the entity For example an investment entity may set up
a separate parallel’ fund for a group of its employees (such as key management
personnel) or other related party investor(s) which mirrors the investments of
the entity’s main investment fund This parallel’ fund may qualify as an
investment entity even though all of its investors are related parties
Ownership interests
B85V An investment entity is typically but is not required to be a separate legal
entity Ownership interests in an investment entity are typically in the form of
equity or similar interests (eg partnership interests) to which proportionate
shares of the net assets of the investment entity are attributed However having
different classes of investors some of which have rights only to a specific
investment or groups of investments or which have different proportionate
shares of the net assets does not preclude an entity from being an investment
entity
B85W In addition an entity that has significant ownership interests in the form of
debt that in accordance with other applicable IFRSs does not meet the
definition of equity may still qualify as an investment entity provided that the
debt holders are exposed to variable returns from changes in the fair value of the
entity’s net assets
IFRS 10
IFRS FoundationA526Accounting requirements
Consolidation procedures
B86 Consolidated financial statements
(a) combine like items of assets liabilities equity income expenses and
cash flows of the parent with those of its subsidiaries
(b) offset (eliminate) the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary (IFRS 3
explains how to account for any related goodwill)
(c) eliminate in full intragroup assets and liabilities equity income
expenses and cash flows relating to transactions between entities of the
group (profits or losses resulting from intragroup transactions that are
recognised in assets such as inventory and fixed assets are eliminated in
full) Intragroup losses may indicate an impairment that requires
recognition in the consolidated financial statements IAS 12 Income Taxes
applies to temporary differences that arise from the elimination of
profits and losses resulting from intragroup transactions
Uniform accounting policies
B87 If a member of the group uses accounting policies other than those adopted in
the consolidated financial statements for like transactions and events in similar
circumstances appropriate adjustments are made to that group member’s
financial statements in preparing the consolidated financial statements to
ensure conformity with the group’s accounting policies
Measurement
B88 An entity includes the income and expenses of a subsidiary in the consolidated
financial statements from the date it gains control until the date when the
entity ceases to control the subsidiary Income and expenses of the subsidiary
are based on the amounts of the assets and liabilities recognised in the
consolidated financial statements at the acquisition date For example
depreciation expense recognised in the consolidated statement of
comprehensive income after the acquisition date is based on the fair values of
the related depreciable assets recognised in the consolidated financial
statements at the acquisition date
Potential voting rights
B89 When potential voting rights or other derivatives containing potential voting
rights exist the proportion of profit or loss and changes in equity allocated to
the parent and noncontrolling interests in preparing consolidated financial
statements is determined solely on the basis of existing ownership interests and
does not reflect the possible exercise or conversion of potential voting rights and
other derivatives unless paragraph B90 applies
B90 In some circumstances an entity has in substance an existing ownership
interest as a result of a transaction that currently gives the entity access to the
returns associated with an ownership interest In such circumstances the
IFRS 10
IFRS Foundation A527proportion allocated to the parent and noncontrolling interests in preparing
consolidated financial statements is determined by taking into account the
eventual exercise of those potential voting rights and other derivatives that
currently give the entity access to the returns
B91 IFRS 9 does not apply to interests in subsidiaries that are consolidated When
instruments containing potential voting rights in substance currently give
access to the returns associated with an ownership interest in a subsidiary the
instruments are not subject to the requirements of IFRS 9 In all other cases
instruments containing potential voting rights in a subsidiary are accounted for
in accordance with IFRS 9
Reporting date
B92 The financial statements of the parent and its subsidiaries used in the
preparation of the consolidated financial statements shall have the same
reporting date When the end of the reporting period of the parent is different
from that of a subsidiary the subsidiary prepares for consolidation purposes
additional financial information as of the same date as the financial statements
of the parent to enable the parent to consolidate the financial information of the
subsidiary unless it is impracticable to do so
B93 If it is impracticable to do so the parent shall consolidate the financial
information of the subsidiary using the most recent financial statements of the
subsidiary adjusted for the effects of significant transactions or events that occur
between the date of those financial statements and the date of the consolidated
financial statements In any case the difference between the date of the
subsidiary’s financial statements and that of the consolidated financial
statements shall be no more than three months and the length of the reporting
periods and any difference between the dates of the financial statements shall be
the same from period to period
Noncontrolling interests
B94 An entity shall attribute the profit or loss and each component of other
comprehensive income to the owners of the parent and to the noncontrolling
interests The entity shall also attribute total comprehensive income to the
owners of the parent and to the noncontrolling interests even if this results in
the noncontrolling interests having a deficit balance
B95 If a subsidiary has outstanding cumulative preference shares that are classified
as equity and are held by noncontrolling interests the entity shall compute its
share of profit or loss after adjusting for the dividends on such shares whether
or not such dividends have been declared
Changes in the proportion held by noncontrolling interests
B96 When the proportion of the equity held by noncontrolling interests changes an
entity shall adjust the carrying amounts of the controlling and noncontrolling
interests to reflect the changes in their relative interests in the subsidiary The
entity shall recognise directly in equity any difference between the amount by
which the noncontrolling interests are adjusted and the fair value of the
consideration paid or received and attribute it to the owners of the parent
IFRS 10
IFRS FoundationA528Loss of control
B97 A parent might lose control of a subsidiary in two or more arrangements
(transactions) However sometimes circumstances indicate that the multiple
arrangements should be accounted for as a single transaction In determining
whether to account for the arrangements as a single transaction a parent shall
consider all the terms and conditions of the arrangements and their economic
effects One or more of the following indicate that the parent should account
for the multiple arrangements as a single transaction
(a) They are entered into at the same time or in contemplation of each
other
(b) They form a single transaction designed to achieve an overall
commercial effect
(c) The occurrence of one arrangement is dependent on the occurrence of at
least one other arrangement
(d) One arrangement considered on its own is not economically justified
but it is economically justified when considered together with other
arrangements An example is when a disposal of shares is priced below
market and is compensated for by a subsequent disposal priced above
market
B98 If a parent loses control of a subsidiary it shall
(a) derecognise
(i) the assets (including any goodwill) and liabilities of the
subsidiary at their carrying amounts at the date when control is
lost and
(ii) the carrying amount of any noncontrolling interests in the
former subsidiary at the date when control is lost (including any
components of other comprehensive income attributable to
them)
(b) recognise
(i) the fair value of the consideration received if any from the
transaction event or circumstances that resulted in the loss of
control
(ii) if the transaction event or circumstances that resulted in the loss
of control involves a distribution of shares of the subsidiary to
owners in their capacity as owners that distribution and
(iii) any investment retained in the former subsidiary at its fair value
at the date when control is lost
(c) reclassify to profit or loss or transfer directly to retained earnings if
required by other IFRSs the amounts recognised in other comprehensive
income in relation to the subsidiary on the basis described in
paragraph B99
(d) recognise any resulting difference as a gain or loss in profit or loss
attributable to the parent
IFRS 10
IFRS Foundation A529B99 If a parent loses control of a subsidiary the parent shall account for all amounts
previously recognised in other comprehensive income in relation to that
subsidiary on the same basis as would be required if the parent had directly
disposed of the related assets or liabilities Therefore if a gain or loss previously
recognised in other comprehensive income would be reclassified to profit or loss
on the disposal of the related assets or liabilities the parent shall reclassify the
gain or loss from equity to profit or loss (as a reclassification adjustment) when
it loses control of the subsidiary If a revaluation surplus previously recognised
in other comprehensive income would be transferred directly to retained
earnings on the disposal of the asset the parent shall transfer the revaluation
surplus directly to retained earnings when it loses control of the subsidiary
B99A If a parent loses control of a subsidiary that does not contain a business as
defined in IFRS 3 as a result of a transaction involving an associate or a joint
venture that is accounted for using the equity method the parent determines
the gain or loss in accordance with paragraphs B98–B99 The gain or loss
resulting from the transaction (including the amounts previously recognised in
other comprehensive income that would be reclassified to profit or loss in
accordance with paragraph B99) is recognised in the parent’s profit or loss only
to the extent of the unrelated investors’ interests in that associate or joint
venture The remaining part of the gain is eliminated against the carrying
amount of the investment in that associate or joint venture In addition if the
parent retains an investment in the former subsidiary and the former subsidiary
is now an associate or a joint venture that is accounted for using the equity
method the parent recognises the part of the gain or loss resulting from the
remeasurement at fair value of the investment retained in that former
subsidiary in its profit or loss only to the extent of the unrelated investors’
interests in the new associate or joint venture The remaining part of that gain
is eliminated against the carrying amount of the investment retained in the
former subsidiary If the parent retains an investment in the former subsidiary
that is now accounted for in accordance with IFRS 9 the part of the gain or loss
resulting from the remeasurement at fair value of the investment retained in
the former subsidiary is recognised in full in the parent’s profit or loss
IFRS 10
IFRS FoundationA530Application examples
Example 17
A parent has a 100 per cent interest in a subsidiary that does not contain a business
The parent sells 70 per cent of its interest in the subsidiary to an associate in which it
has a 20 per cent interest As a consequence of this transaction the parent loses control
of the subsidiary The carrying amount of the net assets of the subsidiary is CU100 and
the carrying amount of the interest sold is CU70 (CU70 CU100 × 70) The fair value
of the consideration received is CU210 which is also the fair value of the interest sold
The investment retained in the former subsidiary is an associate accounted for using the
equity method and its fair value is CU90 The gain determined in accordance with
paragraphs B98–B99 before the elimination required by paragraph B99A is CU200
(CU200 CU210 + CU90 – CU100) This gain comprises two parts
(a) the gain (CU140) resulting from the sale of the 70 per cent interest in the
subsidiary to the associate This gain is the difference between the fair value of
the consideration received (CU210) and the carrying amount of the interest sold
(CU70) According to paragraph B99A the parent recognises in its profit or loss
the amount of the gain attributable to the unrelated investors’ interests in the
existing associate This is 80 per cent of this gain that is CU112 (CU112 CU140
× 80) The remaining 20 per cent of the gain (CU28 CU140 × 20) is
eliminated against the carrying amount of the investment in the existing
associate
(b) the gain (CU60) resulting from the remeasurement at fair value of the
investment directly retained in the former subsidiary This gain is the difference
between the fair value of the investment retained in the former subsidiary
(CU90) and 30 per cent of the carrying amount of the net assets of the subsidiary
(CU30 CU100 × 30) According to paragraph B99A the parent recognises in
its profit or loss the amount of the gain attributable to the unrelated investors’
interests in the new associate This is 56 per cent (70 × 80) of the gain that is
CU34 (CU34 CU60 × 56) The remaining 44 per cent of the gain CU26 (CU26
CU60 × 44) is eliminated against the carrying amount of the investment
retained in the former subsidiary
Accounting for a change in investment entity status
B100 When an entity ceases to be an investment entity it shall apply IFRS 3 to any
subsidiary that was previously measured at fair value through profit or loss in
accordance with paragraph 31 The date of the change of status shall be the
deemed acquisition date The fair value of the subsidiary at the deemed
acquisition date shall represent the transferred deemed consideration when
measuring any goodwill or gain from a bargain purchase that arises from the
deemed acquisition All subsidiaries shall be consolidated in accordance with
paragraphs 19–24 of this IFRS from the date of change of status
B101 When an entity becomes an investment entity it shall cease to consolidate its
subsidiaries at the date of the change in status except for any subsidiary that
shall continue to be consolidated in accordance with paragraph 32 The
IFRS 10
IFRS Foundation A531investment entity shall apply the requirements of paragraphs 25 and 26 to those
subsidiaries that it ceases to consolidate as though the investment entity had
lost control of those subsidiaries at that date
IFRS 10
IFRS FoundationA532Appendix C
Effective date and transition
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
Effective date
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted If an entity applies this IFRS
earlier it shall disclose that fact and apply IFRS 11 IFRS 12 IAS 27 Separate
Financial Statements and IAS 28 (as amended in 2011) at the same time
C1A Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 amended paragraphs C2–C6 and added paragraphs C2A–C2B
C4A–C4C C5A and C6A–C6B An entity shall apply those amendments for
annual periods beginning on or after 1 January 2013 If an entity applies IFRS 10
for an earlier period it shall apply those amendments for that earlier period
C1B Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraphs 2 4 C2A C6A and Appendix A and added
paragraphs 27–33 B85A–B85W B100–B101 and C3A–C3F An entity shall apply
those amendments for annual periods beginning on or after 1 January 2014
Early application is permitted If an entity applies those amendments earlier it
shall disclose that fact and apply all amendments included in Investment Entities
at the same time
C1C Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
(Amendments to IFRS 10 and IAS 28) issued in September 2014 amended
paragraphs 25–26 and added paragraph B99A An entity shall apply those
amendments prospectively to transactions occurring in annual periods
beginning on or after a date to be determined by the IASB Earlier application is
permitted If an entity applies those amendments earlier it shall disclose that
fact
C1D Investment Entities Applying the Consolidation Exception (Amendments to IFRS 10
IFRS 12 and IAS 28) issued in December 2014 amended paragraphs 4 32 B85C
B85E and C2A and added paragraphs 4A–4B An entity shall apply those
amendments for annual periods beginning on or after 1 January 2016 Earlier
application is permitted If an entity applies those amendments for an earlier
period it shall disclose that fact
Transition
C2 An entity shall apply this IFRS retrospectively in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors except as specified in
paragraphs C2A–C6
C2A Notwithstanding the requirements of paragraph 28 of IAS 8 when this IFRS is
first applied and if later when the Investment Entities and Investment Entities
Applying the Consolidation Exception amendments to this IFRS are first applied an
IFRS 10
IFRS Foundation A533entity need only present the quantitative information required by
paragraph 28(f) of IAS 8 for the annual period immediately preceding the date of
initial application of this IFRS (the immediately preceding period’) An entity
may also present this information for the current period or for earlier
comparative periods but is not required to do so
C2B For the purposes of this IFRS the date of initial application is the beginning of
the annual reporting period for which this IFRS is applied for the first time
C3 At the date of initial application an entity is not required to make adjustments
to the previous accounting for its involvement with either
(a) entities that would be consolidated at that date in accordance with
IAS 27 Consolidated and Separate Financial Statements and SIC12
Consolidation—Special Purpose Entities and are still consolidated in
accordance with this IFRS or
(b) entities that would not be consolidated at that date in accordance with
IAS 27 and SIC12 and are not consolidated in accordance with this IFRS
C3A At the date of initial application an entity shall assess whether it is an
investment entity on the basis of the facts and circumstances that exist at that
date If at the date of initial application an entity concludes that it is an
investment entity it shall apply the requirements of paragraphs C3B–C3F
instead of paragraphs C5–C5A
C3B Except for any subsidiary that is consolidated in accordance with paragraph 32
(to which paragraphs C3 and C6 or paragraphs C4–C4C whichever is relevant
apply) an investment entity shall measure its investment in each subsidiary at
fair value through profit or loss as if the requirements of this IFRS had always
been effective The investment entity shall retrospectively adjust both the
annual period that immediately precedes the date of initial application and
equity at the beginning of the immediately preceding period for any difference
between
(a) the previous carrying amount of the subsidiary and
(b) the fair value of the investment entity’s investment in the subsidiary
The cumulative amount of any fair value adjustments previously recognised in
other comprehensive income shall be transferred to retained earnings at the
beginning of the annual period immediately preceding the date of initial
application
C3C Before the date that IFRS 13 Fair Value Measurement is adopted an investment
entity shall use the fair value amounts that were previously reported to investors
or to management if those amounts represent the amount for which the
investment could have been exchanged between knowledgeable willing parties
in an arm’s length transaction at the date of the valuation
C3D If measuring an investment in a subsidiary in accordance with paragraphs
C3B–C3C is impracticable (as defined in IAS 8) an investment entity shall apply
the requirements of this IFRS at the beginning of the earliest period for which
application of paragraphs C3B–C3C is practicable which may be the current
period The investor shall retrospectively adjust the annual period that
IFRS 10
IFRS FoundationA534immediately precedes the date of initial application unless the beginning of the
earliest period for which application of this paragraph is practicable is the
current period If this is the case the adjustment to equity shall be recognised at
the beginning of the current period
C3E If an investment entity has disposed of or has lost control of an investment in a
subsidiary before the date of initial application of this IFRS the investment
entity is not required to make adjustments to the previous accounting for that
subsidiary
C3F If an entity applies the Investment Entities amendments for a period later than
when it applies IFRS 10 for the first time references to the date of initial
application’ in paragraphs C3A–C3E shall be read as the beginning of the
annual reporting period for which the amendments in Investment Entities
(Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October 2012 are applied
for the first time’
C4 If at the date of initial application an investor concludes that it shall
consolidate an investee that was not consolidated in accordance with IAS 27 and
SIC12 the investor shall
(a) if the investee is a business (as defined in IFRS 3 Business Combinations)
measure the assets liabilities and noncontrolling interests in that
previously unconsolidated investee as if that investee had been
consolidated (and thus had applied acquisition accounting in accordance
with IFRS 3) from the date when the investor obtained control of that
investee on the basis of the requirements of this IFRS The investor shall
adjust retrospectively the annual period immediately preceding the date
of initial application When the date that control was obtained is earlier
than the beginning of the immediately preceding period the investor
shall recognise as an adjustment to equity at the beginning of the
immediately preceding period any difference between
(i) the amount of assets liabilities and noncontrolling interests
recognised and
(ii) the previous carrying amount of the investor’s involvement with
the investee
(b) if the investee is not a business (as defined in IFRS 3) measure the assets
liabilities and noncontrolling interests in that previously
unconsolidated investee as if that investee had been consolidated
(applying the acquisition method as described in IFRS 3 but without
recognising any goodwill for the investee) from the date when the
investor obtained control of that investee on the basis of the
requirements of this IFRS The investor shall adjust retrospectively the
annual period immediately preceding the date of initial application
When the date that control was obtained is earlier than the beginning of
the immediately preceding period the investor shall recognise as an
adjustment to equity at the beginning of the immediately preceding
period any difference between
(i) the amount of assets liabilities and noncontrolling interests
recognised and
IFRS 10
IFRS Foundation A535(ii) the previous carrying amount of the investor’s involvement with
the investee
C4A If measuring an investee’s assets liabilities and noncontrolling interests in
accordance with paragraph C4(a) or (b) is impracticable (as defined in IAS 8) an
investor shall
(a) if the investee is a business apply the requirements of IFRS 3 as of the
deemed acquisition date The deemed acquisition date shall be the
beginning of the earliest period for which application of paragraph C4(a)
is practicable which may be the current period
(b) if the investee is not a business apply the acquisition method as
described in IFRS 3 but without recognising any goodwill for the investee
as of the deemed acquisition date The deemed acquisition date shall be
the beginning of the earliest period for which the application of
paragraph C4(b) is practicable which may be the current period
The investor shall adjust retrospectively the annual period immediately
preceding the date of initial application unless the beginning of the earliest
period for which application of this paragraph is practicable is the current
period When the deemed acquisition date is earlier than the beginning of the
immediately preceding period the investor shall recognise as an adjustment to
equity at the beginning of the immediately preceding period any difference
between
(c) the amount of assets liabilities and noncontrolling interests recognised
and
(d) the previous carrying amount of the investor’s involvement with the
investee
If the earliest period for which application of this paragraph is practicable is the
current period the adjustment to equity shall be recognised at the beginning of
the current period
C4B When an investor applies paragraphs C4–C4A and the date that control was
obtained in accordance with this IFRS is later than the effective date of IFRS 3 as
revised in 2008 (IFRS 3 (2008)) the reference to IFRS 3 in paragraphs C4 and C4A
shall be to IFRS 3 (2008) If control was obtained before the effective date of
IFRS 3 (2008) an investor shall apply either IFRS 3 (2008) or IFRS 3 (issued in
2004)
C4C When an investor applies paragraphs C4–C4A and the date that control was
obtained in accordance with this IFRS is later than the effective date of IAS 27 as
revised in 2008 (IAS 27 (2008)) an investor shall apply the requirements of this
IFRS for all periods that the investee is retrospectively consolidated in
accordance with paragraphs C4–C4A If control was obtained before the
effective date of IAS 27 (2008) an investor shall apply either
(a) the requirements of this IFRS for all periods that the investee is
retrospectively consolidated in accordance with paragraphs C4–C4A or
IFRS 10
IFRS FoundationA536(b) the requirements of the version of IAS 27 issued in 2003 (IAS 27 (2003))
for those periods prior to the effective date of IAS 27 (2008) and
thereafter the requirements of this IFRS for subsequent periods
C5 If at the date of initial application an investor concludes that it will no longer
consolidate an investee that was consolidated in accordance with IAS 27 and
SIC12 the investor shall measure its interest in the investee at the amount at
which it would have been measured if the requirements of this IFRS had been
effective when the investor became involved with (but did not obtain control in
accordance with this IFRS) or lost control of the investee The investor shall
adjust retrospectively the annual period immediately preceding the date of
initial application When the date that the investor became involved with (but
did not obtain control in accordance with this IFRS) or lost control of the
investee is earlier than the beginning of the immediately preceding period the
investor shall recognise as an adjustment to equity at the beginning of the
immediately preceding period any difference between
(a) the previous carrying amount of the assets liabilities and
noncontrolling interests and
(b) the recognised amount of the investor’s interest in the investee
C5A If measuring the interest in the investee in accordance with paragraph C5 is
impracticable (as defined in IAS 8) an investor shall apply the requirements of
this IFRS at the beginning of the earliest period for which application of
paragraph C5 is practicable which may be the current period The investor shall
adjust retrospectively the annual period immediately preceding the date of
initial application unless the beginning of the earliest period for which
application of this paragraph is practicable is the current period When the date
that the investor became involved with (but did not obtain control in accordance
with this IFRS) or lost control of the investee is earlier than the beginning of the
immediately preceding period the investor shall recognise as an adjustment to
equity at the beginning of the immediately preceding period any difference
between
(a) the previous carrying amount of the assets liabilities and
noncontrolling interests and
(b) the recognised amount of the investor’s interest in the investee
If the earliest period for which application of this paragraph is practicable is the
current period the adjustment to equity shall be recognised at the beginning of
the current period
C6 Paragraphs 23 25 B94 and B96–B99 were amendments to IAS 27 made in 2008
that were carried forward into IFRS 10 Except when an entity applies
paragraph C3 or is required to apply paragraphs C4–C5A the entity shall apply
the requirements in those paragraphs as follows
(a) An entity shall not restate any profit or loss attribution for reporting
periods before it applied the amendment in paragraph B94 for the first
time
IFRS 10
IFRS Foundation A537(b) The requirements in paragraphs 23 and B96 for accounting for changes
in ownership interests in a subsidiary after control is obtained do not
apply to changes that occurred before an entity applied these
amendments for the first time
(c) An entity shall not restate the carrying amount of an investment in a
former subsidiary if control was lost before it applied the amendments in
paragraphs 25 and B97–B99 for the first time In addition an entity shall
not recalculate any gain or loss on the loss of control of a subsidiary that
occurred before the amendments in paragraphs 25 and B97–B99 were
applied for the first time
References to the immediately preceding period’
C6A Notwithstanding the references to the annual period immediately preceding the
date of initial application (the immediately preceding period’) in paragraphs
C3B–C5A an entity may also present adjusted comparative information for any
earlier periods presented but is not required to do so If an entity does present
adjusted comparative information for any earlier periods all references to the
immediately preceding period’ in paragraphs C3B–C5A shall be read as the
earliest adjusted comparative period presented’
C6B If an entity presents unadjusted comparative information for any earlier
periods it shall clearly identify the information that has not been adjusted state
that it has been prepared on a different basis and explain that basis
References to IFRS 9
C7 If an entity applies this IFRS but does not yet apply IFRS 9 any reference in this
IFRS to IFRS 9 shall be read as a reference to IAS 39 Financial Instruments
Recognition and Measurement
Withdrawal of other IFRSs
C8 This IFRS supersedes the requirements relating to consolidated financial
statements in IAS 27 (as amended in 2008)
C9 This IFRS also supersedes SIC12 Consolidation—Special Purpose Entities
IFRS 10
IFRS FoundationA538Appendix D
Amendments to other IFRSs
This appendix sets out the amendments to other IFRSs that are a consequence of the Board issuing
this IFRS An entity shall apply the amendments for annual periods beginning on or after
1 January 2013 If an entity applies this IFRS for an earlier period it shall apply these amendments
for that earlier period Amended paragraphs are shown with new text underlined and deleted text
struck through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 10
IFRS Foundation A539IFRS Standard 11
Joint Arrangements
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 31
Financial Reporting of Interests in Joint Ventures which had originally been issued by the
International Accounting Standards Committee in December 1990
In December 2003 the Board amended and renamed IAS 31 with a new title—Interests in Joint
Ventures This amendment was done in conjunction with amendments to IAS 27 Consolidated
Financial Statements and Accounting for Investments in Subsidiaries and IAS 28 Accounting for
Investments in Associates
In May 2011 the Board issued IFRS 11 Joint Arrangements to replace IAS 31 IFRS 12 Disclosure
of Interests in Other Entities also issued in May 2011 replaced the disclosure requirements in
IAS 31 IFRS 11 incorporated the guidance contained in a related Interpretation (SIC13
Jointly Controlled EntitiesNonMonetary Contributions by Venturers)
In June 2012 IFRS 11 was amended by Consolidated Financial Statements Joint Arrangements and
Disclosure of Interests in Other Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and
IFRS 12) These amendments provided additional transition relief to IFRS 11 limiting the
requirement to present adjusted comparative information to only the annual period
immediately preceding the first annual period for which IFRS 11 is applied
In May 2014 the Board amended IFRS 11 to provide guidance on the accounting for
acquisitions of interests in joint operations in which the activity constitutes a business
IFRS 11
IFRS Foundation A541CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 11
JOINT ARRANGEMENTS
OBJECTIVE 1
Meeting the objective 2
SCOPE 3
JOINT ARRANGEMENTS 4
Joint control 7
Types of joint arrangement 14
FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT 20
Joint operations 20
Joint ventures 24
SEPARATE FINANCIAL STATEMENTS 26
APPENDICES
A Defined terms
B Application guidance
C Effective date transition and withdrawal of other IFRSs
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 11 ISSUED IN MAY 2011
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 11
Consolidated Financial Statements Joint Arrangements and Disclosure of
Interests in Other Entities Transition Guidance (Amendments to IFRS 10
IFRS 11 and IFRS 12) issued in June 2012
Accounting for Acquisitions of Interests in Joint Operations (Amendments to
IFRS 11) issued in May 2014
BASIS FOR CONCLUSION
APPENDIX
Amendments to the Basis for Conclusions on other IFRSs
ILLUSTRATIVE EXAMPLES
IFRS 11
IFRS FoundationA542International Financial Reporting Standard 11 Joint Arrangements (IFRS 11) is set out in
paragraphs 1–27 and Appendices A–D All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 11 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 11
IFRS Foundation A543Introduction
Overview
IN1 International Financial Reporting Standard 11 Joint Arrangements establishes
principles for financial reporting by parties to a joint arrangement
IN2 The IFRS supersedes IAS 31 Interests in Joint Ventures and SIC13 Jointly Controlled
Entities—NonMonetary Contributions by Venturers and is effective for annual periods
beginning on or after 1 January 2013 Earlier application is permitted
Reasons for issuing the IFRS
IN3 The IFRS is concerned principally with addressing two aspects of IAS 31 first
that the structure of the arrangement was the only determinant of the
accounting and second that an entity had a choice of accounting treatment for
interests in jointly controlled entities
IN4 IFRS 11 improves on IAS 31 by establishing principles that are applicable to the
accounting for all joint arrangements
Reasons for amending IFRS 11 in May 2014
IN4A In May 2014 the International Accounting Standards Board amended IFRS 11 to
provide guidance on the accounting for acquisitions of interests in joint
operations in which the activity constitutes a business
Main features of the IFRS
IN5 The IFRS requires a party to a joint arrangement to determine the type of joint
arrangement in which it is involved by assessing its rights and obligations
arising from the arrangement
General requirements
IN6 The IFRS is to be applied by all entities that are a party to a joint arrangement A
joint arrangement is an arrangement of which two or more parties have joint
control The IFRS defines joint control as the contractually agreed sharing of
control of an arrangement which exists only when decisions about the relevant
activities (ie activities that significantly affect the returns of the arrangement)
require the unanimous consent of the parties sharing control
IN7 The IFRS classifies joint arrangements into two types—joint operations and joint
ventures A joint operation is a joint arrangement whereby the parties that have
joint control of the arrangement (ie joint operators) have rights to the assets
and obligations for the liabilities relating to the arrangement A joint venture is
a joint arrangement whereby the parties that have joint control of the
arrangement (ie joint venturers) have rights to the net assets of the
arrangement
IFRS 11
IFRS FoundationA544IN8 An entity determines the type of joint arrangement in which it is involved by
considering its rights and obligations An entity assesses its rights and
obligations by considering the structure and legal form of the arrangement the
contractual terms agreed to by the parties to the arrangement and when
relevant other facts and circumstances
IN9 The IFRS requires a joint operator to recognise and measure the assets and
liabilities (and recognise the related revenues and expenses) in relation to its
interest in the arrangement in accordance with relevant IFRSs applicable to the
particular assets liabilities revenues and expenses
IN9A This IFRS requires the acquirer of an interest in a joint operation in which the
activity constitutes a business as defined in IFRS 3 Business Combinations to apply
all of the principles on business combinations accounting in IFRS 3 and other
IFRSs except for those principles that conflict with the guidance in this IFRS In
addition the acquirer shall disclose the information required by IFRS 3 and
other IFRSs for business combinations
IN10 The IFRS requires a joint venturer to recognise an investment and to account for
that investment using the equity method in accordance with IAS 28 Investments in
Associates and Joint Ventures unless the entity is exempted from applying the
equity method as specified in that standard
IN11 The disclosure requirements for parties with joint control of a joint
arrangement are specified in IFRS 12 Disclosure of Interests in Other Entities
IFRS 11
IFRS Foundation A545International Financial Reporting Standard 11
Joint Arrangements
Objective
1 The objective of this IFRS is to establish principles for financial reporting
by entities that have an interest in arrangements that are controlled
jointly (ie joint arrangements)
Meeting the objective
2 To meet the objective in paragraph 1 this IFRS defines joint control and requires
an entity that is a party to a joint arrangement to determine the type of joint
arrangement in which it is involved by assessing its rights and obligations and to
account for those rights and obligations in accordance with that type of joint
arrangement
Scope
3 This IFRS shall be applied by all entities that are a party to a joint
arrangement
Joint arrangements
4 A joint arrangement is an arrangement of which two or more parties
have joint control
5 A joint arrangement has the following characteristics
(a) The parties are bound by a contractual arrangement (see
paragraphs B2–B4)
(b) The contractual arrangement gives two or more of those parties
joint control of the arrangement (see paragraphs 7–13)
6 A joint arrangement is either a joint operation or a joint venture
Joint control
7 Joint control is the contractually agreed sharing of control of an
arrangement which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control
8 An entity that is a party to an arrangement shall assess whether the contractual
arrangement gives all the parties or a group of the parties control of the
arrangement collectively All the parties or a group of the parties control the
arrangement collectively when they must act together to direct the activities
that significantly affect the returns of the arrangement (ie the relevant
activities)
IFRS 11
IFRS FoundationA5469 Once it has been determined that all the parties or a group of the parties
control the arrangement collectively joint control exists only when decisions
about the relevant activities require the unanimous consent of the parties that
control the arrangement collectively
10 In a joint arrangement no single party controls the arrangement on its own A
party with joint control of an arrangement can prevent any of the other parties
or a group of the parties from controlling the arrangement
11 An arrangement can be a joint arrangement even though not all of its parties
have joint control of the arrangement This IFRS distinguishes between parties
that have joint control of a joint arrangement (joint operators or joint venturers) and
parties that participate in but do not have joint control of a joint arrangement
12 An entity will need to apply judgement when assessing whether all the parties
or a group of the parties have joint control of an arrangement An entity shall
make this assessment by considering all facts and circumstances (see paragraphs
B5–B11)
13 If facts and circumstances change an entity shall reassess whether it still has
joint control of the arrangement
Types of joint arrangement
14 An entity shall determine the type of joint arrangement in which it is
involved The classification of a joint arrangement as a joint operation or
a joint venture depends upon the rights and obligations of the parties to
the arrangement
15 A joint operation is a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the assets and
obligations for the liabilities relating to the arrangement Those parties
are called joint operators
16 A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the
arrangement Those parties are called joint venturers
17 An entity applies judgement when assessing whether a joint arrangement is a
joint operation or a joint venture An entity shall determine the type of joint
arrangement in which it is involved by considering its rights and obligations
arising from the arrangement An entity assesses its rights and obligations by
considering the structure and legal form of the arrangement the terms agreed
by the parties in the contractual arrangement and when relevant other facts
and circumstances (see paragraphs B12–B33)
18 Sometimes the parties are bound by a framework agreement that sets up the
general contractual terms for undertaking one or more activities The
framework agreement might set out that the parties establish different joint
arrangements to deal with specific activities that form part of the agreement
Even though those joint arrangements are related to the same framework
agreement their type might be different if the parties’ rights and obligations
differ when undertaking the different activities dealt with in the framework
IFRS 11
IFRS Foundation A547agreement Consequently joint operations and joint ventures can coexist when
the parties undertake different activities that form part of the same framework
agreement
19 If facts and circumstances change an entity shall reassess whether the type of
joint arrangement in which it is involved has changed
Financial statements of parties to a joint arrangement
Joint operations
20 A joint operator shall recognise in relation to its interest in a joint
operation
(a) its assets including its share of any assets held jointly
(b) its liabilities including its share of any liabilities incurred jointly
(c) its revenue from the sale of its share of the output arising from the
joint operation
(d) its share of the revenue from the sale of the output by the joint
operation and
(e) its expenses including its share of any expenses incurred jointly
21 A joint operator shall account for the assets liabilities revenues and expenses
relating to its interest in a joint operation in accordance with the IFRSs
applicable to the particular assets liabilities revenues and expenses
21A When an entity acquires an interest in a joint operation in which the activity of
the joint operation constitutes a business as defined in IFRS 3 Business
Combinations it shall apply to the extent of its share in accordance with
paragraph 20 all of the principles on business combinations accounting in
IFRS 3 and other IFRSs that do not conflict with the guidance in this IFRS and
disclose the information that is required in those IFRSs in relation to business
combinations This applies to the acquisition of both the initial interest and
additional interests in a joint operation in which the activity of the joint
operation constitutes a business The accounting for the acquisition of an
interest in such a joint operation is specified in paragraphs B33A–B33D
22 The accounting for transactions such as the sale contribution or purchase of
assets between an entity and a joint operation in which it is a joint operator is
specified in paragraphs B34–B37
23 A party that participates in but does not have joint control of a joint operation
shall also account for its interest in the arrangement in accordance with
paragraphs 20–22 if that party has rights to the assets and obligations for the
liabilities relating to the joint operation If a party that participates in but does
not have joint control of a joint operation does not have rights to the assets and
obligations for the liabilities relating to that joint operation it shall account for
its interest in the joint operation in accordance with the IFRSs applicable to that
interest
IFRS 11
IFRS FoundationA548Joint ventures
24 A joint venturer shall recognise its interest in a joint venture as an
investment and shall account for that investment using the equity
method in accordance with IAS 28 Investments in Associates and Joint
Ventures unless the entity is exempted from applying the equity method
as specified in that standard
25 A party that participates in but does not have joint control of a joint venture
shall account for its interest in the arrangement in accordance with IFRS 9
Financial Instruments unless it has significant influence over the joint venture in
which case it shall account for it in accordance with IAS 28 (as amended in
2011)
Separate financial statements
26 In its separate financial statements a joint operator or joint venturer
shall account for its interest in
(a) a joint operation in accordance with paragraphs 20–22
(b) a joint venture in accordance with paragraph 10 of IAS 27 Separate
Financial Statements
27 In its separate financial statements a party that participates in but does
not have joint control of a joint arrangement shall account for its
interest in
(a) a joint operation in accordance with paragraph 23
(b) a joint venture in accordance with IFRS 9 unless the entity has
significant influence over the joint venture in which case it shall
apply paragraph 10 of IAS 27 (as amended in 2011)
IFRS 11
IFRS Foundation A549Appendix A
Defined terms
This appendix is an integral part of the IFRS
joint arrangement An arrangement of which two or more parties have joint control
joint control The contractually agreed sharing of control of an arrangement
which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control
joint operation A joint arrangement whereby the parties that have joint control
of the arrangement have rights to the assets and obligations for
the liabilities relating to the arrangement
joint operator A party to a joint operation that has joint control of that joint
operation
joint venture A joint arrangement whereby the parties that have joint control
of the arrangement have rights to the net assets of the
arrangement
joint venturer A party to a joint venture that has joint control of that joint
venture
party to a joint
arrangement
An entity that participates in a joint arrangement regardless of
whether that entity has joint control of the arrangement
separate vehicle A separately identifiable financial structure including separate
legal entities or entities recognised by statute regardless of
whether those entities have a legal personality
The following terms are defined in IAS 27 (as amended in 2011) IAS 28 (as amended in 2011)
or IFRS 10 Consolidated Financial Statements and are used in this IFRS with the meanings
specified in those IFRSs
● control of an investee
● equity method
● power
● protective rights
● relevant activities
● separate financial statements
● significant influence
IFRS 11
IFRS FoundationA550Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–27 and
has the same authority as the other parts of the IFRS
B1 The examples in this appendix portray hypothetical situations Although some
aspects of the examples may be present in actual fact patterns all relevant facts
and circumstances of a particular fact pattern would need to be evaluated when
applying IFRS 11
Joint arrangements
Contractual arrangement (paragraph 5)
B2 Contractual arrangements can be evidenced in several ways An enforceable
contractual arrangement is often but not always in writing usually in the form
of a contract or documented discussions between the parties Statutory
mechanisms can also create enforceable arrangements either on their own or in
conjunction with contracts between the parties
B3 When joint arrangements are structured through a separate vehicle (see
paragraphs B19–B33) the contractual arrangement or some aspects of the
contractual arrangement will in some cases be incorporated in the articles
charter or bylaws of the separate vehicle
B4 The contractual arrangement sets out the terms upon which the parties
participate in the activity that is the subject of the arrangement The
contractual arrangement generally deals with such matters as
(a) the purpose activity and duration of the joint arrangement
(b) how the members of the board of directors or equivalent governing
body of the joint arrangement are appointed
(c) the decisionmaking process the matters requiring decisions from the
parties the voting rights of the parties and the required level of support
for those matters The decisionmaking process reflected in the
contractual arrangement establishes joint control of the arrangement
(see paragraphs B5–B11)
(d) the capital or other contributions required of the parties
(e) how the parties share assets liabilities revenues expenses or profit or
loss relating to the joint arrangement
Joint control (paragraphs 7–13)
B5 In assessing whether an entity has joint control of an arrangement an entity
shall assess first whether all the parties or a group of the parties control the
arrangement IFRS 10 defines control and shall be used to determine whether
all the parties or a group of the parties are exposed or have rights to variable
returns from their involvement with the arrangement and have the ability to
affect those returns through their power over the arrangement When all the
parties or a group of the parties considered collectively are able to direct the
IFRS 11
IFRS Foundation A551activities that significantly affect the returns of the arrangement (ie the relevant
activities) the parties control the arrangement collectively
B6 After concluding that all the parties or a group of the parties control the
arrangement collectively an entity shall assess whether it has joint control of
the arrangement Joint control exists only when decisions about the relevant
activities require the unanimous consent of the parties that collectively control
the arrangement Assessing whether the arrangement is jointly controlled by all
of its parties or by a group of the parties or controlled by one of its parties alone
can require judgement
B7 Sometimes the decisionmaking process that is agreed upon by the parties in
their contractual arrangement implicitly leads to joint control For example
assume two parties establish an arrangement in which each has 50 per cent of
the voting rights and the contractual arrangement between them specifies that
at least 51 per cent of the voting rights are required to make decisions about the
relevant activities In this case the parties have implicitly agreed that they have
joint control of the arrangement because decisions about the relevant activities
cannot be made without both parties agreeing
B8 In other circumstances the contractual arrangement requires a minimum
proportion of the voting rights to make decisions about the relevant activities
When that minimum required proportion of the voting rights can be achieved
by more than one combination of the parties agreeing together that
arrangement is not a joint arrangement unless the contractual arrangement
specifies which parties (or combination of parties) are required to agree
unanimously to decisions about the relevant activities of the arrangement
Application examples
Example 1
Assume that three parties establish an arrangement A has 50 per cent of the
voting rights in the arrangement B has 30 per cent and C has 20 per cent
The contractual arrangement between A B and C specifies that at least
75 per cent of the voting rights are required to make decisions about the
relevant activities of the arrangement Even though A can block any
decision it does not control the arrangement because it needs the agreement
of B The terms of their contractual arrangement requiring at least 75 per
cent of the voting rights to make decisions about the relevant activities imply
that A and B have joint control of the arrangement because decisions about
the relevant activities of the arrangement cannot be made without both A
and B agreeing
continued
IFRS 11
IFRS FoundationA552continued
Application examples
Example 2
Assume an arrangement has three parties A has 50 per cent of the voting
rights in the arrangement and B and C each have 25 per cent The
contractual arrangement between A B and C specifies that at least 75 per
cent of the voting rights are required to make decisions about the relevant
activities of the arrangement Even though A can block any decision it does
not control the arrangement because it needs the agreement of either B or C
In this example A B and C collectively control the arrangement However
there is more than one combination of parties that can agree to reach 75 per
cent of the voting rights (ie either A and B or A and C) In such a situation
to be a joint arrangement the contractual arrangement between the parties
would need to specify which combination of the parties is required to agree
unanimously to decisions about the relevant activities of the arrangement
Example 3
Assume an arrangement in which A and B each have 35 per cent of the
voting rights in the arrangement with the remaining 30 per cent being
widely dispersed Decisions about the relevant activities require approval by
a majority of the voting rights A and B have joint control of the
arrangement only if the contractual arrangement specifies that decisions
about the relevant activities of the arrangement require both A and B
agreeing
B9 The requirement for unanimous consent means that any party with joint
control of the arrangement can prevent any of the other parties or a group of
the parties from making unilateral decisions (about the relevant activities)
without its consent If the requirement for unanimous consent relates only to
decisions that give a party protective rights and not to decisions about the
relevant activities of an arrangement that party is not a party with joint control
of the arrangement
B10 A contractual arrangement might include clauses on the resolution of disputes
such as arbitration These provisions may allow for decisions to be made in the
absence of unanimous consent among the parties that have joint control The
existence of such provisions does not prevent the arrangement from being
jointly controlled and consequently from being a joint arrangement
IFRS 11
IFRS Foundation A553B11 When an arrangement is outside the scope of IFRS 11 an entity accounts for its
interest in the arrangement in accordance with relevant IFRSs such as IFRS 10
IAS 28 (as amended in 2011) or IFRS 9
Types of joint arrangement (paragraphs 14–19)
B12 Joint arrangements are established for a variety of purposes (eg as a way for
parties to share costs and risks or as a way to provide the parties with access to
new technology or new markets) and can be established using different
structures and legal forms
B13 Some arrangements do not require the activity that is the subject of the
arrangement to be undertaken in a separate vehicle However other
arrangements involve the establishment of a separate vehicle
B14 The classification of joint arrangements required by this IFRS depends upon the
parties’ rights and obligations arising from the arrangement in the normal
course of business This IFRS classifies joint arrangements as either joint
operations or joint ventures When an entity has rights to the assets and
obligations for the liabilities relating to the arrangement the arrangement is a
joint operation When an entity has rights to the net assets of the arrangement
the arrangement is a joint venture Paragraphs B16–B33 set out the assessment
an entity carries out to determine whether it has an interest in a joint operation
or an interest in a joint venture
Classification of a joint arrangement
B15 As stated in paragraph B14 the classification of joint arrangements requires the
parties to assess their rights and obligations arising from the arrangement
When making that assessment an entity shall consider the following
(a) the structure of the joint arrangement (see paragraphs B16–B21)
(b) when the joint arrangement is structured through a separate vehicle
IFRS 11
IFRS FoundationA554(i) the legal form of the separate vehicle (see paragraphs B22–B24)
(ii) the terms of the contractual arrangement (see paragraphs
B25–B28) and
(iii) when relevant other facts and circumstances (see paragraphs
B29–B33)
Structure of the joint arrangement
Joint arrangements not structured through a separate vehicle
B16 A joint arrangement that is not structured through a separate vehicle is a joint
operation In such cases the contractual arrangement establishes the parties’
rights to the assets and obligations for the liabilities relating to the
arrangement and the parties’ rights to the corresponding revenues and
obligations for the corresponding expenses
B17 The contractual arrangement often describes the nature of the activities that are
the subject of the arrangement and how the parties intend to undertake those
activities together For example the parties to a joint arrangement could agree
to manufacture a product together with each party being responsible for a
specific task and each using its own assets and incurring its own liabilities The
contractual arrangement could also specify how the revenues and expenses that
are common to the parties are to be shared among them In such a case each
joint operator recognises in its financial statements the assets and liabilities
used for the specific task and recognises its share of the revenues and expenses
in accordance with the contractual arrangement
B18 In other cases the parties to a joint arrangement might agree for example to
share and operate an asset together In such a case the contractual
arrangement establishes the parties’ rights to the asset that is operated jointly
and how output or revenue from the asset and operating costs are shared among
the parties Each joint operator accounts for its share of the joint asset and its
agreed share of any liabilities and recognises its share of the output revenues
and expenses in accordance with the contractual arrangement
Joint arrangements structured through a separate vehicle
B19 A joint arrangement in which the assets and liabilities relating to the
arrangement are held in a separate vehicle can be either a joint venture or a
joint operation
B20 Whether a party is a joint operator or a joint venturer depends on the party’s
rights to the assets and obligations for the liabilities relating to the
arrangement that are held in the separate vehicle
B21 As stated in paragraph B15 when the parties have structured a joint
arrangement in a separate vehicle the parties need to assess whether the legal
form of the separate vehicle the terms of the contractual arrangement and
when relevant any other facts and circumstances give them
(a) rights to the assets and obligations for the liabilities relating to the
arrangement (ie the arrangement is a joint operation) or
IFRS 11
IFRS Foundation A555(b) rights to the net assets of the arrangement (ie the arrangement is a joint
venture)
The legal form of the separate vehicle
B22 The legal form of the separate vehicle is relevant when assessing the type of joint
arrangement The legal form assists in the initial assessment of the parties’
rights to the assets and obligations for the liabilities held in the separate vehicle
such as whether the parties have interests in the assets held in the separate
vehicle and whether they are liable for the liabilities held in the separate vehicle
B23 For example the parties might conduct the joint arrangement through a
separate vehicle whose legal form causes the separate vehicle to be considered
in its own right (ie the assets and liabilities held in the separate vehicle are the
assets and liabilities of the separate vehicle and not the assets and liabilities of
the parties) In such a case the assessment of the rights and obligations
conferred upon the parties by the legal form of the separate vehicle indicates
that the arrangement is a joint venture However the terms agreed by the
parties in their contractual arrangement (see paragraphs B25–B28) and when
relevant other facts and circumstances (see paragraphs B29–B33) can override
the assessment of the rights and obligations conferred upon the parties by the
legal form of the separate vehicle
B24 The assessment of the rights and obligations conferred upon the parties by the
legal form of the separate vehicle is sufficient to conclude that the arrangement
is a joint operation only if the parties conduct the joint arrangement in a
separate vehicle whose legal form does not confer separation between the
parties and the separate vehicle (ie the assets and liabilities held in the separate
vehicle are the parties’ assets and liabilities)
IFRS 11
IFRS FoundationA556Assessing the terms of the contractual arrangement
B25 In many cases the rights and obligations agreed to by the parties in their
contractual arrangements are consistent or do not conflict with the rights and
obligations conferred on the parties by the legal form of the separate vehicle in
which the arrangement has been structured
B26 In other cases the parties use the contractual arrangement to reverse or modify
the rights and obligations conferred by the legal form of the separate vehicle in
which the arrangement has been structured
Application example
Example 4
Assume that two parties structure a joint arrangement in an incorporated
entity Each party has a 50 per cent ownership interest in the incorporated
entity The incorporation enables the separation of the entity from its
owners and as a consequence the assets and liabilities held in the entity are
the assets and liabilities of the incorporated entity In such a case the
assessment of the rights and obligations conferred upon the parties by the
legal form of the separate vehicle indicates that the parties have rights to the
net assets of the arrangement
However the parties modify the features of the corporation through their
contractual arrangement so that each has an interest in the assets of the
incorporated entity and each is liable for the liabilities of the incorporated
entity in a specified proportion Such contractual modifications to the
features of a corporation can cause an arrangement to be a joint operation
B27 The following table compares common terms in contractual arrangements of
parties to a joint operation and common terms in contractual arrangements of
parties to a joint venture The examples of the contractual terms provided in the
following table are not exhaustive
Assessing the terms of the contractual arrangement
Joint operation Joint venture
The terms of the
contractual
arrangement
The contractual
arrangement provides the
parties to the joint
arrangement with rights
to the assets and
obligations for the
liabilities relating to the
arrangement
The contractual
arrangement provides the
parties to the joint
arrangement with rights
to the net assets of the
arrangement (ie it is the
separate vehicle not the
parties that has rights to
the assets and
obligations for the
liabilities relating to the
arrangement)
continued
IFRS 11
IFRS Foundation A557continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Rights to assets The contractual
arrangement establishes
that the parties to the
joint arrangement share
all interests (eg rights
title or ownership) in the
assets relating to the
arrangement in a
specified proportion
(eg in proportion to the
parties’ ownership
interest in the
arrangement or in
proportion to the activity
carried out through the
arrangement that is
directly attributed to
them)
The contractual
arrangement establishes
that the assets brought
into the arrangement or
subsequently acquired by
the joint arrangement are
the arrangement’s assets
The parties have no
interests (ie no rights
title or ownership) in the
assets of the
arrangement
continued
IFRS 11
IFRS FoundationA558continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Obligations for
liabilities
The contractual
arrangement establishes
that the parties to the
joint arrangement share
all liabilities obligations
costs and expenses in a
specified proportion
(eg in proportion to the
parties’ ownership
interest in the
arrangement or in
proportion to the activity
carried out through the
arrangement that is
directly attributed to
them)
The contractual
arrangement establishes
that the joint
arrangement is liable for
the debts and obligations
of the arrangement
The contractual
arrangement establishes
that the parties to the
joint arrangement are
liable to the arrangement
only to the extent of their
respective investments in
the arrangement or to
their respective
obligations to contribute
any unpaid or additional
capital to the
arrangement or both
The contractual
arrangement establishes
that the parties to the
joint arrangement are
liable for claims raised by
third parties
The contractual
arrangement states that
creditors of the joint
arrangement do not have
rights of recourse against
any party with respect to
debts or obligations of
the arrangement
continued
IFRS 11
IFRS Foundation A559continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Revenues expenses
profit or loss
The contractual
arrangement establishes
the allocation of revenues
and expenses on the basis
of the relative
performance of each
party to the joint
arrangement For
example the contractual
arrangement might
establish that revenues
and expenses are
allocated on the basis of
the capacity that each
party uses in a plant
operated jointly which
could differ from their
ownership interest in the
joint arrangement In
other instances the
parties might have agreed
to share the profit or loss
relating to the
arrangement on the basis
of a specified proportion
such as the parties’
ownership interest in the
arrangement This would
not prevent the
arrangement from being
a joint operation if the
parties have rights to the
assets and obligations for
the liabilities relating to
the arrangement
The contractual
arrangement establishes
each party’s share in the
profit or loss relating to
the activities of the
arrangement
continued
IFRS 11
IFRS FoundationA560continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Guarantees The parties to joint arrangements are often required
to provide guarantees to third parties that for
example receive a service from or provide financing
to the joint arrangement The provision of such
guarantees or the commitment by the parties to
provide them does not by itself determine that the
joint arrangement is a joint operation The feature
that determines whether the joint arrangement is a
joint operation or a joint venture is whether the
parties have obligations for the liabilities relating to
the arrangement (for some of which the parties
might or might not have provided a guarantee)
B28 When the contractual arrangement specifies that the parties have rights to the
assets and obligations for the liabilities relating to the arrangement they are
parties to a joint operation and do not need to consider other facts and
circumstances (paragraphs B29–B33) for the purposes of classifying the joint
arrangement
Assessing other facts and circumstances
B29 When the terms of the contractual arrangement do not specify that the parties
have rights to the assets and obligations for the liabilities relating to the
arrangement the parties shall consider other facts and circumstances to assess
whether the arrangement is a joint operation or a joint venture
B30 A joint arrangement might be structured in a separate vehicle whose legal form
confers separation between the parties and the separate vehicle The contractual
terms agreed among the parties might not specify the parties’ rights to the
assets and obligations for the liabilities yet consideration of other facts and
circumstances can lead to such an arrangement being classified as a joint
operation This will be the case when other facts and circumstances give the
parties rights to the assets and obligations for the liabilities relating to the
arrangement
B31 When the activities of an arrangement are primarily designed for the provision
of output to the parties this indicates that the parties have rights to
substantially all the economic benefits of the assets of the arrangement The
parties to such arrangements often ensure their access to the outputs provided
by the arrangement by preventing the arrangement from selling output to third
parties
B32 The effect of an arrangement with such a design and purpose is that the
liabilities incurred by the arrangement are in substance satisfied by the cash
flows received from the parties through their purchases of the output When
the parties are substantially the only source of cash flows contributing to the
IFRS 11
IFRS Foundation A561continuity of the operations of the arrangement this indicates that the parties
have an obligation for the liabilities relating to the arrangement
Application example
Example 5
Assume that two parties structure a joint arrangement in an incorporated
entity (entity C) in which each party has a 50 per cent ownership interest
The purpose of the arrangement is to manufacture materials required by the
parties for their own individual manufacturing processes The arrangement
ensures that the parties operate the facility that produces the materials to
the quantity and quality specifications of the parties
The legal form of entity C (an incorporated entity) through which the
activities are conducted initially indicates that the assets and liabilities held
in entity C are the assets and liabilities of entity C The contractual
arrangement between the parties does not specify that the parties have rights
to the assets or obligations for the liabilities of entity C Accordingly the
legal form of entity C and the terms of the contractual arrangement indicate
that the arrangement is a joint venture
However the parties also consider the following aspects of the arrangement
● The parties agreed to purchase all the output produced by entity C in
a ratio of 5050 Entity C cannot sell any of the output to third
parties unless this is approved by the two parties to the arrangement
Because the purpose of the arrangement is to provide the parties with
output they require such sales to third parties are expected to be
uncommon and not material
● The price of the output sold to the parties is set by both parties at a
level that is designed to cover the costs of production and
administrative expenses incurred by entity C On the basis of this
operating model the arrangement is intended to operate at a
breakeven level
continued
IFRS 11
IFRS FoundationA562continued
Application example
From the fact pattern above the following facts and circumstances are
relevant
● The obligation of the parties to purchase all the output produced by
entity C reflects the exclusive dependence of entity C upon the parties
for the generation of cash flows and thus the parties have an
obligation to fund the settlement of the liabilities of entity C
● The fact that the parties have rights to all the output produced by
entity C means that the parties are consuming and therefore have
rights to all the economic benefits of the assets of entity C
These facts and circumstances indicate that the arrangement is a joint
operation The conclusion about the classification of the joint arrangement
in these circumstances would not change if instead of the parties using their
share of the output themselves in a subsequent manufacturing process the
parties sold their share of the output to third parties
If the parties changed the terms of the contractual arrangement so that the
arrangement was able to sell output to third parties this would result in
entity C assuming demand inventory and credit risks In that scenario such
a change in the facts and circumstances would require reassessment of the
classification of the joint arrangement Such facts and circumstances would
indicate that the arrangement is a joint venture
B33 The following flow chart reflects the assessment an entity follows to classify an
arrangement when the joint arrangement is structured through a separate
vehicle
IFRS 11
IFRS Foundation A563Financial statements of parties to a joint arrangement
(paragraphs 21A–22)
Accounting for acquisitions of interests in joint
operations
B33A When an entity acquires an interest in a joint operation in which the activity of
the joint operation constitutes a business as defined in IFRS 3 it shall apply to
the extent of its share in accordance with paragraph 20 all of the principles on
business combinations accounting in IFRS 3 and other IFRSs that do not
conflict with the guidance in this IFRS and disclose the information required by
those IFRSs in relation to business combinations The principles on business
combinations accounting that do not conflict with the guidance in this IFRS
include but are not limited to
(a) measuring identifiable assets and liabilities at fair value other than
items for which exceptions are given in IFRS 3 and other IFRSs
IFRS 11
IFRS FoundationA564(b) recognising acquisitionrelated costs as expenses in the periods in which
the costs are incurred and the services are received with the exception
that the costs to issue debt or equity securities are recognised in
accordance with IAS 32 Financial Instruments Presentation and IFRS 91
(c) recognising deferred tax assets and deferred tax liabilities that arise from
the initial recognition of assets or liabilities except for deferred tax
liabilities that arise from the initial recognition of goodwill as required
by IFRS 3 and IAS 12 Income Taxes for business combinations
(d) recognising the excess of the consideration transferred over the net of
the acquisitiondate amounts of the identifiable assets acquired and the
liabilities assumed if any as goodwill and
(e) testing for impairment a cashgenerating unit to which goodwill has
been allocated at least annually and whenever there is an indication
that the unit may be impaired as required by IAS 36 Impairment of Assets
for goodwill acquired in a business combination
B33B Paragraphs 21A and B33A also apply to the formation of a joint operation if and
only if an existing business as defined in IFRS 3 is contributed to the joint
operation on its formation by one of the parties that participate in the joint
operation However those paragraphs do not apply to the formation of a joint
operation if all of the parties that participate in the joint operation only
contribute assets or groups of assets that do not constitute businesses to the
joint operation on its formation
B33C A joint operator might increase its interest in a joint operation in which the
activity of the joint operation constitutes a business as defined in IFRS 3 by
acquiring an additional interest in the joint operation In such cases previously
held interests in the joint operation are not remeasured if the joint operator
retains joint control
B33D Paragraphs 21A and B33A–B33C do not apply on the acquisition of an interest in
a joint operation when the parties sharing joint control including the entity
acquiring the interest in the joint operation are under the common control of
the same ultimate controlling party or parties both before and after the
acquisition and that control is not transitory
Accounting for sales or contributions of assets to a joint
operation
B34 When an entity enters into a transaction with a joint operation in which it is a
joint operator such as a sale or contribution of assets it is conducting the
transaction with the other parties to the joint operation and as such the joint
operator shall recognise gains and losses resulting from such a transaction only
to the extent of the other parties’ interests in the joint operation
1 If an entity applies these amendments but does not yet apply IFRS 9 the reference in these
amendments to IFRS 9 shall be read as a reference to IAS 39 Financial Instruments Recognition and
Measurement
IFRS 11
IFRS Foundation A565B35 When such transactions provide evidence of a reduction in the net realisable
value of the assets to be sold or contributed to the joint operation or of an
impairment loss of those assets those losses shall be recognised fully by the joint
operator
Accounting for purchases of assets from a joint
operation
B36 When an entity enters into a transaction with a joint operation in which it is a
joint operator such as a purchase of assets it shall not recognise its share of the
gains and losses until it resells those assets to a third party
B37 When such transactions provide evidence of a reduction in the net realisable
value of the assets to be purchased or of an impairment loss of those assets a
joint operator shall recognise its share of those losses
IFRS 11
IFRS FoundationA566Appendix C
Effective date transition and withdrawal of other IFRSs
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
Effective date
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted If an entity applies this IFRS
earlier it shall disclose that fact and apply IFRS 10 IFRS 12 Disclosure of Interests in
Other Entities IAS 27 (as amended in 2011) and IAS 28 (as amended in 2011) at the
same time
C1A Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 amended paragraphs C2–C5 C7–C10 and C12 and added
paragraphs C1B and C12A–C12B An entity shall apply those amendments for
annual periods beginning on or after 1 January 2013 If an entity applies IFRS 11
for an earlier period it shall apply those amendments for that earlier period
C1AA Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
issued in May 2014 amended the heading after paragraph B33 and added
paragraphs 21A B33A–B33D and C14A and their related headings An entity
shall apply those amendments prospectively in annual periods beginning on or
after 1 January 2016 Earlier application is permitted If an entity applies those
amendments in an earlier period it shall disclose that fact
Transition
C1B Notwithstanding the requirements of paragraph 28 of IAS 8 Accounting Policies
Changes in Accounting Estimates and Errors when this IFRS is first applied an entity
need only present the quantitative information required by paragraph 28(f) of
IAS 8 for the annual period immediately preceding the first annual period for
which IFRS 11 is applied (the immediately preceding period’) An entity may
also present this information for the current period or for earlier comparative
periods but is not required to do so
Joint ventures—transition from proportionate
consolidation to the equity method
C2 When changing from proportionate consolidation to the equity method an
entity shall recognise its investment in the joint venture as at the beginning of
the immediately preceding period That initial investment shall be measured as
the aggregate of the carrying amounts of the assets and liabilities that the entity
had previously proportionately consolidated including any goodwill arising
from acquisition If the goodwill previously belonged to a larger cashgenerating
unit or to a group of cashgenerating units the entity shall allocate goodwill to
the joint venture on the basis of the relative carrying amounts of the joint
venture and the cashgenerating unit or group of cashgenerating units to which
it belonged
IFRS 11
IFRS Foundation A567C3 The opening balance of the investment determined in accordance with
paragraph C2 is regarded as the deemed cost of the investment at initial
recognition An entity shall apply paragraphs 40–43 of IAS 28 (as amended in
2011) to the opening balance of the investment to assess whether the investment
is impaired and shall recognise any impairment loss as an adjustment to
retained earnings at the beginning of the immediately preceding period The
initial recognition exception in paragraphs 15 and 24 of IAS 12 Income Taxes does
not apply when the entity recognises an investment in a joint venture resulting
from applying the transition requirements for joint ventures that had previously
been proportionately consolidated
C4 If aggregating all previously proportionately consolidated assets and liabilities
results in negative net assets an entity shall assess whether it has legal or
constructive obligations in relation to the negative net assets and if so the
entity shall recognise the corresponding liability If the entity concludes that it
does not have legal or constructive obligations in relation to the negative net
assets it shall not recognise the corresponding liability but it shall adjust
retained earnings at the beginning of the immediately preceding period The
entity shall disclose this fact along with its cumulative unrecognised share of
losses of its joint ventures as at the beginning of the immediately preceding
period and at the date at which this IFRS is first applied
C5 An entity shall disclose a breakdown of the assets and liabilities that have been
aggregated into the single line investment balance as at the beginning of the
immediately preceding period That disclosure shall be prepared in an
aggregated manner for all joint ventures for which an entity applies the
transition requirements referred to in paragraphs C2–C6
C6 After initial recognition an entity shall account for its investment in the joint
venture using the equity method in accordance with IAS 28 (as amended in
2011)
Joint operations—transition from the equity method to
accounting for assets and liabilities
C7 When changing from the equity method to accounting for assets and liabilities
in respect of its interest in a joint operation an entity shall at the beginning of
the immediately preceding period derecognise the investment that was
previously accounted for using the equity method and any other items that
formed part of the entity’s net investment in the arrangement in accordance
with paragraph 38 of IAS 28 (as amended in 2011) and recognise its share of each
of the assets and the liabilities in respect of its interest in the joint operation
including any goodwill that might have formed part of the carrying amount of
the investment
C8 An entity shall determine its interest in the assets and liabilities relating to the
joint operation on the basis of its rights and obligations in a specified
proportion in accordance with the contractual arrangement An entity
measures the initial carrying amounts of the assets and liabilities by
disaggregating them from the carrying amount of the investment at the
beginning of the immediately preceding period on the basis of the information
used by the entity in applying the equity method
IFRS 11
IFRS FoundationA568C9 Any difference arising from the investment previously accounted for using the
equity method together with any other items that formed part of the entity’s net
investment in the arrangement in accordance with paragraph 38 of IAS 28 (as
amended in 2011) and the net amount of the assets and liabilities including
any goodwill recognised shall be
(a) offset against any goodwill relating to the investment with any
remaining difference adjusted against retained earnings at the
beginning of the immediately preceding period if the net amount of the
assets and liabilities including any goodwill recognised is higher than
the investment (and any other items that formed part of the entity’s net
investment) derecognised
(b) adjusted against retained earnings at the beginning of the immediately
preceding period if the net amount of the assets and liabilities
including any goodwill recognised is lower than the investment (and
any other items that formed part of the entity’s net investment)
derecognised
C10 An entity changing from the equity method to accounting for assets and
liabilities shall provide a reconciliation between the investment derecognised
and the assets and liabilities recognised together with any remaining difference
adjusted against retained earnings at the beginning of the immediately
preceding period
C11 The initial recognition exception in paragraphs 15 and 24 of IAS 12 does not
apply when the entity recognises assets and liabilities relating to its interest in a
joint operation
Transition provisions in an entity’s separate financial
statements
C12 An entity that in accordance with paragraph 10 of IAS 27 was previously
accounting in its separate financial statements for its interest in a joint
operation as an investment at cost or in accordance with IFRS 9 shall
(a) derecognise the investment and recognise the assets and the liabilities in
respect of its interest in the joint operation at the amounts determined
in accordance with paragraphs C7–C9
(b) provide a reconciliation between the investment derecognised and the
assets and liabilities recognised together with any remaining difference
adjusted in retained earnings at the beginning of the immediately
preceding period
C13 The initial recognition exception in paragraphs 15 and 24 of IAS 12 does not
apply when the entity recognises assets and liabilities relating to its interest in a
joint operation in its separate financial statements resulting from applying the
transition requirements for joint operations referred to in paragraph C12
References to the immediately preceding period’
C13A Notwithstanding the references to the immediately preceding period’ in
paragraphs C2–C12 an entity may also present adjusted comparative
information for any earlier periods presented but is not required to do so If an
IFRS 11
IFRS Foundation A569entity does present adjusted comparative information for any earlier periods all
references to the immediately preceding period’ in paragraphs C2–C12 shall be
read as the earliest adjusted comparative period presented’
C13B If an entity presents unadjusted comparative information for any earlier
periods it shall clearly identify the information that has not been adjusted state
that it has been prepared on a different basis and explain that basis
References to IFRS 9
C14 If an entity applies this IFRS but does not yet apply IFRS 9 any reference to
IFRS 9 shall be read as a reference to IAS 39 Financial Instruments Recognition and
Measurement
Accounting for acquisitions of interests in joint
operations
C14A Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
issued in May 2014 amended the heading after paragraph B33 and added
paragraphs 21A B33A–B33D C1AA and their related headings An entity shall
apply those amendments prospectively for acquisitions of interests in joint
operations in which the activities of the joint operations constitute businesses
as defined in IFRS 3 for those acquisitions occurring from the beginning of the
first period in which it applies those amendments Consequently amounts
recognised for acquisitions of interests in joint operations occurring in prior
periods shall not be adjusted
Withdrawal of other IFRSs
C15 This IFRS supersedes the following IFRSs
(a) IAS 31 Interests in Joint Ventures and
(b) SIC13 Jointly Controlled Entities—NonMonetary Contributions by Venturers
IFRS 11
IFRS FoundationA570Appendix D
Amendments to other IFRSs
This appendix sets out amendments to other IFRSs that are a consequence of the Board issuing
IFRS 11 An entity shall apply the amendments for annual periods beginning on or after 1 January
2013 If an entity applies IFRS 11 for an earlier period it shall apply the amendments for that
earlier period Amended paragraphs are shown with new text underlined and deleted text struck
through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 11
IFRS Foundation A571IFRS Standard 12
Disclosure of Interests in Other Entities
In May 2011 the International Accounting Standards Board issued IFRS 12 Disclosure of
Interests in Other Entities IFRS 12 replaced the disclosure requirements in IAS 27 Consolidated
and Separate Financial Statements IAS 28 Investments in Associates and IAS 31 Interests in Joint
Ventures
In June 2012 IFRS 12 was amended by Consolidated Financial Statements Joint Arrangements and
Disclosure of Interests in Other Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and
IFRS 12) These amendments provided additional transition relief in IFRS 12 limiting the
requirement to present adjusted comparative information to only the annual period
immediately preceding the first annual period for which IFRS 12 is applied Furthermore
for disclosures related to unconsolidated structured entities the amendments removed the
requirement to present comparative information for periods before IFRS 12 is first applied
In October 2012 Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) introduced
new disclosure requirements for investment entities that in accordance with IFRS 10
Consolidated Financial Statements measure their subsidiaries at fair value through profit or
loss instead of consolidating them
Other Standards have made minor amendments to IFRS 12 including Investment Entities
Applying the Consolidation Exception (Amendments to IFRS 10 IFRS 12 and IAS 28) (issued
December 2014)
IFRS 12
IFRS Foundation A573CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 12
DISCLOSURE OF INTERESTS IN OTHER ENTITIES
OBJECTIVE 1
Meeting the objective 2
SCOPE 5
SIGNIFICANT JUDGEMENTS AND ASSUMPTIONS 7
Investment entity status 9A
INTERESTS IN SUBSIDIARIES 10
The interest that noncontrolling interests have in the group’s activities and
cash flows 12
The nature and extent of significant restrictions 13
Nature of the risks associated with an entity’s interests in consolidated
structured entities 14
Consequences of changes in a parent’s ownership interest in a subsidiary
that do not result in a loss of control 18
Consequences of losing control of a subsidiary during the reporting period 19
INTERESTS IN UNCONSOLIDATED SUBSIDIARIES (INVESTMENT ENTITIES) 19A
INTERESTS IN JOINT ARRANGEMENTS AND ASSOCIATES 20
Nature extent and financial effects of an entity’s interests in joint
arrangements and associates 21
Risks associated with an entity’s interests in joint ventures and associates 23
INTERESTS IN UNCONSOLIDATED STRUCTURED ENTITIES 24
Nature of interests 26
Nature of risks 29
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 12 ISSUED IN MAY 2011
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 12
Consolidated Financial Statements Joint Arrangements and Disclosure of
Interests in Other Entities Transition Guidance (Amendments to IFRS 10
IFRS 11 and IFRS 12) issued in June 2012
IFRS 12
IFRS FoundationA574Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in
October 2012
Investment Entities Applying the Consolidation Exception (Amendments to
IFRS 10 IFRS 12 and IAS 28) issued in December 2014
BASIS FOR CONCLUSIONS
IFRS 12
IFRS Foundation A575International Financial Reporting Standard 12 Disclosure of Interests in Other Entities
(IFRS 12) is set out in paragraphs 1–31 and Appendices A–D All the paragraphs have
equal authority Paragraphs in bold type state the main principles Terms defined in
Appendix A are in italics the first time they appear in the IFRS Definitions of other terms
are given in the Glossary for International Financial Reporting Standards IFRS 12
should be read in the context of its objective and the Basis for Conclusions the Preface to
International Financial Reporting Standards and the Conceptual Framework for Financial
Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance
IFRS 12
IFRS FoundationA576Introduction
IN1 IFRS 12 Disclosure of Interests in Other Entities applies to entities that have an interest
in a subsidiary a joint arrangement an associate or an unconsolidated
structured entity
IN2 The IFRS is effective for annual periods beginning on or after 1 January 2013
Earlier application is permitted
Reasons for issuing the IFRS
IN3 Users of financial statements have consistently requested improvements to the
disclosure of a reporting entity’s interests in other entities to help identify the
profit or loss and cash flows available to the reporting entity and determine the
value of a current or future investment in the reporting entity
IN4 They highlighted the need for better information about the subsidiaries that are
consolidated as well as an entity’s interests in joint arrangements and associates
that are not consolidated but with which the entity has a special relationship
IN5 The global financial crisis that started in 2007 also highlighted a lack of
transparency about the risks to which a reporting entity was exposed from its
involvement with structured entities including those that it had sponsored
IN6 In response to input received from users and others including the G20 leaders
and the Financial Stability Board the Board decided to address in IFRS 12 the
need for improved disclosure of a reporting entity’s interests in other entities
when the reporting entity has a special relationship with those other entities
IN7 The Board identified an opportunity to integrate and make consistent the
disclosure requirements for subsidiaries joint arrangements associates and
unconsolidated structured entities and present those requirements in a single
IFRS The Board observed that the disclosure requirements of IAS 27 Consolidated
and Separate Financial Statements IAS 28 Investments in Associates and IAS 31 Interests
in Joint Ventures overlapped in many areas In addition many commented that
the disclosure requirements for interests in unconsolidated structured entities
should not be located in a consolidation standard Therefore the Board
concluded that a combined disclosure standard for interests in other entities
would make it easier to understand and apply the disclosure requirements for
subsidiaries joint ventures associates and unconsolidated structured entities
Main features of the IFRS
IN8 The IFRS requires an entity to disclose information that enables users of
financial statements to evaluate
(a) the nature of and risks associated with its interests in other entities
and
(b) the effects of those interests on its financial position financial
performance and cash flows
IFRS 12
IFRS Foundation A577General requirements
IN9 The IFRS establishes disclosure objectives according to which an entity discloses
information that enables users of its financial statements
(a) to understand
(i) the significant judgements and assumptions (and changes to
those judgements and assumptions) made in determining the
nature of its interest in another entity or arrangement
(ie control joint control or significant influence) and in
determining the type of joint arrangement in which it has an
interest and
(ii) the interest that noncontrolling interests have in the group’s
activities and cash flows and
(b) to evaluate
(i) the nature and extent of significant restrictions on its ability to
access or use assets and settle liabilities of the group
(ii) the nature of and changes in the risks associated with its
interests in consolidated structured entities
(iii) the nature and extent of its interests in unconsolidated
structured entities and the nature of and changes in the risks
associated with those interests
(iv) the nature extent and financial effects of its interests in joint
arrangements and associates and the nature of the risks
associated with those interests
(v) the consequences of changes in a parent’s ownership interest in a
subsidiary that do not result in a loss of control and
(vi) the consequences of losing control of a subsidiary during the
reporting period
IN10 The IFRS specifies minimum disclosures that an entity must provide If the
minimum disclosures required by the IFRS are not sufficient to meet the
disclosure objective an entity discloses whatever additional information is
necessary to meet that objective
IN11 The IFRS requires an entity to consider the level of detail necessary to satisfy the
disclosure objective and how much emphasis to place on each of the
requirements in the IFRS An entity shall aggregate or disaggregate disclosures
so that useful information is not obscured by either the inclusion of a large
amount of insignificant detail or the aggregation of items that have different
characteristics
IN12 Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 introduced an exception to the principle in IFRS 10 Consolidated Financial
Statements that all subsidiaries shall be consolidated The amendments define an
investment entity and require a parent that is an investment entity to measure
its investment in particular subsidiaries at fair value through profit or loss in
accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments
IFRS 12
IFRS FoundationA578Recognition and Measurement if IFRS 9 has not yet been adopted) instead of
consolidating those subsidiaries in its consolidated and separate financial
statements Consequently the amendments also introduced new disclosure
requirements for investment entities in this IFRS and IAS 27 Separate Financial
Statements
IFRS 12
IFRS Foundation A579International Financial Reporting Standard 12
Disclosure of Interests in Other Entities
Objective
1 The objective of this IFRS is to require an entity to disclose information
that enables users of its financial statements to evaluate
(a) the nature of and risks associated with its interests in other
entities and
(b) the effects of those interests on its financial position financial
performance and cash flows
Meeting the objective
2 To meet the objective in paragraph 1 an entity shall disclose
(a) the significant judgements and assumptions it has made in determining
(i) the nature of its interest in another entity or arrangement
(ii) the type of joint arrangement in which it has an interest
(paragraphs 7–9)
(iii) that it meets the definition of an investment entity if applicable
(paragraph 9A) and
(b) information about its interests in
(i) subsidiaries (paragraphs 10–19)
(ii) joint arrangements and associates (paragraphs 20–23) and
(iii) structured entities that are not controlled by the entity
(unconsolidated structured entities) (paragraphs 24–31)
3 If the disclosures required by this IFRS together with disclosures required by
other IFRSs do not meet the objective in paragraph 1 an entity shall disclose
whatever additional information is necessary to meet that objective
4 An entity shall consider the level of detail necessary to satisfy the disclosure
objective and how much emphasis to place on each of the requirements in this
IFRS It shall aggregate or disaggregate disclosures so that useful information is
not obscured by either the inclusion of a large amount of insignificant detail or
the aggregation of items that have different characteristics (see paragraphs
B2–B6)
Scope
5 This IFRS shall be applied by an entity that has an interest in any of the
following
(a) subsidiaries
(b) joint arrangements (ie joint operations or joint ventures)
IFRS 12
IFRS FoundationA580(c) associates
(d) unconsolidated structured entities
6 This IFRS does not apply to
(a) postemployment benefit plans or other longterm employee benefit
plans to which IAS 19 Employee Benefits applies
(b) an entity’s separate financial statements to which IAS 27 Separate
Financial Statements applies However
(i) if an entity has interests in unconsolidated structured entities
and prepares separate financial statements as its only financial
statements it shall apply the requirements in paragraphs 24–31
when preparing those separate financial statements
(ii) an investment entity that prepares financial statements in which
all of its subsidiaries are measured at fair value through profit or
loss in accordance with paragraph 31 of IFRS 10 shall present the
disclosures relating to investment entities required by this IFRS
(c) an interest held by an entity that participates in but does not have joint
control of a joint arrangement unless that interest results in significant
influence over the arrangement or is an interest in a structured entity
(d) an interest in another entity that is accounted for in accordance with
IFRS 9 Financial Instruments However an entity shall apply this IFRS
(i) when that interest is an interest in an associate or a joint venture
that in accordance with IAS 28 Investments in Associates and Joint
Ventures is measured at fair value through profit or loss or
(ii) when that interest is an interest in an unconsolidated structured
entity
Significant judgements and assumptions
7 An entity shall disclose information about significant judgements and
assumptions it has made (and changes to those judgements and
assumptions) in determining
(a) that it has control of another entity ie an investee as described in
paragraphs 5 and 6 of IFRS 10 Consolidated Financial Statements
(b) that it has joint control of an arrangement or significant influence
over another entity and
(c) the type of joint arrangement (ie joint operation or joint venture)
when the arrangement has been structured through a separate
vehicle
8 The significant judgements and assumptions disclosed in accordance with
paragraph 7 include those made by the entity when changes in facts and
circumstances are such that the conclusion about whether it has control joint
control or significant influence changes during the reporting period
IFRS 12
IFRS Foundation A5819 To comply with paragraph 7 an entity shall disclose for example significant
judgements and assumptions made in determining that
(a) it does not control another entity even though it holds more than half of
the voting rights of the other entity
(b) it controls another entity even though it holds less than half of the
voting rights of the other entity
(c) it is an agent or a principal (see paragraphs B58–B72 of IFRS 10)
(d) it does not have significant influence even though it holds 20 per cent or
more of the voting rights of another entity
(e) it has significant influence even though it holds less than 20 per cent of
the voting rights of another entity
Investment entity status
9A When a parent determines that it is an investment entity in accordance
with paragraph 27 of IFRS 10 the investment entity shall disclose
information about significant judgements and assumptions it has made in
determining that it is an investment entity If the investment entity does not
have one or more of the typical characteristics of an investment entity (see
paragraph 28 of IFRS 10) it shall disclose its reasons for concluding that it is
nevertheless an investment entity
9B When an entity becomes or ceases to be an investment entity it shall disclose
the change of investment entity status and the reasons for the change In
addition an entity that becomes an investment entity shall disclose the effect of
the change of status on the financial statements for the period presented
including
(a) the total fair value as of the date of change of status of the subsidiaries
that cease to be consolidated
(b) the total gain or loss if any calculated in accordance with
paragraph B101 of IFRS 10 and
(c) the line item(s) in profit or loss in which the gain or loss is recognised (if
not presented separately)
Interests in subsidiaries
10 An entity shall disclose information that enables users of its consolidated
financial statements
(a) to understand
(i) the composition of the group and
(ii) the interest that noncontrolling interests have in the
group’s activities and cash flows (paragraph 12) and
(b) to evaluate
IFRS 12
IFRS FoundationA582(i) the nature and extent of significant restrictions on its
ability to access or use assets and settle liabilities of the
group (paragraph 13)
(ii) the nature of and changes in the risks associated with its
interests in consolidated structured entities (paragraphs
14–17)
(iii) the consequences of changes in its ownership interest in a
subsidiary that do not result in a loss of control
(paragraph 18) and
(iv) the consequences of losing control of a subsidiary during
the reporting period (paragraph 19)
11 When the financial statements of a subsidiary used in the preparation of
consolidated financial statements are as of a date or for a period that is different
from that of the consolidated financial statements (see paragraphs B92 and B93
of IFRS 10) an entity shall disclose
(a) the date of the end of the reporting period of the financial statements of
that subsidiary and
(b) the reason for using a different date or period
The interest that noncontrolling interests have in the
group’s activities and cash flows
12 An entity shall disclose for each of its subsidiaries that have noncontrolling
interests that are material to the reporting entity
(a) the name of the subsidiary
(b) the principal place of business (and country of incorporation if different
from the principal place of business) of the subsidiary
(c) the proportion of ownership interests held by noncontrolling interests
(d) the proportion of voting rights held by noncontrolling interests if
different from the proportion of ownership interests held
(e) the profit or loss allocated to noncontrolling interests of the subsidiary
during the reporting period
(f) accumulated noncontrolling interests of the subsidiary at the end of the
reporting period
(g) summarised financial information about the subsidiary (see
paragraph B10)
The nature and extent of significant restrictions
13 An entity shall disclose
(a) significant restrictions (eg statutory contractual and regulatory
restrictions) on its ability to access or use the assets and settle the
liabilities of the group such as
IFRS 12
IFRS Foundation A583(i) those that restrict the ability of a parent or its subsidiaries to
transfer cash or other assets to (or from) other entities within the
group
(ii) guarantees or other requirements that may restrict dividends
and other capital distributions being paid or loans and advances
being made or repaid to (or from) other entities within the
group
(b) the nature and extent to which protective rights of noncontrolling
interests can significantly restrict the entity’s ability to access or use the
assets and settle the liabilities of the group (such as when a parent is
obliged to settle liabilities of a subsidiary before settling its own
liabilities or approval of noncontrolling interests is required either to
access the assets or to settle the liabilities of a subsidiary)
(c) the carrying amounts in the consolidated financial statements of the
assets and liabilities to which those restrictions apply
Nature of the risks associated with an entity’s interests
in consolidated structured entities
14 An entity shall disclose the terms of any contractual arrangements that could
require the parent or its subsidiaries to provide financial support to a
consolidated structured entity including events or circumstances that could
expose the reporting entity to a loss (eg liquidity arrangements or credit rating
triggers associated with obligations to purchase assets of the structured entity or
provide financial support)
15 If during the reporting period a parent or any of its subsidiaries has without
having a contractual obligation to do so provided financial or other support to a
consolidated structured entity (eg purchasing assets of or instruments issued by
the structured entity) the entity shall disclose
(a) the type and amount of support provided including situations in which
the parent or its subsidiaries assisted the structured entity in obtaining
financial support and
(b) the reasons for providing the support
16 If during the reporting period a parent or any of its subsidiaries has without
having a contractual obligation to do so provided financial or other support to a
previously unconsolidated structured entity and that provision of support
resulted in the entity controlling the structured entity the entity shall disclose
an explanation of the relevant factors in reaching that decision
17 An entity shall disclose any current intentions to provide financial or other
support to a consolidated structured entity including intentions to assist the
structured entity in obtaining financial support
IFRS 12
IFRS FoundationA584Consequences of changes in a parent’s ownership
interest in a subsidiary that do not result in a loss of
control
18 An entity shall present a schedule that shows the effects on the equity
attributable to owners of the parent of any changes in its ownership interest in a
subsidiary that do not result in a loss of control
Consequences of losing control of a subsidiary during
the reporting period
19 An entity shall disclose the gain or loss if any calculated in accordance with
paragraph 25 of IFRS 10 and
(a) the portion of that gain or loss attributable to measuring any investment
retained in the former subsidiary at its fair value at the date when
control is lost and
(b) the line item(s) in profit or loss in which the gain or loss is recognised (if
not presented separately)
Interests in unconsolidated subsidiaries (investment entities)
19A An investment entity that in accordance with IFRS 10 is required to apply the
exception to consolidation and instead account for its investment in a subsidiary
at fair value through profit or loss shall disclose that fact
19B For each unconsolidated subsidiary an investment entity shall disclose
(a) the subsidiary’s name
(b) the principal place of business (and country of incorporation if different
from the principal place of business) of the subsidiary and
(c) the proportion of ownership interest held by the investment entity and
if different the proportion of voting rights held
19C If an investment entity is the parent of another investment entity the parent
shall also provide the disclosures in 19B(a)–(c) for investments that are
controlled by its investment entity subsidiary The disclosure may be provided
by including in the financial statements of the parent the financial statements
of the subsidiary (or subsidiaries) that contain the above information
19D An investment entity shall disclose
(a) the nature and extent of any significant restrictions (eg resulting from
borrowing arrangements regulatory requirements or contractual
arrangements) on the ability of an unconsolidated subsidiary to transfer
funds to the investment entity in the form of cash dividends or to repay
loans or advances made to the unconsolidated subsidiary by the
investment entity and
(b) any current commitments or intentions to provide financial or other
support to an unconsolidated subsidiary including commitments or
intentions to assist the subsidiary in obtaining financial support
IFRS 12
IFRS Foundation A58519E If during the reporting period an investment entity or any of its subsidiaries
has without having a contractual obligation to do so provided financial or
other support to an unconsolidated subsidiary (eg purchasing assets of or
instruments issued by the subsidiary or assisting the subsidiary in obtaining
financial support) the entity shall disclose
(a) the type and amount of support provided to each unconsolidated
subsidiary and
(b) the reasons for providing the support
19F An investment entity shall disclose the terms of any contractual arrangements
that could require the entity or its unconsolidated subsidiaries to provide
financial support to an unconsolidated controlled structured entity including
events or circumstances that could expose the reporting entity to a loss
(eg liquidity arrangements or credit rating triggers associated with obligations
to purchase assets of the structured entity or to provide financial support)
19G If during the reporting period an investment entity or any of its unconsolidated
subsidiaries has without having a contractual obligation to do so provided
financial or other support to an unconsolidated structured entity that the
investment entity did not control and if that provision of support resulted in
the investment entity controlling the structured entity the investment entity
shall disclose an explanation of the relevant factors in reaching the decision to
provide that support
Interests in joint arrangements and associates
20 An entity shall disclose information that enables users of its financial
statements to evaluate
(a) the nature extent and financial effects of its interests in joint
arrangements and associates including the nature and effects of
its contractual relationship with the other investors with joint
control of or significant influence over joint arrangements and
associates (paragraphs 21 and 22) and
(b) the nature of and changes in the risks associated with its interests
in joint ventures and associates (paragraph 23)
Nature extent and financial effects of an entity’s
interests in joint arrangements and associates
21 An entity shall disclose
(a) for each joint arrangement and associate that is material to the
reporting entity
(i) the name of the joint arrangement or associate
(ii) the nature of the entity’s relationship with the joint arrangement
or associate (by for example describing the nature of the
activities of the joint arrangement or associate and whether they
are strategic to the entity’s activities)
IFRS 12
IFRS FoundationA586(iii) the principal place of business (and country of incorporation if
applicable and different from the principal place of business) of
the joint arrangement or associate
(iv) the proportion of ownership interest or participating share held
by the entity and if different the proportion of voting rights
held (if applicable)
(b) for each joint venture and associate that is material to the reporting
entity
(i) whether the investment in the joint venture or associate is
measured using the equity method or at fair value
(ii) summarised financial information about the joint venture or
associate as specified in paragraphs B12 and B13
(iii) if the joint venture or associate is accounted for using the equity
method the fair value of its investment in the joint venture or
associate if there is a quoted market price for the investment
(c) financial information as specified in paragraph B16 about the entity’s
investments in joint ventures and associates that are not individually
material
(i) in aggregate for all individually immaterial joint ventures and
separately
(ii) in aggregate for all individually immaterial associates
21A An investment entity need not provide the disclosures required by
paragraphs 21(b)–21(c)
22 An entity shall also disclose
(a) the nature and extent of any significant restrictions (eg resulting from
borrowing arrangements regulatory requirements or contractual
arrangements between investors with joint control of or significant
influence over a joint venture or an associate) on the ability of joint
ventures or associates to transfer funds to the entity in the form of cash
dividends or to repay loans or advances made by the entity
(b) when the financial statements of a joint venture or associate used in
applying the equity method are as of a date or for a period that is
different from that of the entity
(i) the date of the end of the reporting period of the financial
statements of that joint venture or associate and
(ii) the reason for using a different date or period
(c) the unrecognised share of losses of a joint venture or associate both for
the reporting period and cumulatively if the entity has stopped
recognising its share of losses of the joint venture or associate when
applying the equity method
IFRS 12
IFRS Foundation A587Risks associated with an entity’s interests in joint
ventures and associates
23 An entity shall disclose
(a) commitments that it has relating to its joint ventures separately from
the amount of other commitments as specified in paragraphs B18–B20
(b) in accordance with IAS 37 Provisions Contingent Liabilities and Contingent
Assets unless the probability of loss is remote contingent liabilities
incurred relating to its interests in joint ventures or associates (including
its share of contingent liabilities incurred jointly with other investors
with joint control of or significant influence over the joint ventures or
associates) separately from the amount of other contingent liabilities
Interests in unconsolidated structured entities
24 An entity shall disclose information that enables users of its financial
statements
(a) to understand the nature and extent of its interests in
unconsolidated structured entities (paragraphs 26–28) and
(b) to evaluate the nature of and changes in the risks associated with
its interests in unconsolidated structured entities
(paragraphs 29–31)
25 The information required by paragraph 24(b) includes information about an
entity’s exposure to risk from involvement that it had with unconsolidated
structured entities in previous periods (eg sponsoring the structured entity)
even if the entity no longer has any contractual involvement with the structured
entity at the reporting date
25A An investment entity need not provide the disclosures required by paragraph 24
for an unconsolidated structured entity that it controls and for which it presents
the disclosures required by paragraphs 19A–19G
Nature of interests
26 An entity shall disclose qualitative and quantitative information about its
interests in unconsolidated structured entities including but not limited to the
nature purpose size and activities of the structured entity and how the
structured entity is financed
27 If an entity has sponsored an unconsolidated structured entity for which it does
not provide information required by paragraph 29 (eg because it does not have
an interest in the entity at the reporting date) the entity shall disclose
(a) how it has determined which structured entities it has sponsored
(b) income from those structured entities during the reporting period including a
description of the types of income presented and
(c) the carrying amount (at the time of transfer) of all assets transferred to
those structured entities during the reporting period
IFRS 12
IFRS FoundationA58828 An entity shall present the information in paragraph 27(b) and (c) in tabular
format unless another format is more appropriate and classify its sponsoring
activities into relevant categories (see paragraphs B2–B6)
Nature of risks
29 An entity shall disclose in tabular format unless another format is more
appropriate a summary of
(a) the carrying amounts of the assets and liabilities recognised in its
financial statements relating to its interests in unconsolidated
structured entities
(b) the line items in the statement of financial position in which those assets
and liabilities are recognised
(c) the amount that best represents the entity’s maximum exposure to loss
from its interests in unconsolidated structured entities including how
the maximum exposure to loss is determined If an entity cannot
quantify its maximum exposure to loss from its interests in
unconsolidated structured entities it shall disclose that fact and the
reasons
(d) a comparison of the carrying amounts of the assets and liabilities of the
entity that relate to its interests in unconsolidated structured entities
and the entity’s maximum exposure to loss from those entities
30 If during the reporting period an entity has without having a contractual
obligation to do so provided financial or other support to an unconsolidated
structured entity in which it previously had or currently has an interest (for
example purchasing assets of or instruments issued by the structured entity)
the entity shall disclose
(a) the type and amount of support provided including situations in which
the entity assisted the structured entity in obtaining financial support
and
(b) the reasons for providing the support
31 An entity shall disclose any current intentions to provide financial or other
support to an unconsolidated structured entity including intentions to assist
the structured entity in obtaining financial support
IFRS 12
IFRS Foundation A589Appendix A
Defined terms
This appendix is an integral part of the IFRS
income from a
structured entity
For the purpose of this IFRS income from a structured entity
includes but is not limited to recurring and nonrecurring fees
interest dividends gains or losses on the remeasurement or
derecognition of interests in structured entities and gains or
losses from the transfer of assets and liabilities to the structured
entity
interest in another
entity
For the purpose of this IFRS an interest in another entity refers to
contractual and noncontractual involvement that exposes an
entity to variability of returns from the performance of the other
entity An interest in another entity can be evidenced by but is
not limited to the holding of equity or debt instruments as well
as other forms of involvement such as the provision of funding
liquidity support credit enhancement and guarantees It
includes the means by which an entity has control or joint
control of or significant influence over another entity An entity
does not necessarily have an interest in another entity solely
because of a typical customer supplier relationship
Paragraphs B7–B9 provide further information about interests in
other entities
Paragraphs B55–B57 of IFRS 10 explain variability of returns
structured entity An entity that has been designed so that voting or similar rights
are not the dominant factor in deciding who controls the entity
such as when any voting rights relate to administrative tasks only
and the relevant activities are directed by means of contractual
arrangements
Paragraphs B22–B24 provide further information about
structured entities
The following terms are defined in IAS 27 (as amended in 2011) IAS 28 (as amended in
2011) IFRS 10 and IFRS 11 Joint Arrangements and are used in this IFRS with the meanings
specified in those IFRSs
● associate
● consolidated financial statements
● control of an entity
● equity method
● group
● investment entity
● joint arrangement
● joint control
IFRS 12
IFRS FoundationA590● joint operation
● joint venture
● noncontrolling interest
● parent
● protective rights
● relevant activities
● separate financial statements
● separate vehicle
● significant influence
● subsidiary
IFRS 12
IFRS Foundation A591Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–31 and
has the same authority as the other parts of the IFRS
B1 The examples in this appendix portray hypothetical situations Although some
aspects of the examples may be present in actual fact patterns all relevant facts
and circumstances of a particular fact pattern would need to be evaluated when
applying IFRS 12
Aggregation (paragraph 4)
B2 An entity shall decide in the light of its circumstances how much detail it
provides to satisfy the information needs of users how much emphasis it places
on different aspects of the requirements and how it aggregates the information
It is necessary to strike a balance between burdening financial statements with
excessive detail that may not assist users of financial statements and obscuring
information as a result of too much aggregation
B3 An entity may aggregate the disclosures required by this IFRS for interests in
similar entities if aggregation is consistent with the disclosure objective and the
requirement in paragraph B4 and does not obscure the information provided
An entity shall disclose how it has aggregated its interests in similar entities
B4 An entity shall present information separately for interests in
(a) subsidiaries
(b) joint ventures
(c) joint operations
(d) associates and
(e) unconsolidated structured entities
B5 In determining whether to aggregate information an entity shall consider
quantitative and qualitative information about the different risk and return
characteristics of each entity it is considering for aggregation and the
significance of each such entity to the reporting entity The entity shall present
the disclosures in a manner that clearly explains to users of financial statements
the nature and extent of its interests in those other entities
B6 Examples of aggregation levels within the classes of entities set out in
paragraph B4 that might be appropriate are
(a) nature of activities (eg a research and development entity a revolving
credit card securitisation entity)
(b) industry classification
(c) geography (eg country or region)
IFRS 12
IFRS FoundationA592Interests in other entities
B7 An interest in another entity refers to contractual and noncontractual
involvement that exposes the reporting entity to variability of returns from the
performance of the other entity Consideration of the purpose and design of the
other entity may help the reporting entity when assessing whether it has an
interest in that entity and therefore whether it is required to provide the
disclosures in this IFRS That assessment shall include consideration of the risks
that the other entity was designed to create and the risks the other entity was
designed to pass on to the reporting entity and other parties
B8 A reporting entity is typically exposed to variability of returns from the
performance of another entity by holding instruments (such as equity or debt
instruments issued by the other entity) or having another involvement that
absorbs variability For example assume a structured entity holds a loan
portfolio The structured entity obtains a credit default swap from another
entity (the reporting entity) to protect itself from the default of interest and
principal payments on the loans The reporting entity has involvement that
exposes it to variability of returns from the performance of the structured entity
because the credit default swap absorbs variability of returns of the structured
entity
B9 Some instruments are designed to transfer risk from a reporting entity to
another entity Such instruments create variability of returns for the other
entity but do not typically expose the reporting entity to variability of returns
from the performance of the other entity For example assume a structured
entity is established to provide investment opportunities for investors who wish
to have exposure to entity Z’s credit risk (entity Z is unrelated to any party
involved in the arrangement) The structured entity obtains funding by issuing
to those investors notes that are linked to entity Z’s credit risk (creditlinked
notes) and uses the proceeds to invest in a portfolio of riskfree financial assets
The structured entity obtains exposure to entity Z’s credit risk by entering into a
credit default swap (CDS) with a swap counterparty The CDS passes entity Z’s
credit risk to the structured entity in return for a fee paid by the swap
counterparty The investors in the structured entity receive a higher return that
reflects both the structured entity’s return from its asset portfolio and the CDS
fee The swap counterparty does not have involvement with the structured
entity that exposes it to variability of returns from the performance of the
structured entity because the CDS transfers variability to the structured entity
rather than absorbing variability of returns of the structured entity
Summarised financial information for subsidiaries joint ventures
and associates (paragraphs 12 and 21)
B10 For each subsidiary that has noncontrolling interests that are material to the
reporting entity an entity shall disclose
(a) dividends paid to noncontrolling interests
IFRS 12
IFRS Foundation A593(b) summarised financial information about the assets liabilities profit or
loss and cash flows of the subsidiary that enables users to understand the
interest that noncontrolling interests have in the group’s activities and
cash flows That information might include but is not limited to for
example current assets noncurrent assets current liabilities
noncurrent liabilities revenue profit or loss and total comprehensive
income
B11 The summarised financial information required by paragraph B10(b) shall be the
amounts before intercompany eliminations
B12 For each joint venture and associate that is material to the reporting entity an
entity shall disclose
(a) dividends received from the joint venture or associate
(b) summarised financial information for the joint venture or associate (see
paragraphs B14 and B15) including but not necessarily limited to
(i) current assets
(ii) noncurrent assets
(iii) current liabilities
(iv) noncurrent liabilities
(v) revenue
(vi) profit or loss from continuing operations
(vii) posttax profit or loss from discontinued operations
(viii) other comprehensive income
(ix) total comprehensive income
B13 In addition to the summarised financial information required by paragraph B12
an entity shall disclose for each joint venture that is material to the reporting
entity the amount of
(a) cash and cash equivalents included in paragraph B12(b)(i)
(b) current financial liabilities (excluding trade and other payables and
provisions) included in paragraph B12(b)(iii)
(c) noncurrent financial liabilities (excluding trade and other payables and
provisions) included in paragraph B12(b)(iv)
(d) depreciation and amortisation
(e) interest income
(f) interest expense
(g) income tax expense or income
B14 The summarised financial information presented in accordance with
paragraphs B12 and B13 shall be the amounts included in the IFRS financial
statements of the joint venture or associate (and not the entity’s share of those
amounts) If the entity accounts for its interest in the joint venture or associate
using the equity method
IFRS 12
IFRS FoundationA594(a) the amounts included in the IFRS financial statements of the joint
venture or associate shall be adjusted to reflect adjustments made by the
entity when using the equity method such as fair value adjustments
made at the time of acquisition and adjustments for differences in
accounting policies
(b) the entity shall provide a reconciliation of the summarised financial
information presented to the carrying amount of its interest in the joint
venture or associate
B15 An entity may present the summarised financial information required by
paragraphs B12 and B13 on the basis of the joint venture’s or associate’s
financial statements if
(a) the entity measures its interest in the joint venture or associate at fair
value in accordance with IAS 28 (as amended in 2011) and
(b) the joint venture or associate does not prepare IFRS financial statements
and preparation on that basis would be impracticable or cause undue
cost
In that case the entity shall disclose the basis on which the summarised
financial information has been prepared
B16 An entity shall disclose in aggregate the carrying amount of its interests in all
individually immaterial joint ventures or associates that are accounted for using
the equity method An entity shall also disclose separately the aggregate
amount of its share of those joint ventures’ or associates’
(a) profit or loss from continuing operations
(b) posttax profit or loss from discontinued operations
(c) other comprehensive income
(d) total comprehensive income
An entity provides the disclosures separately for joint ventures and associates
B17 When an entity’s interest in a subsidiary a joint venture or an associate (or a
portion of its interest in a joint venture or an associate) is classified as held for
sale in accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations the entity is not required to disclose summarised financial
information for that subsidiary joint venture or associate in accordance with
paragraphs B10–B16
Commitments for joint ventures (paragraph 23(a))
B18 An entity shall disclose total commitments it has made but not recognised at the
reporting date (including its share of commitments made jointly with other
investors with joint control of a joint venture) relating to its interests in joint
ventures Commitments are those that may give rise to a future outflow of cash
or other resources
B19 Unrecognised commitments that may give rise to a future outflow of cash or
other resources include
IFRS 12
IFRS Foundation A595(a) unrecognised commitments to contribute funding or resources as a
result of for example
(i) the constitution or acquisition agreements of a joint venture
(that for example require an entity to contribute funds over a
specific period)
(ii) capitalintensive projects undertaken by a joint venture
(iii) unconditional purchase obligations comprising procurement of
equipment inventory or services that an entity is committed to
purchasing from or on behalf of a joint venture
(iv) unrecognised commitments to provide loans or other financial
support to a joint venture
(v) unrecognised commitments to contribute resources to a joint
venture such as assets or services
(vi) other noncancellable unrecognised commitments relating to a
joint venture
(b) unrecognised commitments to acquire another party’s ownership
interest (or a portion of that ownership interest) in a joint venture if a
particular event occurs or does not occur in the future
B20 The requirements and examples in paragraphs B18 and B19 illustrate some of
the types of disclosure required by paragraph 18 of IAS 24 Related Party Disclosures
Interests in unconsolidated structured entities
(paragraphs 24–31)
Structured entities
B21 A structured entity is an entity that has been designed so that voting or similar
rights are not the dominant factor in deciding who controls the entity such as
when any voting rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements
B22 A structured entity often has some or all of the following features or attributes
(a) restricted activities
(b) a narrow and welldefined objective such as to effect a taxefficient lease
carry out research and development activities provide a source of capital
or funding to an entity or provide investment opportunities for investors
by passing on risks and rewards associated with the assets of the
structured entity to investors
(c) insufficient equity to permit the structured entity to finance its activities
without subordinated financial support
(d) financing in the form of multiple contractually linked instruments to
investors that create concentrations of credit or other risks (tranches)
B23 Examples of entities that are regarded as structured entities include but are not
limited to
IFRS 12
IFRS FoundationA596(a) securitisation vehicles
(b) assetbacked financings
(c) some investment funds
B24 An entity that is controlled by voting rights is not a structured entity simply
because for example it receives funding from third parties following a
restructuring
Nature of risks from interests in unconsolidated
structured entities (paragraphs 29–31)
B25 In addition to the information required by paragraphs 29–31 an entity shall
disclose additional information that is necessary to meet the disclosure objective
in paragraph 24(b)
B26 Examples of additional information that depending on the circumstances
might be relevant to an assessment of the risks to which an entity is exposed
when it has an interest in an unconsolidated structured entity are
(a) the terms of an arrangement that could require the entity to provide
financial support to an unconsolidated structured entity (eg liquidity
arrangements or credit rating triggers associated with obligations to
purchase assets of the structured entity or provide financial support)
including
(i) a description of events or circumstances that could expose the
reporting entity to a loss
(ii) whether there are any terms that would limit the obligation
(iii) whether there are any other parties that provide financial
support and if so how the reporting entity’s obligation ranks
with those of other parties
(b) losses incurred by the entity during the reporting period relating to its
interests in unconsolidated structured entities
(c) the types of income the entity received during the reporting period from
its interests in unconsolidated structured entities
(d) whether the entity is required to absorb losses of an unconsolidated
structured entity before other parties the maximum limit of such losses
for the entity and (if relevant) the ranking and amounts of potential
losses borne by parties whose interests rank lower than the entity’s
interest in the unconsolidated structured entity
(e) information about any liquidity arrangements guarantees or other
commitments with third parties that may affect the fair value or risk of
the entity’s interests in unconsolidated structured entities
(f) any difficulties an unconsolidated structured entity has experienced in
financing its activities during the reporting period
(g) in relation to the funding of an unconsolidated structured entity the
forms of funding (eg commercial paper or mediumterm notes) and their
weightedaverage life That information might include maturity
IFRS 12
IFRS Foundation A597analyses of the assets and funding of an unconsolidated structured entity
if the structured entity has longerterm assets funded by shorterterm
funding
IFRS 12
IFRS FoundationA598Appendix C
Effective date and transition
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
Effective date and transition
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted
C1A Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 added paragraphs C2A–C2B An entity shall apply those
amendments for annual periods beginning on or after 1 January 2013 If an
entity applies IFRS 12 for an earlier period it shall apply those amendments for
that earlier period
C1B Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraph 2 and Appendix A and added paragraphs 9A–9B
19A–19G 21A and 25A An entity shall apply those amendments for annual
periods beginning on or after 1 January 2014 Early adoption is permitted If an
entity applies those amendments earlier it shall disclose that fact and apply all
amendments included in Investment Entities at the same time
C1C Investment Entities Applying the Consolidation Exception (Amendments to IFRS 10
IFRS 12 and IAS 28) issued in December 2014 amended paragraph 6 An entity
shall apply that amendment for annual periods beginning on or after 1 January
2016 Earlier application is permitted If an entity applies that amendment for
an earlier period it shall disclose that fact
C2 An entity is encouraged to provide information required by this IFRS earlier
than annual periods beginning on or after 1 January 2013 Providing some of
the disclosures required by this IFRS does not compel the entity to comply with
all the requirements of this IFRS or to apply IFRS 10 IFRS 11 IAS 27 (as amended
in 2011) and IAS 28 (as amended in 2011) early
C2A The disclosure requirements of this IFRS need not be applied for any period
presented that begins before the annual period immediately preceding the first
annual period for which IFRS 12 is applied
C2B The disclosure requirements of paragraphs 24–31 and the corresponding
guidance in paragraphs B21–B26 of this IFRS need not be applied for any period
presented that begins before the first annual period for which IFRS 12 is applied
References to IFRS 9
C3 If an entity applies this IFRS but does not yet apply IFRS 9 any reference to
IFRS 9 shall be read as a reference to IAS 39 Financial Instruments Recognition and
Measurement
IFRS 12
IFRS Foundation A599Appendix D
Amendments to other IFRSs
This appendix sets out amendments to other IFRSs that are a consequence of the Board issuing
IFRS 12 An entity shall apply the amendments for annual periods beginning on or after 1 January
2013 If an entity applies IFRS 12 for an earlier period it shall apply the amendments for that
earlier period Amended paragraphs are shown with new text underlined and deleted text struck
through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 12
IFRS FoundationA600IFRS Standard 13
Fair Value Measurement
In May 2011 the International Accounting Standards Board issued IFRS 13 Fair Value
Measurement IFRS 13 defines fair value and replaces the requirement contained in
individual Standards
Other Standards have made minor consequential amendments to IFRS 13 They include
IAS 19 Employee Benefits (issued June 2011) Annual Improvements to IFRSs 2011–2013 Cycle (issued
December 2013) IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases (issued
January 2016)
IFRS 13
IFRS Foundation A601CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 13
FAIR VALUE MEASUREMENT
OBJECTIVE 1
SCOPE 5
MEASUREMENT 9
Definition of fair value 9
The asset or liability 11
The transaction 15
Market participants 22
The price 24
Application to nonfinancial assets 27
Application to liabilities and an entity’s own equity instruments 34
Application to financial assets and financial liabilities with offsetting
positions in market risks or counterparty credit risk 48
Fair value at initial recognition 57
Valuation techniques 61
Inputs to valuation techniques 67
Fair value hierarchy 72
DISCLOSURE 91
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 13 ISSUED IN MAY
2011 BASIS FOR CONCLUSIONS
APPENDIX
Amendments to the Basis for Conclusions on other IFRSs
ILLUSTRATIVE EXAMPLES
APPENDIX
Amendments to the guidance on other IFRSs
IFRS 13
IFRS FoundationA602International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13) is set out
in paragraphs 1–99 and Appendices A–D All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the IFRS Definitions of other terms are given in the
Glossary for International Financial Reporting Standards IFRS 13 should be read in the
context of its objective and the Basis for Conclusions the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance
IFRS 13
IFRS Foundation A603Introduction
Overview
IN1 International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13)
(a) defines fair value
(b) sets out in a single IFRS a framework for measuring fair value and
(c) requires disclosures about fair value measurements
IN2 The IFRS applies to IFRSs that require or permit fair value measurements or
disclosures about fair value measurements (and measurements such as fair
value less costs to sell based on fair value or disclosures about those
measurements) except in specified circumstances
IN3 The IFRS is to be applied for annual periods beginning on or after 1 January
2013 Earlier application is permitted
IN4 The IFRS explains how to measure fair value for financial reporting It does not
require fair value measurements in addition to those already required or
permitted by other IFRSs and is not intended to establish valuation standards or
affect valuation practices outside financial reporting
Reasons for issuing the IFRS
IN5 Some IFRSs require or permit entities to measure or disclose the fair value of
assets liabilities or their own equity instruments Because those IFRSs were
developed over many years the requirements for measuring fair value and for
disclosing information about fair value measurements were dispersed and in
many cases did not articulate a clear measurement or disclosure objective
IN6 As a result some of those IFRSs contained limited guidance about how to
measure fair value whereas others contained extensive guidance and that
guidance was not always consistent across those IFRSs that refer to fair value
Inconsistencies in the requirements for measuring fair value and for disclosing
information about fair value measurements have contributed to diversity in
practice and have reduced the comparability of information reported in
financial statements IFRS 13 remedies that situation
IN7 Furthermore in 2006 the International Accounting Standards Board (IASB) and
the US national standardsetter the Financial Accounting Standards Board
(FASB) published a Memorandum of Understanding which has served as the
foundation of the boards’ efforts to create a common set of high quality global
accounting standards Consistent with the Memorandum of Understanding and
the boards’ commitment to achieving that goal IFRS 13 is the result of the work
by the IASB and the FASB to develop common requirements for measuring fair
value and for disclosing information about fair value measurements in
accordance with IFRSs and US generally accepted accounting principles (GAAP)
IFRS 13
IFRS FoundationA604Main features
IN8 IFRS 13 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants
at the measurement date (ie an exit price)
IN9 That definition of fair value emphasises that fair value is a marketbased
measurement not an entityspecific measurement When measuring fair value
an entity uses the assumptions that market participants would use when pricing
the asset or liability under current market conditions including assumptions
about risk As a result an entity’s intention to hold an asset or to settle or
otherwise fulfil a liability is not relevant when measuring fair value
IN10 The IFRS explains that a fair value measurement requires an entity to determine
the following
(a) the particular asset or liability being measured
(b) for a nonfinancial asset the highest and best use of the asset and
whether the asset is used in combination with other assets or on a
standalone basis
(c) the market in which an orderly transaction would take place for the
asset or liability and
(d) the appropriate valuation technique(s) to use when measuring fair value
The valuation technique(s) used should maximise the use of relevant
observable inputs and minimise unobservable inputs Those inputs
should be consistent with the inputs a market participant would use
when pricing the asset or liability
IFRS 13
IFRS Foundation A605International Financial Reporting Standard 13
Fair Value Measurement
Objective
1 This IFRS
(a) defines fair value
(b) sets out in a single IFRS a framework for measuring fair value and
(c) requires disclosures about fair value measurements
2 Fair value is a marketbased measurement not an entityspecific measurement
For some assets and liabilities observable market transactions or market
information might be available For other assets and liabilities observable
market transactions and market information might not be available However
the objective of a fair value measurement in both cases is the same—to estimate
the price at which an orderly transaction to sell the asset or to transfer the liability
would take place between market participants at the measurement date under
current market conditions (ie an exit price at the measurement date from the
perspective of a market participant that holds the asset or owes the liability)
3 When a price for an identical asset or liability is not observable an entity
measures fair value using another valuation technique that maximises the use
of relevant observable inputs and minimises the use of unobservable inputs Because
fair value is a marketbased measurement it is measured using the assumptions
that market participants would use when pricing the asset or liability including
assumptions about risk As a result an entity’s intention to hold an asset or to
settle or otherwise fulfil a liability is not relevant when measuring fair value
4 The definition of fair value focuses on assets and liabilities because they are a
primary subject of accounting measurement In addition this IFRS shall be
applied to an entity’s own equity instruments measured at fair value
Scope
5 This IFRS applies when another IFRS requires or permits fair value
measurements or disclosures about fair value measurements (and
measurements such as fair value less costs to sell based on fair value or
disclosures about those measurements) except as specified in
paragraphs 6 and 7
6 The measurement and disclosure requirements of this IFRS do not apply to the
following
(a) sharebased payment transactions within the scope of IFRS 2 Sharebased
Payment
(b) leasing transactions accounted for in accordance with IFRS 16 Leases and
IFRS 13
IFRS FoundationA606(c) measurements that have some similarities to fair value but are not fair
value such as net realisable value in IAS 2 Inventories or value in use in
IAS 36 Impairment of Assets
7 The disclosures required by this IFRS are not required for the following
(a) plan assets measured at fair value in accordance with IAS 19 Employee
Benefits
(b) retirement benefit plan investments measured at fair value in
accordance with IAS 26 Accounting and Reporting by Retirement Benefit Plans
and
(c) assets for which recoverable amount is fair value less costs of disposal in
accordance with IAS 36
8 The fair value measurement framework described in this IFRS applies to both
initial and subsequent measurement if fair value is required or permitted by
other IFRSs
Measurement
Definition of fair value
9 This IFRS defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date
10 Paragraph B2 describes the overall fair value measurement approach
The asset or liability
11 A fair value measurement is for a particular asset or liability Therefore
when measuring fair value an entity shall take into account the
characteristics of the asset or liability if market participants would take
those characteristics into account when pricing the asset or liability at
the measurement date Such characteristics include for example the
following
(a) the condition and location of the asset and
(b) restrictions if any on the sale or use of the asset
12 The effect on the measurement arising from a particular characteristic will
differ depending on how that characteristic would be taken into account by
market participants
13 The asset or liability measured at fair value might be either of the following
(a) a standalone asset or liability (eg a financial instrument or a
nonfinancial asset) or
(b) a group of assets a group of liabilities or a group of assets and liabilities
(eg a cashgenerating unit or a business)
14 Whether the asset or liability is a standalone asset or liability a group of assets
a group of liabilities or a group of assets and liabilities for recognition or
disclosure purposes depends on its unit of account The unit of account for the
IFRS 13
IFRS Foundation A607asset or liability shall be determined in accordance with the IFRS that requires
or permits the fair value measurement except as provided in this IFRS
The transaction
15 A fair value measurement assumes that the asset or liability is exchanged
in an orderly transaction between market participants to sell the asset or
transfer the liability at the measurement date under current market
conditions
16 A fair value measurement assumes that the transaction to sell the asset or
transfer the liability takes place either
(a) in the principal market for the asset or liability or
(b) in the absence of a principal market in the most advantageous
market for the asset or liability
17 An entity need not undertake an exhaustive search of all possible markets to
identify the principal market or in the absence of a principal market the most
advantageous market but it shall take into account all information that is
reasonably available In the absence of evidence to the contrary the market in
which the entity would normally enter into a transaction to sell the asset or to
transfer the liability is presumed to be the principal market or in the absence of
a principal market the most advantageous market
18 If there is a principal market for the asset or liability the fair value
measurement shall represent the price in that market (whether that price is
directly observable or estimated using another valuation technique) even if the
price in a different market is potentially more advantageous at the
measurement date
19 The entity must have access to the principal (or most advantageous) market at
the measurement date Because different entities (and businesses within those
entities) with different activities may have access to different markets the
principal (or most advantageous) market for the same asset or liability might be
different for different entities (and businesses within those entities) Therefore
the principal (or most advantageous) market (and thus market participants)
shall be considered from the perspective of the entity thereby allowing for
differences between and among entities with different activities
20 Although an entity must be able to access the market the entity does not need
to be able to sell the particular asset or transfer the particular liability on the
measurement date to be able to measure fair value on the basis of the price in
that market
21 Even when there is no observable market to provide pricing information about
the sale of an asset or the transfer of a liability at the measurement date a fair
value measurement shall assume that a transaction takes place at that date
considered from the perspective of a market participant that holds the asset or
owes the liability That assumed transaction establishes a basis for estimating
the price to sell the asset or to transfer the liability
IFRS 13
IFRS FoundationA608Market participants
22 An entity shall measure the fair value of an asset or a liability using the
assumptions that market participants would use when pricing the asset
or liability assuming that market participants act in their economic best
interest
23 In developing those assumptions an entity need not identify specific market
participants Rather the entity shall identify characteristics that distinguish
market participants generally considering factors specific to all the following
(a) the asset or liability
(b) the principal (or most advantageous) market for the asset or liability and
(c) market participants with whom the entity would enter into a
transaction in that market
The price
24 Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction in the principal (or most
advantageous) market at the measurement date under current market
conditions (ie an exit price) regardless of whether that price is directly
observable or estimated using another valuation technique
25 The price in the principal (or most advantageous) market used to measure the
fair value of the asset or liability shall not be adjusted for transaction costs
Transaction costs shall be accounted for in accordance with other IFRSs
Transaction costs are not a characteristic of an asset or a liability rather they
are specific to a transaction and will differ depending on how an entity enters
into a transaction for the asset or liability
26 Transaction costs do not include transport costs If location is a characteristic of
the asset (as might be the case for example for a commodity) the price in the
principal (or most advantageous) market shall be adjusted for the costs if any
that would be incurred to transport the asset from its current location to that
market
Application to nonfinancial assets
Highest and best use for nonfinancial assets
27 A fair value measurement of a nonfinancial asset takes into account a
market participant’s ability to generate economic benefits by using the
asset in its highest and best use or by selling it to another market
participant that would use the asset in its highest and best use
28 The highest and best use of a nonfinancial asset takes into account the use of
the asset that is physically possible legally permissible and financially feasible
as follows
(a) A use that is physically possible takes into account the physical
characteristics of the asset that market participants would take into
account when pricing the asset (eg the location or size of a property)
IFRS 13
IFRS Foundation A609(b) A use that is legally permissible takes into account any legal restrictions
on the use of the asset that market participants would take into account
when pricing the asset (eg the zoning regulations applicable to a
property)
(c) A use that is financially feasible takes into account whether a use of the
asset that is physically possible and legally permissible generates
adequate income or cash flows (taking into account the costs of
converting the asset to that use) to produce an investment return that
market participants would require from an investment in that asset put
to that use
29 Highest and best use is determined from the perspective of market participants
even if the entity intends a different use However an entity’s current use of a
nonfinancial asset is presumed to be its highest and best use unless market or
other factors suggest that a different use by market participants would
maximise the value of the asset
30 To protect its competitive position or for other reasons an entity may intend
not to use an acquired nonfinancial asset actively or it may intend not to use the
asset according to its highest and best use For example that might be the case
for an acquired intangible asset that the entity plans to use defensively by
preventing others from using it Nevertheless the entity shall measure the fair
value of a nonfinancial asset assuming its highest and best use by market
participants
Valuation premise for nonfinancial assets
31 The highest and best use of a nonfinancial asset establishes the valuation
premise used to measure the fair value of the asset as follows
(a) The highest and best use of a nonfinancial asset might provide
maximum value to market participants through its use in combination
with other assets as a group (as installed or otherwise configured for use)
or in combination with other assets and liabilities (eg a business)
(i) If the highest and best use of the asset is to use the asset in
combination with other assets or with other assets and liabilities
the fair value of the asset is the price that would be received in a
current transaction to sell the asset assuming that the asset
would be used with other assets or with other assets and
liabilities and that those assets and liabilities (ie its
complementary assets and the associated liabilities) would be
available to market participants
(ii) Liabilities associated with the asset and with the complementary
assets include liabilities that fund working capital but do not
include liabilities used to fund assets other than those within the
group of assets
(iii) Assumptions about the highest and best use of a nonfinancial
asset shall be consistent for all the assets (for which highest and
best use is relevant) of the group of assets or the group of assets
and liabilities within which the asset would be used
IFRS 13
IFRS FoundationA610(b) The highest and best use of a nonfinancial asset might provide
maximum value to market participants on a standalone basis If the
highest and best use of the asset is to use it on a standalone basis the
fair value of the asset is the price that would be received in a current
transaction to sell the asset to market participants that would use the
asset on a standalone basis
32 The fair value measurement of a nonfinancial asset assumes that the asset is
sold consistently with the unit of account specified in other IFRSs (which may be
an individual asset) That is the case even when that fair value measurement
assumes that the highest and best use of the asset is to use it in combination
with other assets or with other assets and liabilities because a fair value
measurement assumes that the market participant already holds the
complementary assets and the associated liabilities
33 Paragraph B3 describes the application of the valuation premise concept for
nonfinancial assets
Application to liabilities and an entity’s own equity
instruments
General principles
34 A fair value measurement assumes that a financial or nonfinancial
liability or an entity’s own equity instrument (eg equity interests issued
as consideration in a business combination) is transferred to a market
participant at the measurement date The transfer of a liability or an
entity’s own equity instrument assumes the following
(a) A liability would remain outstanding and the market participant
transferee would be required to fulfil the obligation The liability
would not be settled with the counterparty or otherwise
extinguished on the measurement date
(b) An entity’s own equity instrument would remain outstanding and
the market participant transferee would take on the rights and
responsibilities associated with the instrument The instrument
would not be cancelled or otherwise extinguished on the
measurement date
35 Even when there is no observable market to provide pricing information about
the transfer of a liability or an entity’s own equity instrument (eg because
contractual or other legal restrictions prevent the transfer of such items) there
might be an observable market for such items if they are held by other parties as
assets (eg a corporate bond or a call option on an entity’s shares)
36 In all cases an entity shall maximise the use of relevant observable inputs and
minimise the use of unobservable inputs to meet the objective of a fair value
measurement which is to estimate the price at which an orderly transaction to
transfer the liability or equity instrument would take place between market
participants at the measurement date under current market conditions
IFRS 13
IFRS Foundation A611Liabilities and equity instruments held by other parties as assets
37 When a quoted price for the transfer of an identical or a similar liability
or entity’s own equity instrument is not available and the identical item
is held by another party as an asset an entity shall measure the fair value
of the liability or equity instrument from the perspective of a market
participant that holds the identical item as an asset at the measurement
date
38 In such cases an entity shall measure the fair value of the liability or equity
instrument as follows
(a) using the quoted price in an active market for the identical item held by
another party as an asset if that price is available
(b) if that price is not available using other observable inputs such as the
quoted price in a market that is not active for the identical item held by
another party as an asset
(c) if the observable prices in (a) and (b) are not available using another
valuation technique such as
(i) an income approach (eg a present value technique that takes into
account the future cash flows that a market participant would
expect to receive from holding the liability or equity instrument
as an asset see paragraphs B10 and B11)
(ii) a market approach (eg using quoted prices for similar liabilities or
equity instruments held by other parties as assets see
paragraphs B5–B7)
39 An entity shall adjust the quoted price of a liability or an entity’s own equity
instrument held by another party as an asset only if there are factors specific to
the asset that are not applicable to the fair value measurement of the liability or
equity instrument An entity shall ensure that the price of the asset does not
reflect the effect of a restriction preventing the sale of that asset Some factors
that may indicate that the quoted price of the asset should be adjusted include
the following
(a) The quoted price for the asset relates to a similar (but not identical)
liability or equity instrument held by another party as an asset For
example the liability or equity instrument may have a particular
characteristic (eg the credit quality of the issuer) that is different from
that reflected in the fair value of the similar liability or equity
instrument held as an asset
(b) The unit of account for the asset is not the same as for the liability or
equity instrument For example for liabilities in some cases the price
for an asset reflects a combined price for a package comprising both the
amounts due from the issuer and a thirdparty credit enhancement If
the unit of account for the liability is not for the combined package the
objective is to measure the fair value of the issuer’s liability not the fair
value of the combined package Thus in such cases the entity would
adjust the observed price for the asset to exclude the effect of the
thirdparty credit enhancement
IFRS 13
IFRS FoundationA612Liabilities and equity instruments not held by other parties as assets
40 When a quoted price for the transfer of an identical or a similar liability
or entity’s own equity instrument is not available and the identical item
is not held by another party as an asset an entity shall measure the fair
value of the liability or equity instrument using a valuation technique
from the perspective of a market participant that owes the liability or has
issued the claim on equity
41 For example when applying a present value technique an entity might take into
account either of the following
(a) the future cash outflows that a market participant would expect to incur
in fulfilling the obligation including the compensation that a market
participant would require for taking on the obligation (see paragraphs
B31–B33)
(b) the amount that a market participant would receive to enter into or
issue an identical liability or equity instrument using the assumptions
that market participants would use when pricing the identical item
(eg having the same credit characteristics) in the principal (or most
advantageous) market for issuing a liability or an equity instrument with
the same contractual terms
Nonperformance risk
42 The fair value of a liability reflects the effect of nonperformance risk
Nonperformance risk includes but may not be limited to an entity’s own
credit risk (as defined in IFRS 7 Financial Instruments Disclosures)
Nonperformance risk is assumed to be the same before and after the
transfer of the liability
43 When measuring the fair value of a liability an entity shall take into account
the effect of its credit risk (credit standing) and any other factors that might
influence the likelihood that the obligation will or will not be fulfilled That
effect may differ depending on the liability for example
(a) whether the liability is an obligation to deliver cash (a financial liability)
or an obligation to deliver goods or services (a nonfinancial liability)
(b) the terms of credit enhancements related to the liability if any
44 The fair value of a liability reflects the effect of nonperformance risk on the
basis of its unit of account The issuer of a liability issued with an inseparable
thirdparty credit enhancement that is accounted for separately from the
liability shall not include the effect of the credit enhancement (eg a thirdparty
guarantee of debt) in the fair value measurement of the liability If the credit
enhancement is accounted for separately from the liability the issuer would
take into account its own credit standing and not that of the third party
guarantor when measuring the fair value of the liability
IFRS 13
IFRS Foundation A613Restriction preventing the transfer of a liability or an entity’s own
equity instrument
45 When measuring the fair value of a liability or an entity’s own equity
instrument an entity shall not include a separate input or an adjustment to
other inputs relating to the existence of a restriction that prevents the transfer of
the item The effect of a restriction that prevents the transfer of a liability or an
entity’s own equity instrument is either implicitly or explicitly included in the
other inputs to the fair value measurement
46 For example at the transaction date both the creditor and the obligor accepted
the transaction price for the liability with full knowledge that the obligation
includes a restriction that prevents its transfer As a result of the restriction
being included in the transaction price a separate input or an adjustment to an
existing input is not required at the transaction date to reflect the effect of the
restriction on transfer Similarly a separate input or an adjustment to an
existing input is not required at subsequent measurement dates to reflect the
effect of the restriction on transfer
Financial liability with a demand feature
47 The fair value of a financial liability with a demand feature (eg a demand
deposit) is not less than the amount payable on demand discounted from the
first date that the amount could be required to be paid
Application to financial assets and financial liabilities
with offsetting positions in market risks or counterparty
credit risk
48 An entity that holds a group of financial assets and financial liabilities is
exposed to market risks (as defined in IFRS 7) and to the credit risk (as defined in
IFRS 7) of each of the counterparties If the entity manages that group of
financial assets and financial liabilities on the basis of its net exposure to either
market risks or credit risk the entity is permitted to apply an exception to this
IFRS for measuring fair value That exception permits an entity to measure the
fair value of a group of financial assets and financial liabilities on the basis of
the price that would be received to sell a net long position (ie an asset) for a
particular risk exposure or paid to transfer a net short position (ie a liability) for
a particular risk exposure in an orderly transaction between market participants
at the measurement date under current market conditions Accordingly an
entity shall measure the fair value of the group of financial assets and financial
liabilities consistently with how market participants would price the net risk
exposure at the measurement date
49 An entity is permitted to use the exception in paragraph 48 only if the entity
does all the following
(a) manages the group of financial assets and financial liabilities on the
basis of the entity’s net exposure to a particular market risk (or risks) or
to the credit risk of a particular counterparty in accordance with the
entity’s documented risk management or investment strategy
IFRS 13
IFRS FoundationA614(b) provides information on that basis about the group of financial assets
and financial liabilities to the entity’s key management personnel as
defined in IAS 24 Related Party Disclosures and
(c) is required or has elected to measure those financial assets and financial
liabilities at fair value in the statement of financial position at the end of
each reporting period
50 The exception in paragraph 48 does not pertain to financial statement
presentation In some cases the basis for the presentation of financial
instruments in the statement of financial position differs from the basis for the
measurement of financial instruments for example if an IFRS does not require
or permit financial instruments to be presented on a net basis In such cases an
entity may need to allocate the portfoliolevel adjustments (see paragraphs
53–56) to the individual assets or liabilities that make up the group of financial
assets and financial liabilities managed on the basis of the entity’s net risk
exposure An entity shall perform such allocations on a reasonable and
consistent basis using a methodology appropriate in the circumstances
51 An entity shall make an accounting policy decision in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors to use the exception in
paragraph 48 An entity that uses the exception shall apply that accounting
policy including its policy for allocating bidask adjustments (see paragraphs
53–55) and credit adjustments (see paragraph 56) if applicable consistently
from period to period for a particular portfolio
52 The exception in paragraph 48 applies only to financial assets financial
liabilities and other contracts within the scope of IFRS 9 Financial Instruments (or
IAS 39 Financial Instruments Recognition and Measurement if IFRS 9 has not yet been
adopted) The references to financial assets and financial liabilities in
paragraphs 48–51 and 53–56 should be read as applying to all contracts within
the scope of and accounted for in accordance with IFRS 9 (or IAS 39 if IFRS 9
has not yet been adopted) regardless of whether they meet the definitions of
financial assets or financial liabilities in IAS 32 Financial Instruments Presentation
Exposure to market risks
53 When using the exception in paragraph 48 to measure the fair value of a group
of financial assets and financial liabilities managed on the basis of the entity’s
net exposure to a particular market risk (or risks) the entity shall apply the price
within the bidask spread that is most representative of fair value in the
circumstances to the entity’s net exposure to those market risks (see paragraphs
70 and 71)
54 When using the exception in paragraph 48 an entity shall ensure that the
market risk (or risks) to which the entity is exposed within that group of
financial assets and financial liabilities is substantially the same For example
an entity would not combine the interest rate risk associated with a financial
asset with the commodity price risk associated with a financial liability because
doing so would not mitigate the entity’s exposure to interest rate risk or
commodity price risk When using the exception in paragraph 48 any basis risk
IFRS 13
IFRS Foundation A615resulting from the market risk parameters not being identical shall be taken
into account in the fair value measurement of the financial assets and financial
liabilities within the group
55 Similarly the duration of the entity’s exposure to a particular market risk (or
risks) arising from the financial assets and financial liabilities shall be
substantially the same For example an entity that uses a 12month futures
contract against the cash flows associated with 12 months’ worth of interest rate
risk exposure on a fiveyear financial instrument within a group made up of only
those financial assets and financial liabilities measures the fair value of the
exposure to 12month interest rate risk on a net basis and the remaining interest
rate risk exposure (ie years 2–5) on a gross basis
Exposure to the credit risk of a particular counterparty
56 When using the exception in paragraph 48 to measure the fair value of a group
of financial assets and financial liabilities entered into with a particular
counterparty the entity shall include the effect of the entity’s net exposure to
the credit risk of that counterparty or the counterparty’s net exposure to the
credit risk of the entity in the fair value measurement when market participants
would take into account any existing arrangements that mitigate credit risk
exposure in the event of default (eg a master netting agreement with the
counterparty or an agreement that requires the exchange of collateral on the
basis of each party’s net exposure to the credit risk of the other party) The fair
value measurement shall reflect market participants’ expectations about the
likelihood that such an arrangement would be legally enforceable in the event
of default
Fair value at initial recognition
57 When an asset is acquired or a liability is assumed in an exchange transaction
for that asset or liability the transaction price is the price paid to acquire the
asset or received to assume the liability (an entry price) In contrast the fair value
of the asset or liability is the price that would be received to sell the asset or paid
to transfer the liability (an exit price) Entities do not necessarily sell assets at
the prices paid to acquire them Similarly entities do not necessarily transfer
liabilities at the prices received to assume them
58 In many cases the transaction price will equal the fair value (eg that might be
the case when on the transaction date the transaction to buy an asset takes place
in the market in which the asset would be sold)
59 When determining whether fair value at initial recognition equals the
transaction price an entity shall take into account factors specific to the
transaction and to the asset or liability Paragraph B4 describes situations in
which the transaction price might not represent the fair value of an asset or a
liability at initial recognition
60 If another IFRS requires or permits an entity to measure an asset or a liability
initially at fair value and the transaction price differs from fair value the entity
shall recognise the resulting gain or loss in profit or loss unless that IFRS
specifies otherwise
IFRS 13
IFRS FoundationA616Valuation techniques
61 An entity shall use valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to measure fair
value maximising the use of relevant observable inputs and minimising
the use of unobservable inputs
62 The objective of using a valuation technique is to estimate the price at which an
orderly transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market
conditions Three widely used valuation techniques are the market approach
the cost approach and the income approach The main aspects of those
approaches are summarised in paragraphs B5–B11 An entity shall use valuation
techniques consistent with one or more of those approaches to measure fair
value
63 In some cases a single valuation technique will be appropriate (eg when valuing
an asset or a liability using quoted prices in an active market for identical assets
or liabilities) In other cases multiple valuation techniques will be appropriate
(eg that might be the case when valuing a cashgenerating unit) If multiple
valuation techniques are used to measure fair value the results (ie respective
indications of fair value) shall be evaluated considering the reasonableness of
the range of values indicated by those results A fair value measurement is the
point within that range that is most representative of fair value in the
circumstances
64 If the transaction price is fair value at initial recognition and a valuation
technique that uses unobservable inputs will be used to measure fair value in
subsequent periods the valuation technique shall be calibrated so that at initial
recognition the result of the valuation technique equals the transaction price
Calibration ensures that the valuation technique reflects current market
conditions and it helps an entity to determine whether an adjustment to the
valuation technique is necessary (eg there might be a characteristic of the asset
or liability that is not captured by the valuation technique) After initial
recognition when measuring fair value using a valuation technique or
techniques that use unobservable inputs an entity shall ensure that those
valuation techniques reflect observable market data (eg the price for a similar
asset or liability) at the measurement date
65 Valuation techniques used to measure fair value shall be applied consistently
However a change in a valuation technique or its application (eg a change in its
weighting when multiple valuation techniques are used or a change in an
adjustment applied to a valuation technique) is appropriate if the change results
in a measurement that is equally or more representative of fair value in the
circumstances That might be the case if for example any of the following
events take place
(a) new markets develop
(b) new information becomes available
(c) information previously used is no longer available
(d) valuation techniques improve or
IFRS 13
IFRS Foundation A617(e) market conditions change
66 Revisions resulting from a change in the valuation technique or its application
shall be accounted for as a change in accounting estimate in accordance with
IAS 8 However the disclosures in IAS 8 for a change in accounting estimate are
not required for revisions resulting from a change in a valuation technique or its
application
Inputs to valuation techniques
General principles
67 Valuation techniques used to measure fair value shall maximise the use
of relevant observable inputs and minimise the use of unobservable
inputs
68 Examples of markets in which inputs might be observable for some assets and
liabilities (eg financial instruments) include exchange markets dealer markets
brokered markets and principaltoprincipal markets (see paragraph B34)
69 An entity shall select inputs that are consistent with the characteristics of the
asset or liability that market participants would take into account in a
transaction for the asset or liability (see paragraphs 11 and 12) In some cases
those characteristics result in the application of an adjustment such as a
premium or discount (eg a control premium or noncontrolling interest
discount) However a fair value measurement shall not incorporate a premium
or discount that is inconsistent with the unit of account in the IFRS that requires
or permits the fair value measurement (see paragraphs 13 and 14) Premiums or
discounts that reflect size as a characteristic of the entity’s holding (specifically
a blockage factor that adjusts the quoted price of an asset or a liability because
the market’s normal daily trading volume is not sufficient to absorb the
quantity held by the entity as described in paragraph 80) rather than as a
characteristic of the asset or liability (eg a control premium when measuring the
fair value of a controlling interest) are not permitted in a fair value
measurement In all cases if there is a quoted price in an active market (ie a
Level 1 input) for an asset or a liability an entity shall use that price without
adjustment when measuring fair value except as specified in paragraph 79
Inputs based on bid and ask prices
70 If an asset or a liability measured at fair value has a bid price and an ask price
(eg an input from a dealer market) the price within the bidask spread that is
most representative of fair value in the circumstances shall be used to measure
fair value regardless of where the input is categorised within the fair value
hierarchy (ie Level 1 2 or 3 see paragraphs 72–90) The use of bid prices for asset
positions and ask prices for liability positions is permitted but is not required
71 This IFRS does not preclude the use of midmarket pricing or other pricing
conventions that are used by market participants as a practical expedient for fair
value measurements within a bidask spread
IFRS 13
IFRS FoundationA618Fair value hierarchy
72 To increase consistency and comparability in fair value measurements and
related disclosures this IFRS establishes a fair value hierarchy that categorises
into three levels (see paragraphs 76–90) the inputs to valuation techniques used
to measure fair value The fair value hierarchy gives the highest priority to
quoted prices (unadjusted) in active markets for identical assets or liabilities
(Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs)
73 In some cases the inputs used to measure the fair value of an asset or a liability
might be categorised within different levels of the fair value hierarchy In those
cases the fair value measurement is categorised in its entirety in the same level
of the fair value hierarchy as the lowest level input that is significant to the
entire measurement Assessing the significance of a particular input to the
entire measurement requires judgement taking into account factors specific to
the asset or liability Adjustments to arrive at measurements based on fair value
such as costs to sell when measuring fair value less costs to sell shall not be
taken into account when determining the level of the fair value hierarchy
within which a fair value measurement is categorised
74 The availability of relevant inputs and their relative subjectivity might affect the
selection of appropriate valuation techniques (see paragraph 61) However the
fair value hierarchy prioritises the inputs to valuation techniques not the
valuation techniques used to measure fair value For example a fair value
measurement developed using a present value technique might be categorised
within Level 2 or Level 3 depending on the inputs that are significant to the
entire measurement and the level of the fair value hierarchy within which those
inputs are categorised
75 If an observable input requires an adjustment using an unobservable input and
that adjustment results in a significantly higher or lower fair value
measurement the resulting measurement would be categorised within Level 3
of the fair value hierarchy For example if a market participant would take into
account the effect of a restriction on the sale of an asset when estimating the
price for the asset an entity would adjust the quoted price to reflect the effect of
that restriction If that quoted price is a Level 2 input and the adjustment is an
unobservable input that is significant to the entire measurement the
measurement would be categorised within Level 3 of the fair value hierarchy
Level 1 inputs
76 Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement date
77 A quoted price in an active market provides the most reliable evidence of fair
value and shall be used without adjustment to measure fair value whenever
available except as specified in paragraph 79
78 A Level 1 input will be available for many financial assets and financial
liabilities some of which might be exchanged in multiple active markets (eg on
different exchanges) Therefore the emphasis within Level 1 is on determining
both of the following
IFRS 13
IFRS Foundation A619(a) the principal market for the asset or liability or in the absence of a
principal market the most advantageous market for the asset or
liability and
(b) whether the entity can enter into a transaction for the asset or liability at
the price in that market at the measurement date
79 An entity shall not make an adjustment to a Level 1 input except in the
following circumstances
(a) when an entity holds a large number of similar (but not identical) assets
or liabilities (eg debt securities) that are measured at fair value and a
quoted price in an active market is available but not readily accessible
for each of those assets or liabilities individually (ie given the large
number of similar assets or liabilities held by the entity it would be
difficult to obtain pricing information for each individual asset or
liability at the measurement date) In that case as a practical expedient
an entity may measure fair value using an alternative pricing method
that does not rely exclusively on quoted prices (eg matrix pricing)
However the use of an alternative pricing method results in a fair value
measurement categorised within a lower level of the fair value hierarchy
(b) when a quoted price in an active market does not represent fair value at
the measurement date That might be the case if for example
significant events (such as transactions in a principaltoprincipal
market trades in a brokered market or announcements) take place after
the close of a market but before the measurement date An entity shall
establish and consistently apply a policy for identifying those events that
might affect fair value measurements However if the quoted price is
adjusted for new information the adjustment results in a fair value
measurement categorised within a lower level of the fair value hierarchy
(c) when measuring the fair value of a liability or an entity’s own equity
instrument using the quoted price for the identical item traded as an
asset in an active market and that price needs to be adjusted for factors
specific to the item or the asset (see paragraph 39) If no adjustment to
the quoted price of the asset is required the result is a fair value
measurement categorised within Level 1 of the fair value hierarchy
However any adjustment to the quoted price of the asset results in a fair
value measurement categorised within a lower level of the fair value
hierarchy
80 If an entity holds a position in a single asset or liability (including a position
comprising a large number of identical assets or liabilities such as a holding of
financial instruments) and the asset or liability is traded in an active market the
fair value of the asset or liability shall be measured within Level 1 as the product
of the quoted price for the individual asset or liability and the quantity held by
the entity That is the case even if a market’s normal daily trading volume is not
sufficient to absorb the quantity held and placing orders to sell the position in a
single transaction might affect the quoted price
IFRS 13
IFRS FoundationA620Level 2 inputs
81 Level 2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability either directly or indirectly
82 If the asset or liability has a specified (contractual) term a Level 2 input must be
observable for substantially the full term of the asset or liability Level 2 inputs
include the following
(a) quoted prices for similar assets or liabilities in active markets
(b) quoted prices for identical or similar assets or liabilities in markets that
are not active
(c) inputs other than quoted prices that are observable for the asset or
liability for example
(i) interest rates and yield curves observable at commonly quoted
intervals
(ii) implied volatilities and
(iii) credit spreads
(d) marketcorroborated inputs
83 Adjustments to Level 2 inputs will vary depending on factors specific to the asset
or liability Those factors include the following
(a) the condition or location of the asset
(b) the extent to which inputs relate to items that are comparable to the
asset or liability (including those factors described in paragraph 39) and
(c) the volume or level of activity in the markets within which the inputs
are observed
84 An adjustment to a Level 2 input that is significant to the entire measurement
might result in a fair value measurement categorised within Level 3 of the fair
value hierarchy if the adjustment uses significant unobservable inputs
85 Paragraph B35 describes the use of Level 2 inputs for particular assets and
liabilities
Level 3 inputs
86 Level 3 inputs are unobservable inputs for the asset or liability
87 Unobservable inputs shall be used to measure fair value to the extent that
relevant observable inputs are not available thereby allowing for situations in
which there is little if any market activity for the asset or liability at the
measurement date However the fair value measurement objective remains the
same ie an exit price at the measurement date from the perspective of a market
participant that holds the asset or owes the liability Therefore unobservable
inputs shall reflect the assumptions that market participants would use when
pricing the asset or liability including assumptions about risk
88 Assumptions about risk include the risk inherent in a particular valuation
technique used to measure fair value (such as a pricing model) and the risk
IFRS 13
IFRS Foundation A621inherent in the inputs to the valuation technique A measurement that does not
include an adjustment for risk would not represent a fair value measurement if
market participants would include one when pricing the asset or liability For
example it might be necessary to include a risk adjustment when there is
significant measurement uncertainty (eg when there has been a significant
decrease in the volume or level of activity when compared with normal market
activity for the asset or liability or similar assets or liabilities and the entity has
determined that the transaction price or quoted price does not represent fair
value as described in paragraphs B37–B47)
89 An entity shall develop unobservable inputs using the best information available
in the circumstances which might include the entity’s own data In developing
unobservable inputs an entity may begin with its own data but it shall adjust
those data if reasonably available information indicates that other market
participants would use different data or there is something particular to the
entity that is not available to other market participants (eg an entityspecific
synergy) An entity need not undertake exhaustive efforts to obtain information
about market participant assumptions However an entity shall take into
account all information about market participant assumptions that is
reasonably available Unobservable inputs developed in the manner described
above are considered market participant assumptions and meet the objective of
a fair value measurement
90 Paragraph B36 describes the use of Level 3 inputs for particular assets and
liabilities
Disclosure
91 An entity shall disclose information that helps users of its financial
statements assess both of the following
(a) for assets and liabilities that are measured at fair value on a
recurring or nonrecurring basis in the statement of financial
position after initial recognition the valuation techniques and
inputs used to develop those measurements
(b) for recurring fair value measurements using significant
unobservable inputs (Level 3) the effect of the measurements on
profit or loss or other comprehensive income for the period
92 To meet the objectives in paragraph 91 an entity shall consider all the
following
(a) the level of detail necessary to satisfy the disclosure requirements
(b) how much emphasis to place on each of the various requirements
(c) how much aggregation or disaggregation to undertake and
(d) whether users of financial statements need additional information to
evaluate the quantitative information disclosed
If the disclosures provided in accordance with this IFRS and other IFRSs are
insufficient to meet the objectives in paragraph 91 an entity shall disclose
additional information necessary to meet those objectives
IFRS 13
IFRS FoundationA62293 To meet the objectives in paragraph 91 an entity shall disclose at a minimum
the following information for each class of assets and liabilities (see
paragraph 94 for information on determining appropriate classes of assets and
liabilities) measured at fair value (including measurements based on fair value
within the scope of this IFRS) in the statement of financial position after initial
recognition
(a) for recurring and nonrecurring fair value measurements the fair value
measurement at the end of the reporting period and for nonrecurring
fair value measurements the reasons for the measurement Recurring
fair value measurements of assets or liabilities are those that other IFRSs
require or permit in the statement of financial position at the end of
each reporting period Nonrecurring fair value measurements of assets
or liabilities are those that other IFRSs require or permit in the statement
of financial position in particular circumstances (eg when an entity
measures an asset held for sale at fair value less costs to sell in
accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations because the asset’s fair value less costs to sell is lower than its
carrying amount)
(b) for recurring and nonrecurring fair value measurements the level of the
fair value hierarchy within which the fair value measurements are
categorised in their entirety (Level 1 2 or 3)
(c) for assets and liabilities held at the end of the reporting period that are
measured at fair value on a recurring basis the amounts of any transfers
between Level 1 and Level 2 of the fair value hierarchy the reasons for
those transfers and the entity’s policy for determining when transfers
between levels are deemed to have occurred (see paragraph 95)
Transfers into each level shall be disclosed and discussed separately from
transfers out of each level
(d) for recurring and nonrecurring fair value measurements categorised
within Level 2 and Level 3 of the fair value hierarchy a description of the
valuation technique(s) and the inputs used in the fair value
measurement If there has been a change in valuation technique
(eg changing from a market approach to an income approach or the use
of an additional valuation technique) the entity shall disclose that
change and the reason(s) for making it For fair value measurements
categorised within Level 3 of the fair value hierarchy an entity shall
provide quantitative information about the significant unobservable
inputs used in the fair value measurement An entity is not required to
create quantitative information to comply with this disclosure
requirement if quantitative unobservable inputs are not developed by
the entity when measuring fair value (eg when an entity uses prices from
prior transactions or thirdparty pricing information without
adjustment) However when providing this disclosure an entity cannot
ignore quantitative unobservable inputs that are significant to the fair
value measurement and are reasonably available to the entity
IFRS 13
IFRS Foundation A623(e) for recurring fair value measurements categorised within Level 3 of the
fair value hierarchy a reconciliation from the opening balances to the
closing balances disclosing separately changes during the period
attributable to the following
(i) total gains or losses for the period recognised in profit or loss
and the line item(s) in profit or loss in which those gains or losses
are recognised
(ii) total gains or losses for the period recognised in other
comprehensive income and the line item(s) in other
comprehensive income in which those gains or losses are
recognised
(iii) purchases sales issues and settlements (each of those types of
changes disclosed separately)
(iv) the amounts of any transfers into or out of Level 3 of the fair
value hierarchy the reasons for those transfers and the entity’s
policy for determining when transfers between levels are deemed
to have occurred (see paragraph 95) Transfers into Level 3 shall
be disclosed and discussed separately from transfers out of
Level 3
(f) for recurring fair value measurements categorised within Level 3 of the
fair value hierarchy the amount of the total gains or losses for the period
in (e)(i) included in profit or loss that is attributable to the change in
unrealised gains or losses relating to those assets and liabilities held at
the end of the reporting period and the line item(s) in profit or loss in
which those unrealised gains or losses are recognised
(g) for recurring and nonrecurring fair value measurements categorised
within Level 3 of the fair value hierarchy a description of the valuation
processes used by the entity (including for example how an entity
decides its valuation policies and procedures and analyses changes in fair
value measurements from period to period)
(h) for recurring fair value measurements categorised within Level 3 of the
fair value hierarchy
(i) for all such measurements a narrative description of the
sensitivity of the fair value measurement to changes in
unobservable inputs if a change in those inputs to a different
amount might result in a significantly higher or lower fair value
measurement If there are interrelationships between those
inputs and other unobservable inputs used in the fair value
measurement an entity shall also provide a description of those
interrelationships and of how they might magnify or mitigate
the effect of changes in the unobservable inputs on the fair value
measurement To comply with that disclosure requirement the
narrative description of the sensitivity to changes in
unobservable inputs shall include at a minimum the
unobservable inputs disclosed when complying with (d)
IFRS 13
IFRS FoundationA624(ii) for financial assets and financial liabilities if changing one or
more of the unobservable inputs to reflect reasonably possible
alternative assumptions would change fair value significantly an
entity shall state that fact and disclose the effect of those
changes The entity shall disclose how the effect of a change to
reflect a reasonably possible alternative assumption was
calculated For that purpose significance shall be judged with
respect to profit or loss and total assets or total liabilities or
when changes in fair value are recognised in other
comprehensive income total equity
(i) for recurring and nonrecurring fair value measurements if the highest
and best use of a nonfinancial asset differs from its current use an entity
shall disclose that fact and why the nonfinancial asset is being used in a
manner that differs from its highest and best use
94 An entity shall determine appropriate classes of assets and liabilities on the basis
of the following
(a) the nature characteristics and risks of the asset or liability and
(b) the level of the fair value hierarchy within which the fair value
measurement is categorised
The number of classes may need to be greater for fair value measurements
categorised within Level 3 of the fair value hierarchy because those
measurements have a greater degree of uncertainty and subjectivity
Determining appropriate classes of assets and liabilities for which disclosures
about fair value measurements should be provided requires judgement A class
of assets and liabilities will often require greater disaggregation than the line
items presented in the statement of financial position However an entity shall
provide information sufficient to permit reconciliation to the line items
presented in the statement of financial position If another IFRS specifies the
class for an asset or a liability an entity may use that class in providing the
disclosures required in this IFRS if that class meets the requirements in this
paragraph
95 An entity shall disclose and consistently follow its policy for determining when
transfers between levels of the fair value hierarchy are deemed to have occurred
in accordance with paragraph 93(c) and (e)(iv) The policy about the timing of
recognising transfers shall be the same for transfers into the levels as for
transfers out of the levels Examples of policies for determining the timing of
transfers include the following
(a) the date of the event or change in circumstances that caused the
transfer
(b) the beginning of the reporting period
(c) the end of the reporting period
96 If an entity makes an accounting policy decision to use the exception in
paragraph 48 it shall disclose that fact
IFRS 13
IFRS Foundation A62597 For each class of assets and liabilities not measured at fair value in the statement
of financial position but for which the fair value is disclosed an entity shall
disclose the information required by paragraph 93(b) (d) and (i) However an
entity is not required to provide the quantitative disclosures about significant
unobservable inputs used in fair value measurements categorised within Level 3
of the fair value hierarchy required by paragraph 93(d) For such assets and
liabilities an entity does not need to provide the other disclosures required by
this IFRS
98 For a liability measured at fair value and issued with an inseparable thirdparty
credit enhancement an issuer shall disclose the existence of that credit
enhancement and whether it is reflected in the fair value measurement of the
liability
99 An entity shall present the quantitative disclosures required by this IFRS in a
tabular format unless another format is more appropriate
IFRS 13
IFRS FoundationA626Appendix A
Defined terms
This appendix is an integral part of the IFRS
active market A market in which transactions for the asset or liability take
place with sufficient frequency and volume to provide pricing
information on an ongoing basis
cost approach A valuation technique that reflects the amount that would be
required currently to replace the service capacity of an asset
(often referred to as current replacement cost)
entry price The price paid to acquire an asset or received to assume a liability
in an exchange transaction
exit price The price that would be received to sell an asset or paid to
transfer a liability
expected cash flow The probabilityweighted average (ie mean of the distribution) of
possible future cash flows
fair value The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date
highest and best use The use of a nonfinancial asset by market participants that
would maximise the value of the asset or the group of assets and
liabilities (eg a business) within which the asset would be used
income approach Valuation techniques that convert future amounts (eg cash flows
or income and expenses) to a single current (ie discounted)
amount The fair value measurement is determined on the basis
of the value indicated by current market expectations about
those future amounts
inputs The assumptions that market participants would use when
pricing the asset or liability including assumptions about risk
such as the following
(a) the risk inherent in a particular valuation technique used
to measure fair value (such as a pricing model) and
(b) the risk inherent in the inputs to the valuation technique
Inputs may be observable or unobservable
Level 1 inputs Quoted prices (unadjusted) in active markets for identical assets
or liabilities that the entity can access at the measurement date
Level 2 inputs Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability either directly or indirectly
Level 3 inputs Unobservable inputs for the asset or liability
IFRS 13
IFRS Foundation A627market approach A valuation technique that uses prices and other relevant
information generated by market transactions involving
identical or comparable (ie similar) assets liabilities or a group of
assets and liabilities such as a business
marketcorroborated
inputs
Inputs that are derived principally from or corroborated by
observable market data by correlation or other means
market participant Buyers and sellers in the principal (or most advantageous) market
for the asset or liability that have all of the following
characteristics
(a) They are independent of each other ie they are not
related parties as defined in IAS 24 although the price in
a related party transaction may be used as an input to a
fair value measurement if the entity has evidence that the
transaction was entered into at market terms
(b) They are knowledgeable having a reasonable
understanding about the asset or liability and the
transaction using all available information including
information that might be obtained through due
diligence efforts that are usual and customary
(c) They are able to enter into a transaction for the asset or
liability
(d) They are willing to enter into a transaction for the asset
or liability ie they are motivated but not forced or
otherwise compelled to do so
most advantageous
market
The market that maximises the amount that would be received to
sell the asset or minimises the amount that would be paid to
transfer the liability after taking into account transaction costs
and transport costs
nonperformance risk The risk that an entity will not fulfil an obligation
Nonperformance risk includes but may not be limited to the
entity’s own credit risk
observable inputs Inputs that are developed using market data such as publicly
available information about actual events or transactions and
that reflect the assumptions that market participants would use
when pricing the asset or liability
orderly transaction A transaction that assumes exposure to the market for a period
before the measurement date to allow for marketing activities
that are usual and customary for transactions involving such
assets or liabilities it is not a forced transaction (eg a forced
liquidation or distress sale)
principal market The market with the greatest volume and level of activity for the
asset or liability
IFRS 13
IFRS FoundationA628risk premium Compensation sought by riskaverse market participants for
bearing the uncertainty inherent in the cash flows of an asset or a
liability Also referred to as a risk adjustment’
transaction costs The costs to sell an asset or transfer a liability in the principal (or
most advantageous) market for the asset or liability that are
directly attributable to the disposal of the asset or the transfer of
the liability and meet both of the following criteria
(a) They result directly from and are essential to that
transaction
(b) They would not have been incurred by the entity had the
decision to sell the asset or transfer the liability not been
made (similar to costs to sell as defined in IFRS 5)
transport costs The costs that would be incurred to transport an asset from its
current location to its principal (or most advantageous) market
unit of account The level at which an asset or a liability is aggregated or
disaggregated in an IFRS for recognition purposes
unobservable inputs Inputs for which market data are not available and that are
developed using the best information available about the
assumptions that market participants would use when pricing
the asset or liability
IFRS 13
IFRS Foundation A629Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–99 and
has the same authority as the other parts of the IFRS
B1 The judgements applied in different valuation situations may be different This
appendix describes the judgements that might apply when an entity measures
fair value in different valuation situations
The fair value measurement approach
B2 The objective of a fair value measurement is to estimate the price at which an
orderly transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market
conditions A fair value measurement requires an entity to determine all the
following
(a) the particular asset or liability that is the subject of the measurement
(consistently with its unit of account)
(b) for a nonfinancial asset the valuation premise that is appropriate for
the measurement (consistently with its highest and best use)
(c) the principal (or most advantageous) market for the asset or liability
(d) the valuation technique(s) appropriate for the measurement considering
the availability of data with which to develop inputs that represent the
assumptions that market participants would use when pricing the asset
or liability and the level of the fair value hierarchy within which the
inputs are categorised
Valuation premise for nonfinancial assets (paragraphs 31–33)
B3 When measuring the fair value of a nonfinancial asset used in combination
with other assets as a group (as installed or otherwise configured for use) or in
combination with other assets and liabilities (eg a business) the effect of the
valuation premise depends on the circumstances For example
(a) the fair value of the asset might be the same whether the asset is used on
a standalone basis or in combination with other assets or with other
assets and liabilities That might be the case if the asset is a business that
market participants would continue to operate In that case the
transaction would involve valuing the business in its entirety The use of
the assets as a group in an ongoing business would generate synergies
that would be available to market participants (ie market participant
synergies that therefore should affect the fair value of the asset on
either a standalone basis or in combination with other assets or with
other assets and liabilities)
(b) an asset’s use in combination with other assets or with other assets and
liabilities might be incorporated into the fair value measurement
through adjustments to the value of the asset used on a standalone basis
IFRS 13
IFRS FoundationA630That might be the case if the asset is a machine and the fair value
measurement is determined using an observed price for a similar
machine (not installed or otherwise configured for use) adjusted for
transport and installation costs so that the fair value measurement
reflects the current condition and location of the machine (installed and
configured for use)
(c) an asset’s use in combination with other assets or with other assets and
liabilities might be incorporated into the fair value measurement
through the market participant assumptions used to measure the fair
value of the asset For example if the asset is work in progress inventory
that is unique and market participants would convert the inventory into
finished goods the fair value of the inventory would assume that market
participants have acquired or would acquire any specialised machinery
necessary to convert the inventory into finished goods
(d) an asset’s use in combination with other assets or with other assets and
liabilities might be incorporated into the valuation technique used to
measure the fair value of the asset That might be the case when using
the multiperiod excess earnings method to measure the fair value of an
intangible asset because that valuation technique specifically takes into
account the contribution of any complementary assets and the
associated liabilities in the group in which such an intangible asset
would be used
(e) in more limited situations when an entity uses an asset within a group
of assets the entity might measure the asset at an amount that
approximates its fair value when allocating the fair value of the asset
group to the individual assets of the group That might be the case if the
valuation involves real property and the fair value of improved property
(ie an asset group) is allocated to its component assets (such as land and
improvements)
Fair value at initial recognition (paragraphs 57–60)
B4 When determining whether fair value at initial recognition equals the
transaction price an entity shall take into account factors specific to the
transaction and to the asset or liability For example the transaction price
might not represent the fair value of an asset or a liability at initial recognition
if any of the following conditions exist
(a) The transaction is between related parties although the price in a
related party transaction may be used as an input into a fair value
measurement if the entity has evidence that the transaction was entered
into at market terms
(b) The transaction takes place under duress or the seller is forced to accept
the price in the transaction For example that might be the case if the
seller is experiencing financial difficulty
(c) The unit of account represented by the transaction price is different from
the unit of account for the asset or liability measured at fair value For
example that might be the case if the asset or liability measured at fair
IFRS 13
IFRS Foundation A631value is only one of the elements in the transaction (eg in a business
combination) the transaction includes unstated rights and privileges
that are measured separately in accordance with another IFRS or the
transaction price includes transaction costs
(d) The market in which the transaction takes place is different from the
principal market (or most advantageous market) For example those
markets might be different if the entity is a dealer that enters into
transactions with customers in the retail market but the principal (or
most advantageous) market for the exit transaction is with other dealers
in the dealer market
Valuation techniques (paragraphs 61–66)
Market approach
B5 The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable (ie similar) assets
liabilities or a group of assets and liabilities such as a business
B6 For example valuation techniques consistent with the market approach often
use market multiples derived from a set of comparables Multiples might be in
ranges with a different multiple for each comparable The selection of the
appropriate multiple within the range requires judgement considering
qualitative and quantitative factors specific to the measurement
B7 Valuation techniques consistent with the market approach include matrix
pricing Matrix pricing is a mathematical technique used principally to value
some types of financial instruments such as debt securities without relying
exclusively on quoted prices for the specific securities but rather relying on the
securities’ relationship to other benchmark quoted securities
Cost approach
B8 The cost approach reflects the amount that would be required currently to
replace the service capacity of an asset (often referred to as current replacement
cost)
B9 From the perspective of a market participant seller the price that would be
received for the asset is based on the cost to a market participant buyer to
acquire or construct a substitute asset of comparable utility adjusted for
obsolescence That is because a market participant buyer would not pay more
for an asset than the amount for which it could replace the service capacity of
that asset Obsolescence encompasses physical deterioration functional
(technological) obsolescence and economic (external) obsolescence and is
broader than depreciation for financial reporting purposes (an allocation of
historical cost) or tax purposes (using specified service lives) In many cases the
current replacement cost method is used to measure the fair value of tangible
assets that are used in combination with other assets or with other assets and
liabilities
IFRS 13
IFRS FoundationA632Income approach
B10 The income approach converts future amounts (eg cash flows or income and
expenses) to a single current (ie discounted) amount When the income
approach is used the fair value measurement reflects current market
expectations about those future amounts
B11 Those valuation techniques include for example the following
(a) present value techniques (see paragraphs B12–B30)
(b) option pricing models such as the BlackScholesMerton formula or a
binomial model (ie a lattice model) that incorporate present value
techniques and reflect both the time value and the intrinsic value of an
option and
(c) the multiperiod excess earnings method which is used to measure the
fair value of some intangible assets
Present value techniques
B12 Paragraphs B13–B30 describe the use of present value techniques to measure fair
value Those paragraphs focus on a discount rate adjustment technique and an
expected cash flow (expected present value) technique Those paragraphs neither
prescribe the use of a single specific present value technique nor limit the use of
present value techniques to measure fair value to the techniques discussed The
present value technique used to measure fair value will depend on facts and
circumstances specific to the asset or liability being measured (eg whether prices
for comparable assets or liabilities can be observed in the market) and the
availability of sufficient data
The components of a present value measurement
B13 Present value (ie an application of the income approach) is a tool used to link
future amounts (eg cash flows or values) to a present amount using a discount
rate A fair value measurement of an asset or a liability using a present value
technique captures all the following elements from the perspective of market
participants at the measurement date
(a) an estimate of future cash flows for the asset or liability being measured
(b) expectations about possible variations in the amount and timing of the
cash flows representing the uncertainty inherent in the cash flows
(c) the time value of money represented by the rate on riskfree monetary
assets that have maturity dates or durations that coincide with the
period covered by the cash flows and pose neither uncertainty in timing
nor risk of default to the holder (ie a riskfree interest rate)
(d) the price for bearing the uncertainty inherent in the cash flows (ie a risk
premium)
(e) other factors that market participants would take into account in the
circumstances
(f) for a liability the nonperformance risk relating to that liability
including the entity’s (ie the obligor’s) own credit risk
IFRS 13
IFRS Foundation A633General principles
B14 Present value techniques differ in how they capture the elements in
paragraph B13 However all the following general principles govern the
application of any present value technique used to measure fair value
(a) Cash flows and discount rates should reflect assumptions that market
participants would use when pricing the asset or liability
(b) Cash flows and discount rates should take into account only the factors
attributable to the asset or liability being measured
(c) To avoid doublecounting or omitting the effects of risk factors discount
rates should reflect assumptions that are consistent with those inherent
in the cash flows For example a discount rate that reflects the
uncertainty in expectations about future defaults is appropriate if using
contractual cash flows of a loan (ie a discount rate adjustment
technique) That same rate should not be used if using expected
(ie probabilityweighted) cash flows (ie an expected present value
technique) because the expected cash flows already reflect assumptions
about the uncertainty in future defaults instead a discount rate that is
commensurate with the risk inherent in the expected cash flows should
be used
(d) Assumptions about cash flows and discount rates should be internally
consistent For example nominal cash flows which include the effect of
inflation should be discounted at a rate that includes the effect of
inflation The nominal riskfree interest rate includes the effect of
inflation Real cash flows which exclude the effect of inflation should
be discounted at a rate that excludes the effect of inflation Similarly
aftertax cash flows should be discounted using an aftertax discount
rate Pretax cash flows should be discounted at a rate consistent with
those cash flows
(e) Discount rates should be consistent with the underlying economic
factors of the currency in which the cash flows are denominated
Risk and uncertainty
B15 A fair value measurement using present value techniques is made under
conditions of uncertainty because the cash flows used are estimates rather than
known amounts In many cases both the amount and timing of the cash flows
are uncertain Even contractually fixed amounts such as the payments on a
loan are uncertain if there is risk of default
B16 Market participants generally seek compensation (ie a risk premium) for bearing
the uncertainty inherent in the cash flows of an asset or a liability A fair value
measurement should include a risk premium reflecting the amount that market
participants would demand as compensation for the uncertainty inherent in the
cash flows Otherwise the measurement would not faithfully represent fair
value In some cases determining the appropriate risk premium might be
difficult However the degree of difficulty alone is not a sufficient reason to
exclude a risk premium
IFRS 13
IFRS FoundationA634B17 Present value techniques differ in how they adjust for risk and in the type of
cash flows they use For example
(a) The discount rate adjustment technique (see paragraphs B18–B22) uses a
riskadjusted discount rate and contractual promised or most likely cash
flows
(b) Method 1 of the expected present value technique (see paragraph B25)
uses riskadjusted expected cash flows and a riskfree rate
(c) Method 2 of the expected present value technique (see paragraph B26)
uses expected cash flows that are not riskadjusted and a discount rate
adjusted to include the risk premium that market participants require
That rate is different from the rate used in the discount rate adjustment
technique
Discount rate adjustment technique
B18 The discount rate adjustment technique uses a single set of cash flows from the
range of possible estimated amounts whether contractual or promised (as is the
case for a bond) or most likely cash flows In all cases those cash flows are
conditional upon the occurrence of specified events (eg contractual or promised
cash flows for a bond are conditional on the event of no default by the debtor)
The discount rate used in the discount rate adjustment technique is derived
from observed rates of return for comparable assets or liabilities that are traded
in the market Accordingly the contractual promised or most likely cash flows
are discounted at an observed or estimated market rate for such conditional
cash flows (ie a market rate of return)
B19 The discount rate adjustment technique requires an analysis of market data for
comparable assets or liabilities Comparability is established by considering the
nature of the cash flows (eg whether the cash flows are contractual or
noncontractual and are likely to respond similarly to changes in economic
conditions) as well as other factors (eg credit standing collateral duration
restrictive covenants and liquidity) Alternatively if a single comparable asset or
liability does not fairly reflect the risk inherent in the cash flows of the asset or
liability being measured it may be possible to derive a discount rate using data
for several comparable assets or liabilities in conjunction with the riskfree yield
curve (ie using a buildup’ approach)
B20 To illustrate a buildup approach assume that Asset A is a contractual right to
receive CU8001 in one year (ie there is no timing uncertainty) There is an
established market for comparable assets and information about those assets
including price information is available Of those comparable assets
(a) Asset B is a contractual right to receive CU1200 in one year and has a
market price of CU1083 Thus the implied annual rate of return (ie a
oneyear market rate of return) is 108 per cent [(CU1200CU1083) – 1]
(b) Asset C is a contractual right to receive CU700 in two years and has a
market price of CU566 Thus the implied annual rate of return (ie a
twoyear market rate of return) is 112 per cent [(CU700CU566)^05 – 1]
1 In this IFRS monetary amounts are denominated in currency units (CU)’
IFRS 13
IFRS Foundation A635(c) All three assets are comparable with respect to risk (ie dispersion of
possible payoffs and credit)
B21 On the basis of the timing of the contractual payments to be received for Asset A
relative to the timing for Asset B and Asset C (ie one year for Asset B versus two
years for Asset C) Asset B is deemed more comparable to Asset A Using the
contractual payment to be received for Asset A (CU800) and the oneyear market
rate derived from Asset B (108 per cent) the fair value of Asset A is CU722
(CU8001108) Alternatively in the absence of available market information for
Asset B the oneyear market rate could be derived from Asset C using the
buildup approach In that case the twoyear market rate indicated by Asset C
(112 per cent) would be adjusted to a oneyear market rate using the term
structure of the riskfree yield curve Additional information and analysis might
be required to determine whether the risk premiums for oneyear and twoyear
assets are the same If it is determined that the risk premiums for oneyear and
twoyear assets are not the same the twoyear market rate of return would be
further adjusted for that effect
B22 When the discount rate adjustment technique is applied to fixed receipts or
payments the adjustment for risk inherent in the cash flows of the asset or
liability being measured is included in the discount rate In some applications
of the discount rate adjustment technique to cash flows that are not fixed
receipts or payments an adjustment to the cash flows may be necessary to
achieve comparability with the observed asset or liability from which the
discount rate is derived
Expected present value technique
B23 The expected present value technique uses as a starting point a set of cash flows
that represents the probabilityweighted average of all possible future cash flows
(ie the expected cash flows) The resulting estimate is identical to expected
value which in statistical terms is the weighted average of a discrete random
variable’s possible values with the respective probabilities as the weights
Because all possible cash flows are probabilityweighted the resulting expected
cash flow is not conditional upon the occurrence of any specified event (unlike
the cash flows used in the discount rate adjustment technique)
B24 In making an investment decision riskaverse market participants would take
into account the risk that the actual cash flows may differ from the expected
cash flows Portfolio theory distinguishes between two types of risk
(a) unsystematic (diversifiable) risk which is the risk specific to a particular
asset or liability
(b) systematic (nondiversifiable) risk which is the common risk shared by
an asset or a liability with the other items in a diversified portfolio
Portfolio theory holds that in a market in equilibrium market participants will
be compensated only for bearing the systematic risk inherent in the cash flows
(In markets that are inefficient or out of equilibrium other forms of return or
compensation might be available)
B25 Method 1 of the expected present value technique adjusts the expected cash
flows of an asset for systematic (ie market) risk by subtracting a cash risk
IFRS 13
IFRS FoundationA636premium (ie riskadjusted expected cash flows) Those riskadjusted expected
cash flows represent a certaintyequivalent cash flow which is discounted at a
riskfree interest rate A certaintyequivalent cash flow refers to an expected cash
flow (as defined) adjusted for risk so that a market participant is indifferent to
trading a certain cash flow for an expected cash flow For example if a market
participant was willing to trade an expected cash flow of CU1200 for a certain
cash flow of CU1000 the CU1000 is the certainty equivalent of the CU1200
(ie the CU200 would represent the cash risk premium) In that case the market
participant would be indifferent as to the asset held
B26 In contrast Method 2 of the expected present value technique adjusts for
systematic (ie market) risk by applying a risk premium to the riskfree interest
rate Accordingly the expected cash flows are discounted at a rate that
corresponds to an expected rate associated with probabilityweighted cash flows
(ie an expected rate of return) Models used for pricing risky assets such as the
capital asset pricing model can be used to estimate the expected rate of return
Because the discount rate used in the discount rate adjustment technique is a
rate of return relating to conditional cash flows it is likely to be higher than the
discount rate used in Method 2 of the expected present value technique which
is an expected rate of return relating to expected or probabilityweighted cash
flows
B27 To illustrate Methods 1 and 2 assume that an asset has expected cash flows of
CU780 in one year determined on the basis of the possible cash flows and
probabilities shown below The applicable riskfree interest rate for cash flows
with a oneyear horizon is 5 per cent and the systematic risk premium for an
asset with the same risk profile is 3 per cent
Possible cash flows Probability Probabilityweighted
cash flows
CU500 15 CU75
CU800 60 CU480
CU900 25 CU225
Expected cash flows CU780
B28 In this simple illustration the expected cash flows (CU780) represent the
probabilityweighted average of the three possible outcomes In more realistic
situations there could be many possible outcomes However to apply the
expected present value technique it is not always necessary to take into account
distributions of all possible cash flows using complex models and techniques
Rather it might be possible to develop a limited number of discrete scenarios
and probabilities that capture the array of possible cash flows For example an
entity might use realised cash flows for some relevant past period adjusted for
changes in circumstances occurring subsequently (eg changes in external
factors including economic or market conditions industry trends and
competition as well as changes in internal factors affecting the entity more
specifically) taking into account the assumptions of market participants
B29 In theory the present value (ie the fair value) of the asset’s cash flows is the same
whether determined using Method 1 or Method 2 as follows
IFRS 13
IFRS Foundation A637(a) Using Method 1 the expected cash flows are adjusted for systematic
(ie market) risk In the absence of market data directly indicating the
amount of the risk adjustment such adjustment could be derived from
an asset pricing model using the concept of certainty equivalents For
example the risk adjustment (ie the cash risk premium of CU22) could
be determined using the systematic risk premium of 3 per cent (CU780 –
[CU780 × (105108)]) which results in riskadjusted expected cash flows
of CU758 (CU780 – CU22) The CU758 is the certainty equivalent of
CU780 and is discounted at the riskfree interest rate (5 per cent) The
present value (ie the fair value) of the asset is CU722 (CU758105)
(b) Using Method 2 the expected cash flows are not adjusted for systematic
(ie market) risk Rather the adjustment for that risk is included in the
discount rate Thus the expected cash flows are discounted at an
expected rate of return of 8 per cent (ie the 5 per cent riskfree interest
rate plus the 3 per cent systematic risk premium) The present value
(ie the fair value) of the asset is CU722 (CU780108)
B30 When using an expected present value technique to measure fair value either
Method 1 or Method 2 could be used The selection of Method 1 or Method 2 will
depend on facts and circumstances specific to the asset or liability being
measured the extent to which sufficient data are available and the judgements
applied
Applying present value techniques to liabilities and an entity’s
own equity instruments not held by other parties as assets
(paragraphs 40 and 41)
B31 When using a present value technique to measure the fair value of a liability
that is not held by another party as an asset (eg a decommissioning liability) an
entity shall among other things estimate the future cash outflows that market
participants would expect to incur in fulfilling the obligation Those future cash
outflows shall include market participants’ expectations about the costs of
fulfilling the obligation and the compensation that a market participant would
require for taking on the obligation Such compensation includes the return
that a market participant would require for the following
(a) undertaking the activity (ie the value of fulfilling the obligation eg by
using resources that could be used for other activities) and
(b) assuming the risk associated with the obligation (ie a risk premium that
reflects the risk that the actual cash outflows might differ from the
expected cash outflows see paragraph B33)
B32 For example a nonfinancial liability does not contain a contractual rate of
return and there is no observable market yield for that liability In some cases
the components of the return that market participants would require will be
indistinguishable from one another (eg when using the price a third party
contractor would charge on a fixed fee basis) In other cases an entity needs to
estimate those components separately (eg when using the price a third party
contractor would charge on a cost plus basis because the contractor in that case
would not bear the risk of future changes in costs)
IFRS 13
IFRS FoundationA638B33 An entity can include a risk premium in the fair value measurement of a
liability or an entity’s own equity instrument that is not held by another party as
an asset in one of the following ways
(a) by adjusting the cash flows (ie as an increase in the amount of cash
outflows) or
(b) by adjusting the rate used to discount the future cash flows to their
present values (ie as a reduction in the discount rate)
An entity shall ensure that it does not doublecount or omit adjustments for risk
For example if the estimated cash flows are increased to take into account the
compensation for assuming the risk associated with the obligation the discount
rate should not be adjusted to reflect that risk
Inputs to valuation techniques (paragraphs 67–71)
B34 Examples of markets in which inputs might be observable for some assets and
liabilities (eg financial instruments) include the following
(a) Exchange markets In an exchange market closing prices are both readily
available and generally representative of fair value An example of such
a market is the London Stock Exchange
(b) Dealer markets In a dealer market dealers stand ready to trade (either buy
or sell for their own account) thereby providing liquidity by using their
capital to hold an inventory of the items for which they make a market
Typically bid and ask prices (representing the price at which the dealer is
willing to buy and the price at which the dealer is willing to sell
respectively) are more readily available than closing prices
Overthecounter markets (for which prices are publicly reported) are
dealer markets Dealer markets also exist for some other assets and
liabilities including some financial instruments commodities and
physical assets (eg used equipment)
(c) Brokered markets In a brokered market brokers attempt to match buyers
with sellers but do not stand ready to trade for their own account In
other words brokers do not use their own capital to hold an inventory of
the items for which they make a market The broker knows the prices
bid and asked by the respective parties but each party is typically
unaware of another party’s price requirements Prices of completed
transactions are sometimes available Brokered markets include
electronic communication networks in which buy and sell orders are
matched and commercial and residential real estate markets
(d) Principaltoprincipal markets In a principaltoprincipal market
transactions both originations and resales are negotiated
independently with no intermediary Little information about those
transactions may be made available publicly
IFRS 13
IFRS Foundation A639Fair value hierarchy (paragraphs 72–90)
Level 2 inputs (paragraphs 81–85)
B35 Examples of Level 2 inputs for particular assets and liabilities include the
following
(a) Receivefixed payvariable interest rate swap based on the London Interbank Offered
Rate (LIBOR) swap rate A Level 2 input would be the LIBOR swap rate if that
rate is observable at commonly quoted intervals for substantially the full
term of the swap
(b) Receivefixed payvariable interest rate swap based on a yield curve denominated in
a foreign currency A Level 2 input would be the swap rate based on a yield
curve denominated in a foreign currency that is observable at commonly
quoted intervals for substantially the full term of the swap That would
be the case if the term of the swap is 10 years and that rate is observable
at commonly quoted intervals for 9 years provided that any reasonable
extrapolation of the yield curve for year 10 would not be significant to
the fair value measurement of the swap in its entirety
(c) Receivefixed payvariable interest rate swap based on a specific bank’s prime rate
A Level 2 input would be the bank’s prime rate derived through
extrapolation if the extrapolated values are corroborated by observable
market data for example by correlation with an interest rate that is
observable over substantially the full term of the swap
(d) Threeyear option on exchangetraded shares A Level 2 input would be the
implied volatility for the shares derived through extrapolation to year 3
if both of the following conditions exist
(i) Prices for oneyear and twoyear options on the shares are
observable
(ii) The extrapolated implied volatility of a threeyear option is
corroborated by observable market data for substantially the full
term of the option
In that case the implied volatility could be derived by extrapolating from
the implied volatility of the oneyear and twoyear options on the shares
and corroborated by the implied volatility for threeyear options on
comparable entities’ shares provided that correlation with the oneyear
and twoyear implied volatilities is established
(e) Licensing arrangement For a licensing arrangement that is acquired in a
business combination and was recently negotiated with an unrelated
party by the acquired entity (the party to the licensing arrangement) a
Level 2 input would be the royalty rate in the contract with the unrelated
party at inception of the arrangement
(f) Finished goods inventory at a retail outlet For finished goods inventory that
is acquired in a business combination a Level 2 input would be either a
price to customers in a retail market or a price to retailers in a wholesale
market adjusted for differences between the condition and location of
IFRS 13
IFRS FoundationA640the inventory item and the comparable (ie similar) inventory items so
that the fair value measurement reflects the price that would be received
in a transaction to sell the inventory to another retailer that would
complete the requisite selling efforts Conceptually the fair value
measurement will be the same whether adjustments are made to a retail
price (downward) or to a wholesale price (upward) Generally the price
that requires the least amount of subjective adjustments should be used
for the fair value measurement
(g) Building held and used A Level 2 input would be the price per square
metre for the building (a valuation multiple) derived from observable
market data eg multiples derived from prices in observed transactions
involving comparable (ie similar) buildings in similar locations
(h) Cashgenerating unit A Level 2 input would be a valuation multiple (eg a
multiple of earnings or revenue or a similar performance measure)
derived from observable market data eg multiples derived from prices in
observed transactions involving comparable (ie similar) businesses
taking into account operational market financial and nonfinancial
factors
Level 3 inputs (paragraphs 86–90)
B36 Examples of Level 3 inputs for particular assets and liabilities include the
following
(a) Longdated currency swap A Level 3 input would be an interest rate in a
specified currency that is not observable and cannot be corroborated by
observable market data at commonly quoted intervals or otherwise for
substantially the full term of the currency swap The interest rates in a
currency swap are the swap rates calculated from the respective
countries’ yield curves
(b) Threeyear option on exchangetraded shares A Level 3 input would be
historical volatility ie the volatility for the shares derived from the
shares’ historical prices Historical volatility typically does not represent
current market participants’ expectations about future volatility even if
it is the only information available to price an option
(c) Interest rate swap A Level 3 input would be an adjustment to a
midmarket consensus (nonbinding) price for the swap developed using
data that are not directly observable and cannot otherwise be
corroborated by observable market data
(d) Decommissioning liability assumed in a business combination A Level 3 input
would be a current estimate using the entity’s own data about the future
cash outflows to be paid to fulfil the obligation (including market
participants’ expectations about the costs of fulfilling the obligation and
the compensation that a market participant would require for taking on
the obligation to dismantle the asset) if there is no reasonably available
information that indicates that market participants would use different
assumptions That Level 3 input would be used in a present value
technique together with other inputs eg a current riskfree interest rate
or a creditadjusted riskfree rate if the effect of the entity’s credit
IFRS 13
IFRS Foundation A641standing on the fair value of the liability is reflected in the discount rate
rather than in the estimate of future cash outflows
(e) Cashgenerating unit A Level 3 input would be a financial forecast (eg of
cash flows or profit or loss) developed using the entity’s own data if there
is no reasonably available information that indicates that market
participants would use different assumptions
Measuring fair value when the volume or level of activity for an
asset or a liability has significantly decreased
B37 The fair value of an asset or a liability might be affected when there has been a
significant decrease in the volume or level of activity for that asset or liability in
relation to normal market activity for the asset or liability (or similar assets or
liabilities) To determine whether on the basis of the evidence available there
has been a significant decrease in the volume or level of activity for the asset or
liability an entity shall evaluate the significance and relevance of factors such as
the following
(a) There are few recent transactions
(b) Price quotations are not developed using current information
(c) Price quotations vary substantially either over time or among
marketmakers (eg some brokered markets)
(d) Indices that previously were highly correlated with the fair values of the
asset or liability are demonstrably uncorrelated with recent indications
of fair value for that asset or liability
(e) There is a significant increase in implied liquidity risk premiums yields
or performance indicators (such as delinquency rates or loss severities)
for observed transactions or quoted prices when compared with the
entity’s estimate of expected cash flows taking into account all available
market data about credit and other nonperformance risk for the asset or
liability
(f) There is a wide bidask spread or significant increase in the bidask
spread
(g) There is a significant decline in the activity of or there is an absence of a
market for new issues (ie a primary market) for the asset or liability or
similar assets or liabilities
(h) Little information is publicly available (eg for transactions that take
place in a principaltoprincipal market)
B38 If an entity concludes that there has been a significant decrease in the volume or
level of activity for the asset or liability in relation to normal market activity for
the asset or liability (or similar assets or liabilities) further analysis of the
transactions or quoted prices is needed A decrease in the volume or level of
activity on its own may not indicate that a transaction price or quoted price does
not represent fair value or that a transaction in that market is not orderly
However if an entity determines that a transaction or quoted price does not
represent fair value (eg there may be transactions that are not orderly) an
IFRS 13
IFRS FoundationA642adjustment to the transactions or quoted prices will be necessary if the entity
uses those prices as a basis for measuring fair value and that adjustment may be
significant to the fair value measurement in its entirety Adjustments also may
be necessary in other circumstances (eg when a price for a similar asset requires
significant adjustment to make it comparable to the asset being measured or
when the price is stale)
B39 This IFRS does not prescribe a methodology for making significant adjustments
to transactions or quoted prices See paragraphs 61–66 and B5–B11 for a
discussion of the use of valuation techniques when measuring fair value
Regardless of the valuation technique used an entity shall include appropriate
risk adjustments including a risk premium reflecting the amount that market
participants would demand as compensation for the uncertainty inherent in the
cash flows of an asset or a liability (see paragraph B17) Otherwise the
measurement does not faithfully represent fair value In some cases
determining the appropriate risk adjustment might be difficult However the
degree of difficulty alone is not a sufficient basis on which to exclude a risk
adjustment The risk adjustment shall be reflective of an orderly transaction
between market participants at the measurement date under current market
conditions
B40 If there has been a significant decrease in the volume or level of activity for the
asset or liability a change in valuation technique or the use of multiple
valuation techniques may be appropriate (eg the use of a market approach and a
present value technique) When weighting indications of fair value resulting
from the use of multiple valuation techniques an entity shall consider the
reasonableness of the range of fair value measurements The objective is to
determine the point within the range that is most representative of fair value
under current market conditions A wide range of fair value measurements may
be an indication that further analysis is needed
B41 Even when there has been a significant decrease in the volume or level of
activity for the asset or liability the objective of a fair value measurement
remains the same Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction (ie not a forced
liquidation or distress sale) between market participants at the measurement
date under current market conditions
B42 Estimating the price at which market participants would be willing to enter into
a transaction at the measurement date under current market conditions if there
has been a significant decrease in the volume or level of activity for the asset or
liability depends on the facts and circumstances at the measurement date and
requires judgement An entity’s intention to hold the asset or to settle or
otherwise fulfil the liability is not relevant when measuring fair value because
fair value is a marketbased measurement not an entityspecific measurement
Identifying transactions that are not orderly
B43 The determination of whether a transaction is orderly (or is not orderly) is more
difficult if there has been a significant decrease in the volume or level of activity
for the asset or liability in relation to normal market activity for the asset or
liability (or similar assets or liabilities) In such circumstances it is not
IFRS 13
IFRS Foundation A643appropriate to conclude that all transactions in that market are not orderly (ie
forced liquidations or distress sales) Circumstances that may indicate that a
transaction is not orderly include the following
(a) There was not adequate exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and
customary for transactions involving such assets or liabilities under
current market conditions
(b) There was a usual and customary marketing period but the seller
marketed the asset or liability to a single market participant
(c) The seller is in or near bankruptcy or receivership (ie the seller is
distressed)
(d) The seller was required to sell to meet regulatory or legal requirements
(ie the seller was forced)
(e) The transaction price is an outlier when compared with other recent
transactions for the same or a similar asset or liability
An entity shall evaluate the circumstances to determine whether on the weight
of the evidence available the transaction is orderly
B44 An entity shall consider all the following when measuring fair value or
estimating market risk premiums
(a) If the evidence indicates that a transaction is not orderly an entity shall
place little if any weight (compared with other indications of fair value)
on that transaction price
(b) If the evidence indicates that a transaction is orderly an entity shall take
into account that transaction price The amount of weight placed on
that transaction price when compared with other indications of fair
value will depend on the facts and circumstances such as the following
(i) the volume of the transaction
(ii) the comparability of the transaction to the asset or liability being
measured
(iii) the proximity of the transaction to the measurement date
(c) If an entity does not have sufficient information to conclude whether a
transaction is orderly it shall take into account the transaction price
However that transaction price may not represent fair value (ie the
transaction price is not necessarily the sole or primary basis for
measuring fair value or estimating market risk premiums) When an
entity does not have sufficient information to conclude whether
particular transactions are orderly the entity shall place less weight on
those transactions when compared with other transactions that are
known to be orderly
An entity need not undertake exhaustive efforts to determine whether a
transaction is orderly but it shall not ignore information that is reasonably
available When an entity is a party to a transaction it is presumed to have
sufficient information to conclude whether the transaction is orderly
IFRS 13
IFRS FoundationA644Using quoted prices provided by third parties
B45 This IFRS does not preclude the use of quoted prices provided by third parties
such as pricing services or brokers if an entity has determined that the quoted
prices provided by those parties are developed in accordance with this IFRS
B46 If there has been a significant decrease in the volume or level of activity for the
asset or liability an entity shall evaluate whether the quoted prices provided by
third parties are developed using current information that reflects orderly
transactions or a valuation technique that reflects market participant
assumptions (including assumptions about risk) In weighting a quoted price as
an input to a fair value measurement an entity places less weight (when
compared with other indications of fair value that reflect the results of
transactions) on quotes that do not reflect the result of transactions
B47 Furthermore the nature of a quote (eg whether the quote is an indicative price
or a binding offer) shall be taken into account when weighting the available
evidence with more weight given to quotes provided by third parties that
represent binding offers
IFRS 13
IFRS Foundation A645Appendix C
Effective date and transition
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted If an entity applies this IFRS
for an earlier period it shall disclose that fact
C2 This IFRS shall be applied prospectively as of the beginning of the annual period
in which it is initially applied
C3 The disclosure requirements of this IFRS need not be applied in comparative
information provided for periods before initial application of this IFRS
C4 Annual Improvements Cycle 2011–2013 issued in December 2013 amended
paragraph 52 An entity shall apply that amendment for annual periods
beginning on or after 1 July 2014 An entity shall apply that amendment
prospectively from the beginning of the annual period in which IFRS 13 was
initially applied Earlier application is permitted If an entity applies that
amendment for an earlier period it shall disclose that fact
C5 IFRS 9 as issued in July 2014 amended paragraph 52 An entity shall apply that
amendment when it applies IFRS 9
C6 IFRS 16 Leases issued in January 2016 amended paragraph 6 An entity shall
apply that amendment when it applies IFRS 16
IFRS 13
IFRS FoundationA646Appendix D
Amendments to other IFRSs
This appendix sets out amendments to other IFRSs that are a consequence of the Board issuing
IFRS 13 An entity shall apply the amendments for annual periods beginning on or after 1 January
2013 If an entity applies IFRS 13 for an earlier period it shall apply the amendments for that
earlier period Amended paragraphs are shown with new text underlined and deleted text struck
through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 13
IFRS Foundation A647IFRS Standard 14
Regulatory Deferral Accounts
In January 2014 the International Accounting Standards Board issued IFRS 14 Regulatory
Deferral Accounts IFRS 14 permits a firsttime adopter of IFRS Standards that is within its
scope to continue to recognise and measure its regulatory deferral account balances in its
first and subsequent IFRS financial statements in accordance with its previous GAAP
IFRS 14
IFRS Foundation A649CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 14
REGULATORY DEFERRAL ACCOUNTS
OBJECTIVE 1
SCOPE 5
RECOGNITION MEASUREMENT IMPAIRMENT AND DERECOGNITION 9
Temporary exemption from paragraph 11 of IAS 8 Accounting Policies
Changes in Accounting Estimates and Errors 9
Continuation of existing accounting policies 11
Changes in accounting policies 13
Interaction with other Standards 16
PRESENTATION 18
Changes in presentation 18
Classification of regulatory deferral account balances 20
Classification of movements in regulatory deferral account balances 22
DISCLOSURE 27
Objective 27
Explanation of activities subject to rate regulation 30
Explanation of recognised amounts 32
APPENDICES
A Defined terms
B Application Guidance
C Effective date and transition
D Consequential amendments to IFRS 1 Firsttime Adoption of International
Financial Reporting Standards
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 14 REGULATORY
DEFERRAL ACCOUNTS ISSUED IN JANUARY 2014
BASIS FOR CONCLUSIONS ON IFRS 14 REGULATORY DEFERRAL
ACCOUNTS
DISSENTING OPINIONS
ILLUSTRATIVE EXAMPLES
IFRS 14
IFRS FoundationA650International Financial Reporting Standard 14 Regulatory Deferral Accounts (IFRS 14) is set
out in paragraphs 1–36 and Appendices A–D All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time that they appear in the Standard Definitions of other terms are
given in the Glossary for International Financial Reporting Standards The Standard
should be read in the context of its objective and the Basis for Conclusions the Preface to
International Financial Reporting Standards and the Conceptual Framework for Financial
Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance
IFRS 14
IFRS Foundation A651Introduction
IN1 IFRS 14 Regulatory Deferral Accounts (this Standard’) describes regulatory deferral
account balances as amounts of expense or income that would not be recognised
as assets or liabilities in accordance with other Standards but that qualify to be
deferred in accordance with this Standard because the amount is included or is
expected to be included by the rate regulator in establishing the price(s) that an
entity can charge to customers for rateregulated goods or services
IN2 This Standard permits a firsttime adopter within its scope to continue to
account for regulatory deferral account balances in its first IFRS financial
statements in accordance with its previous GAAP when it adopts IFRS However
IFRS 14 introduces limited changes to some previous GAAP accounting practices
for regulatory deferral account balances which are primarily related to the
presentation of these accounts
IN3 The scope of this Standard is limited to firsttime adopters that recognised
regulatory deferral account balances in their financial statements in accordance
with their previous GAAP as defined in IFRS 1 Firsttime Adoption of International
Financial Reporting Standards (ie the basis of accounting that a firsttime adopter
used immediately before adopting IFRS) An entity that is within the scope of
and that elects to apply this Standard in its first IFRS financial statements
continues to apply it in the entity’s subsequent financial statements
IN4 This Standard is effective for annual periods beginning on or after 1 January
2016 Earlier application is permitted
Reasons for publishing this Standard
IN5 The International Accounting Standards Board (IASB) has developed this
International Financial Reporting Standard for regulatory deferral accounts
because
(a) the requirements of some national accounting standardsetting bodies
permit or require entities that are subject to rate regulation to capitalise
and defer expenditures that nonrateregulated entities would recognise
as expenses Similarly these rateregulated entities are permitted or
required to defer income that nonrateregulated entities would
recognise in the statement of profit or loss and other comprehensive
income The resulting regulatory deferral account balances are
presented in a variety of ways They are often described as regulatory
assets’ and regulatory liabilities’ but are sometimes incorporated within
other line items in the financial statements such as property plant and
equipment
(b) there is currently no Standard in IFRS that specifically addresses the
accounting for rateregulated activities Consequently an entity is
required to determine its accounting policy for the financial effects of
rate regulation in accordance with paragraphs 10–12 of IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors The IASB has not seen
evidence of significant diversity in practice within jurisdictions that are
IFRS 14
IFRS FoundationA652applying IFRS because almost all entities have eliminated regulatory
deferral account balances when making the transition to IFRS and thus
do not recognise them in IFRS financial statements However despite
this consistency of treatment within IFRS financial statements there are
different views within jurisdictions that have not yet adopted IFRS and
also within some others that have adopted IFRS on how the effects of
rate regulation should be accounted for This has resulted in several
requests to the IASB for guidance which have asked whether regulatory
deferral account balances might meet the definitions of assets and
liabilities in the Conceptual Framework for Financial Reporting (the Conceptual
Framework) depending on the terms of the rate regulation
(c) the lack of specific guidance in IFRS has resulted in various jurisdictions
that have not yet fully adopted IFRS taking different approaches to
reporting the effects of rate regulation which could reduce
comparability and transparency for users of financial statements and
(d) income and expenses that are subject to rate regulation are significant to
entities that are engaged in rateregulated activities such as those in the
utilities telecommunications and transport industries Consequently
the lack of guidance could be a significant barrier to the adoption of IFRS
for those entities
IN6 In September 2012 the IASB started a comprehensive Rateregulated Activities
project starting with a research phase to develop a Discussion Paper
IN7 In December 2012 the IASB decided to add an additional phase to the
Rateregulated Activities project to develop a limitedscope Standard to provide a
shortterm interim solution for rateregulated entities that had not yet adopted
IFRS This Standard is intended to allow entities that are firsttime adopters of
IFRS and that currently recognise regulatory deferral accounts in accordance
with their previous GAAP to continue to do so on transition to IFRS This will
allow those entities to avoid making major changes in accounting policy for
regulatory deferral accounts on transition to IFRS until the comprehensive
project is completed
IN8 However by publishing this Standard the IASB is not anticipating the outcome
of the comprehensive Rateregulated Activities project The term regulatory
deferral account balances’ has been chosen as a neutral descriptor for the items
that arise from rate regulation and that are within the scope of this Standard In
this Standard such balances are not described as regulatory assets’ or
regulatory liabilities’ because of differing views as to whether they meet the
definitions of assets or liabilities in the Conceptual Framework Consequently the
IASB’s objectives for this Standard are to
(a) enhance the comparability of financial reporting by reducing barriers to
the adoption of IFRS by entities with rateregulated activities until
guidance is developed through the IASB’s comprehensive Rateregulated
Activities project and
(b) ensure that users of financial statements will be able to clearly identify
the amounts of regulatory deferral account balances and movements in
those balances in order to be able to compare the financial statements of
IFRS 14
IFRS Foundation A653entities that recognise such balances in accordance with this Standard
against the financial statements of entities that do not recognise such
balances
Main features of this Standard
IN9 This Standard
(a) permits an entity that adopts IFRS to continue to use in its first and
subsequent IFRS financial statements its previous GAAP accounting
policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances without
specifically considering the requirements of paragraph 11 of IAS 8
(b) requires entities to present regulatory deferral account balances as
separate line items in the statement of financial position and to present
movements in those account balances as separate line items in the
statement of profit or loss and other comprehensive income and
(c) requires specific disclosures to identify the nature of and risks
associated with the rate regulation that has resulted in the recognition
of regulatory deferral account balances in accordance with this
Standard
IFRS 14
IFRS FoundationA654International Financial Reporting Standard 14
Regulatory Deferral Accounts
Objective
1 The objective of this Standard is to specify the financial reporting requirements
for regulatory deferral account balances that arise when an entity provides goods or
services to customers at a price or rate that is subject to rate regulation
2 In meeting this objective the Standard requires
(a) limited changes to the accounting policies that were applied in
accordance with previous generally accepted accounting principles
(previous GAAP) for regulatory deferral account balances which are
primarily related to the presentation of these accounts and
(b) disclosures that
(i) identify and explain the amounts recognised in the entity’s
financial statements that arise from rate regulation and
(ii) help users of the financial statements to understand the amount
timing and uncertainty of future cash flows from any regulatory
deferral account balances that are recognised
3 The requirements of this Standard permit an entity within its scope to continue
to account for regulatory deferral account balances in its financial statements in
accordance with its previous GAAP when it adopts IFRS subject to the limited
changes referred to in paragraph 2 above
4 In addition this Standard provides some exceptions to or exemptions from the
requirements of other Standards All specified requirements for reporting
regulatory deferral account balances and any exceptions to or exemptions
from the requirements of other Standards that are related to those balances are
contained within this Standard instead of within those other Standards
Scope
5 An entity is permitted to apply the requirements of this Standard in its
first IFRS financial statements if and only if it
(a) conducts rateregulated activities and
(b) recognised amounts that qualify as regulatory deferral account
balances in its financial statements in accordance with its
previous GAAP
6 An entity shall apply the requirements of this Standard in its financial
statements for subsequent periods if and only if in its first IFRS financial
statements it recognised regulatory deferral account balances by electing
to apply the requirements of this Standard
7 This Standard does not address other aspects of accounting by entities that are
engaged in rateregulated activities By applying the requirements in this
IFRS 14
IFRS Foundation A655Standard any amounts that are permitted or required to be recognised as assets
or liabilities in accordance with other Standards shall not be included within
the amounts classified as regulatory deferral account balances
8 An entity that is within the scope of and that elects to apply this
Standard shall apply all of its requirements to all regulatory deferral
account balances that arise from all of the entity’s rateregulated
activities
Recognition measurement impairment and derecognition
Temporary exemption from paragraph 11 of IAS 8
Accounting Policies Changes in Accounting Estimates
and Errors
9 An entity that has rateregulated activities and that is within the scope of
and elects to apply this Standard shall apply paragraphs 10 and 12 of
IAS 8 when developing its accounting policies for the recognition
measurement impairment and derecognition of regulatory deferral
account balances
10 Paragraphs 11–12 of IAS 8 specify sources of requirements and guidance that
management is required or permitted to consider in developing an accounting
policy for an item if no relevant Standard applies specifically to that item This
Standard exempts an entity from applying paragraph 11 of IAS 8 to its
accounting policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances Consequently entities
that recognise regulatory deferral account balances either as separate items or
as part of the carrying value of other assets and liabilities in accordance with
their previous GAAP are permitted to continue to recognise those balances in
accordance with this Standard through the exemption from paragraph 11 of
IAS 8 subject to any presentation changes required by paragraphs 18–19 of this
Standard
Continuation of existing accounting policies
11 On initial application of this Standard an entity shall continue to apply
its previous GAAP accounting policies for the recognition measurement
impairment and derecognition of regulatory deferral account balances
except for any changes permitted by paragraphs 13–15 However the
presentation of such amounts shall comply with the presentation
requirements of this Standard which may require changes to the entity’s
previous GAAP presentation policies (see paragraphs 18–19)
12 An entity shall apply the policies established in accordance with paragraph 11
consistently in subsequent periods except for any changes permitted by
paragraphs 13–15
Changes in accounting policies
13 An entity shall not change its accounting policies in order to start to
recognise regulatory deferral account balances An entity may only
change its accounting policies for the recognition measurement
IFRS 14
IFRS FoundationA656impairment and derecognition of regulatory deferral account balances if
the change makes the financial statements more relevant to the
economic decisionmaking needs of users and no less reliable1 or more
reliable and no less relevant to those needs An entity shall judge
relevance and reliability using the criteria in paragraph 10 of IAS 8
14 This Standard does not exempt entities from applying paragraphs 10 or 14–15 of
IAS 8 to changes in accounting policy To justify changing its accounting
policies for regulatory deferral account balances an entity shall demonstrate
that the change brings its financial statements closer to meeting the criteria in
paragraph 10 of IAS 8 However the change does not need to achieve full
compliance with those criteria for the recognition measurement impairment
and derecognition of regulatory deferral account balances
15 Paragraphs 13–14 apply both to changes made on initial application of this
Standard and to changes made in subsequent reporting periods
Interaction with other Standards
16 Any specific exception exemption or additional requirements related to
the interaction of this Standard with other Standards are contained
within this Standard (see paragraphs B7–B28) In the absence of any such
exception exemption or additional requirements other Standards shall
apply to regulatory deferral account balances in the same way as they
apply to assets liabilities income and expenses that are recognised in
accordance with other Standards
17 In some situations another Standard might need to be applied to a regulatory
deferral account balance that has been measured in accordance with an entity’s
accounting policies that are established in accordance with paragraphs 11–12 in
order to reflect that balance appropriately in the financial statements For
example the entity might have rateregulated activities in a foreign country for
which the transactions and regulatory deferral account balances are
denominated in a currency that is not the functional currency of the reporting
entity The regulatory deferral account balances and the movements in those
balances are translated by applying IAS 21 The Effects of Changes in Foreign Exchange
Rates
Presentation
Changes in presentation
18 This Standard introduces presentation requirements outlined in paragraphs
20–26 for regulatory deferral account balances that are recognised in
accordance with paragraphs 11–12 When this Standard is applied the
regulatory deferral account balances are recognised in the statement of financial
position in addition to the assets and liabilities that are recognised in
1 In September 2010 the IASB replaced the Framework for the Preparation and Presentation of Financial
Statements with the Conceptual Framework for Financial Reporting The term faithful representation
encompasses the main characteristics that the previous Framework called reliability The
requirement in paragraph 13 of this Standard is based on the requirements of IAS 8 which retains
the term reliable
IFRS 14
IFRS Foundation A657accordance with other Standards These presentation requirements separate the
impact of recognising regulatory deferral account balances from the financial
reporting requirements of other Standards
19 In addition to the items that are required to be presented in the statement of
financial position and in the statement(s) of profit or loss and other
comprehensive income in accordance with IAS 1 Presentation of Financial
Statements an entity applying this Standard shall present all regulatory deferral
account balances and the movements in those balances in accordance with
paragraphs 20–26
Classification of regulatory deferral account balances
20 An entity shall present separate line items in the statement of financial
position for
(a) the total of all regulatory deferral account debit balances and
(b) the total of all regulatory deferral account credit balances
21 When an entity presents current and noncurrent assets and current and
noncurrent liabilities as separate classifications in its statement of
financial position it shall not classify the totals of regulatory deferral
account balances as current or noncurrent Instead the separate line
items required by paragraph 20 shall be distinguished from the assets
and liabilities that are presented in accordance with other Standards by
the use of subtotals which are drawn before the regulatory deferral
account balances are presented
Classification of movements in regulatory deferral
account balances
22 An entity shall present in the other comprehensive income section of the
statement of profit or loss and other comprehensive income the net
movement in all regulatory deferral account balances for the reporting
period that relate to items recognised in other comprehensive income
Separate line items shall be used for the net movement related to items
that in accordance with other Standards
(a) will not be reclassified subsequently to profit or loss and
(b) will be reclassified subsequently to profit or loss when specific
conditions are met
23 An entity shall present a separate line item in the profit or loss section of
the statement of profit or loss and other comprehensive income or in the
separate statement of profit or loss for the remaining net movement in
all regulatory deferral account balances for the reporting period
excluding movements that are not reflected in profit or loss such as
amounts acquired This separate line item shall be distinguished from
the income and expenses that are presented in accordance with other
Standards by the use of a subtotal which is drawn before the net
movement in regulatory deferral account balances
IFRS 14
IFRS FoundationA65824 When an entity recognises a deferred tax asset or a deferred tax liability as a
result of recognising regulatory deferral account balances the entity shall
present the resulting deferred tax asset (liability) and the related movement in
that deferred tax asset (liability) with the related regulatory deferral account
balances and movements in those balances instead of within the total presented
in accordance with IAS 12 Income Taxes for deferred tax assets (liabilities) and the
tax expense (income) (see paragraphs B9–B12)
25 When an entity presents a discontinued operation or a disposal group in
accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations
the entity shall present any related regulatory deferral account balances and the
net movement in those balances as applicable with the regulatory deferral
account balances and movements in those balances instead of within the
disposal groups or discontinued operations (see paragraphs B19–B22)
26 When an entity presents earnings per share in accordance with IAS 33 Earnings
per Share the entity shall present additional basic and diluted earnings per
share which are calculated using the earnings amounts required by IAS 33 but
excluding the movements in regulatory deferral account balances (see
paragraphs B13–B14)
Disclosure
Objective
27 An entity that elects to apply this Standard shall disclose information
that enables users to assess
(a) the nature of and the risks associated with the rate regulation
that establishes the price(s) that the entity can charge customers
for the goods or services it provides and
(b) the effects of that rate regulation on its financial position
financial performance and cash flows
28 If any of the disclosures set out in paragraphs 30–36 are not considered relevant
to meet the objective in paragraph 27 they may be omitted from the financial
statements If the disclosures provided in accordance with paragraphs 30–36 are
insufficient to meet the objective in paragraph 27 an entity shall disclose
additional information that is necessary to meet that objective
29 To meet the disclosure objective in paragraph 27 an entity shall consider all of
the following
(a) the level of detail that is necessary to satisfy the disclosure requirements
(b) how much emphasis to place on each of the various requirements
(c) how much aggregation or disaggregation to undertake and
(d) whether users of financial statements need additional information to
evaluate the quantitative information disclosed
IFRS 14
IFRS Foundation A659Explanation of activities subject to rate regulation
30 To help a user of the financial statements assess the nature of and the risks
associated with the entity’s rateregulated activities an entity shall for each
type of rateregulated activity disclose
(a) a brief description of the nature and extent of the rateregulated activity
and the nature of the regulatory ratesetting process
(b) the identity of the rate regulator(s) If the rate regulator is a related party
(as defined in IAS 24 Related Party Disclosures) the entity shall disclose that
fact together with an explanation of how it is related
(c) how the future recovery of each class (ie each type of cost or income) of
regulatory deferral account debit balance or reversal of each class of
regulatory deferral account credit balance is affected by risks and
uncertainty for example
(i) demand risk (for example changes in consumer attitudes the
availability of alternative sources of supply or the level of
competition)
(ii) regulatory risk (for example the submission or approval of a
ratesetting application or the entity’s assessment of the expected
future regulatory actions) and
(iii) other risks (for example currency or other market risks)
31 The disclosures required by paragraph 30 shall be given in the financial
statements either directly in the notes or incorporated by crossreference from
the financial statements to some other statement such as a management
commentary or risk report that is available to users of the financial statements
on the same terms as the financial statements and at the same time If the
information is not included in the financial statements directly or incorporated
by crossreference the financial statements are incomplete
Explanation of recognised amounts
32 An entity shall disclose the basis on which regulatory deferral account balances
are recognised and derecognised and how they are measured initially and
subsequently including how regulatory deferral account balances are assessed
for recoverability and how any impairment loss is allocated
33 For each type of rateregulated activity an entity shall disclose the following
information for each class of regulatory deferral account balance
(a) a reconciliation of the carrying amount at the beginning and the end of
the period in a table unless another format is more appropriate The
entity shall apply judgement in deciding the level of detail necessary (see
paragraphs 28–29) but the following components would usually be
relevant
(i) the amounts that have been recognised in the current period in
the statement of financial position as regulatory deferral account
balances
IFRS 14
IFRS FoundationA660(ii) the amounts that have been recognised in the statement(s) of
profit or loss and other comprehensive income relating to
balances that have been recovered (sometimes described as
amortised) or reversed in the current period and
(iii) other amounts separately identified that affected the regulatory
deferral account balances such as impairments items acquired
or assumed in a business combination items disposed of or the
effects of changes in foreign exchange rates or discount rates
(b) the rate of return or discount rate (including a zero rate or a range of
rates when applicable) used to reflect the time value of money that is
applicable to each class of regulatory deferral account balance and
(c) the remaining periods over which the entity expects to recover (or
amortise) the carrying amount of each class of regulatory deferral
account debit balance or to reverse each class of regulatory deferral
account credit balance
34 When rate regulation affects the amount and timing of an entity’s income tax
expense (income) the entity shall disclose the impact of the rate regulation on
the amounts of current and deferred tax recognised In addition the entity shall
separately disclose any regulatory deferral account balance that relates to
taxation and the related movement in that balance
35 When an entity provides disclosures in accordance with IFRS 12 Disclosure of
Interests in Other Entities for an interest in a subsidiary associate or joint venture
that has rateregulated activities and for which regulatory deferral account
balances are recognised in accordance with this Standard the entity shall
disclose the amounts that are included for the regulatory deferral account debit
and credit balances and the net movement in those balances for the interests
disclosed (see paragraphs B25–B28)
36 When an entity concludes that a regulatory deferral account balance is no
longer fully recoverable or reversible it shall disclose that fact the reason why it
is not recoverable or reversible and the amount by which the regulatory deferral
account balance has been reduced
IFRS 14
IFRS Foundation A661Appendix A
Defined terms
This appendix is an integral part of the Standard
first IFRS financial
statements
The first annual financial statements in which an entity adopts
International Financial Reporting Standards (IFRS) by an explicit
and unreserved statement of compliance with IFRS
firsttime adopter An entity that presents its first IFRS financial statements
previous GAAP The basis of accounting that a firsttime adopter used
immediately before adopting IFRS
rateregulated
activities
An entity’s activities that are subject to rate regulation
rate regulation A framework for establishing the prices that can be charged to
customers for goods or services and that framework is subject to
oversight andor approval by a rate regulator
rate regulator An authorised body that is empowered by statute or regulation to
establish the rate or a range of rates that bind an entity The rate
regulator may be a thirdparty body or a related party of the
entity including the entity’s own governing board if that body is
required by statute or regulation to set rates both in the interest
of the customers and to ensure the overall financial viability of
the entity
regulatory deferral
account balance
The balance of any expense (or income) account that would not
be recognised as an asset or a liability in accordance with other
Standards but that qualifies for deferral because it is included or
is expected to be included by the rate regulator in establishing
the rate(s) that can be charged to customers
IFRS 14
IFRS FoundationA662Appendix B
Application Guidance
This appendix is an integral part of the Standard
Rateregulated activities
B1 Historically rate regulation applied to all activities of an entity However with
acquisitions diversification and deregulation rate regulation may now apply to
only a portion of an entity’s activities resulting in it having both regulated and
nonregulated activities This Standard applies only to the rateregulated
activities that are subject to statutory or regulatory restrictions through the
actions of a rate regulator regardless of the type of entity or the industry to
which it belongs
B2 An entity shall not apply this Standard to activities that are selfregulated ie
activities that are not subject to a pricing framework that is overseen andor
approved by a rate regulator This does not prevent the entity from being
eligible to apply this Standard when
(a) the entity’s own governing body or a related party establishes rates both
in the interest of the customers and to ensure the overall financial
viability of the entity within a specified pricing framework and
(b) the framework is subject to oversight andor approval by an authorised
body that is empowered by statute or regulation
Continuation of existing accounting policies
B3 For the purposes of this Standard a regulatory deferral account balance is
defined as the balance of any expense (or income) account that would not be
recognised as an asset or a liability in accordance with other Standards but that
qualifies for deferral because it is included or is expected to be included by the
rate regulator in establishing the rate(s) that can be charged to customers Some
items of expense (income) may be outside the regulated rate(s) because for
example the amounts are not expected to be accepted by the rate regulator or
because they are not within the scope of the rate regulation Consequently such
an item is recognised as income or expense as incurred unless another Standard
permits or requires it to be included in the carrying amount of an asset or
liability
B4 In some cases other Standards explicitly prohibit an entity from recognising in
the statement of financial position regulatory deferral account balances that
might be recognised either separately or included within other line items such
as property plant and equipment in accordance with previous GAAP accounting
policies However in accordance with paragraph 11 of this Standard an entity
that elects to apply this Standard in its first IFRS financial statements applies the
exemption from paragraph 11 of IAS 8 in order to continue to apply its previous
GAAP accounting policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances Such accounting policies
may include for example the following practices
IFRS 14
IFRS Foundation A663(a) recognising a regulatory deferral account debit balance when the entity
has the right as a result of the actual or expected actions of the rate
regulator to increase rates in future periods in order to recover its
allowable costs (ie the costs for which the regulated rate(s) is intended to
provide recovery)
(b) recognising as a regulatory deferral account debit or credit balance an
amount that is equivalent to any loss or gain on the disposal or
retirement of both items of property plant and equipment and of
intangible assets which is expected to be recovered or reversed through
future rates
(c) recognising a regulatory deferral account credit balance when the entity
is required as a result of the actual or expected actions of the rate
regulator to decrease rates in future periods in order to reverse
overrecoveries of allowable costs (ie amounts in excess of the recoverable
amount specified by the rate regulator) and
(d) measuring regulatory deferral account balances on an undiscounted
basis or on a discounted basis that uses an interest or discount rate
specified by the rate regulator
B5 The following are examples of the types of costs that rate regulators might allow
in ratesetting decisions and that an entity might therefore recognise in
regulatory deferral account balances
(i) volume or purchase price variances
(ii) costs of approved green energy’ initiatives (in excess of amounts that are
capitalised as part of the cost of property plant and equipment in
accordance with IAS 16 Property Plant and Equipment)
(iii) nondirectlyattributable overhead costs that are treated as capital costs
for rate regulation purposes (but are not permitted in accordance with
IAS 16 to be included in the cost of an item of property plant and
equipment)
(iv) project cancellation costs
(v) storm damage costs and
(vi) deemed interest (including amounts allowed for funds that are used
during construction that provide the entity with a return on the owner’s
equity capital as well as borrowings)
B6 Regulatory deferral account balances usually represent timing differences
between the recognition of items of income or expenses for regulatory purposes
and the recognition of those items for financial reporting purposes When an
entity changes an accounting policy on the firsttime adoption of IFRS or on the
initial application of a new or revised Standard new or revised timing
differences may arise that create new or revised regulatory deferral account
balances The prohibition in paragraph 13 that prevents an entity from
changing its accounting policy in order to start to recognise regulatory deferral
account balances does not prohibit the recognition of the new or revised
regulatory deferral account balances that are created because of other changes
IFRS 14
IFRS FoundationA664in accounting policies required by IFRS This is because the recognition of
regulatory deferral account balances for such timing differences would be
consistent with the existing recognition policy applied in accordance with
paragraph 11 and would not represent the introduction of a new accounting
policy Similarly paragraph 13 does not prohibit the recognition of regulatory
deferral account balances arising from timing differences that did not exist
immediately prior to the date of transition to IFRS but are consistent with the
entity’s accounting policies established in accordance with paragraph 11 (for
example storm damage costs)
Applicability of other Standards
B7 An entity that is within the scope of and that elects to apply the requirements
of this Standard shall continue to apply its previous GAAP accounting policies
for the recognition measurement impairment and derecognition of regulatory
deferral account balances However paragraphs 16–17 state that in some
situations other Standards might also need to be applied to regulatory deferral
account balances in order to reflect them appropriately in the financial
statements The following paragraphs outline how some other Standards
interact with the requirements of this Standard In particular the following
paragraphs clarify specific exceptions to and exemptions from other Standards
and additional presentation and disclosure requirements that are expected to be
applicable
Application of IAS 10 Events after the Reporting Period
B8 An entity may need to use estimates and assumptions in the recognition and
measurement of its regulatory deferral account balances For events that occur
between the end of the reporting period and the date when the financial
statements are authorised for issue the entity shall apply IAS 10 to identify
whether those estimates and assumptions should be adjusted to reflect those
events
Application of IAS 12 Income Taxes
B9 IAS 12 requires with certain limited exceptions an entity to recognise a
deferred tax liability and (subject to certain conditions) a deferred tax asset for
all temporary differences A rateregulated entity shall apply IAS 12 to all of its
activities including its rateregulated activities to identify the amount of
income tax that is to be recognised
B10 In some rateregulatory schemes the rate regulator permits or requires an entity
to increase its future rates in order to recover some or all of the entity’s income
tax expense In such circumstances this might result in the entity recognising a
regulatory deferral account balance in the statement of financial position
related to income tax in accordance with its accounting policies established in
accordance with paragraphs 11–12 The recognition of this regulatory deferral
account balance that relates to income tax might itself create an additional
temporary difference for which a further deferred tax amount would be
recognised
IFRS 14
IFRS Foundation A665B11 Notwithstanding the presentation and disclosure requirements of IAS 12 when
an entity recognises a deferred tax asset or a deferred tax liability as a result of
recognising regulatory deferral account balances the entity shall not include
that deferred tax amount within the total deferred tax asset (liability) balances
Instead the entity shall present the deferred tax asset (liability) that arises as a
result of recognising regulatory deferral account balances either
(a) with the line items that are presented for the regulatory deferral account
debit balances and credit balances or
(b) as a separate line item alongside the related regulatory deferral account
debit balances and credit balances
B12 Similarly when an entity recognises the movement in a deferred tax asset
(liability) that arises as a result of recognising regulatory deferral account
balances the entity shall not include the movement in that deferred tax amount
within the tax expense (income) line item that is presented in the statement(s) of
profit or loss and other comprehensive income in accordance with IAS 12
Instead the entity shall present the movement in the deferred tax asset (liability)
that arises as a result of recognising regulatory deferral account balances either
(a) with the line items that are presented in the statement(s) of profit or loss
and other comprehensive income for the movements in regulatory
deferral account balances or
(b) as a separate line item alongside the related line items that are presented
in the statement(s) of profit or loss and other comprehensive income for
the movements in regulatory deferral account balances
Application of IAS 33 Earnings per Share
B13 Paragraph 66 of IAS 33 requires some entities to present in the statement of
profit or loss and other comprehensive income basic and diluted earnings per
share both for profit or loss from continuing operations and profit or loss that is
attributable to the ordinary equity holders of the parent entity In addition
paragraph 68 of IAS 33 requires an entity that reports a discontinued operation
to disclose the basic and diluted amounts per share for the discontinued
operation either in the statement of profit or loss and other comprehensive
income or in the notes
B14 For each earnings per share amount presented in accordance with IAS 33 an
entity applying this Standard shall present additional basic and diluted earnings
per share amounts that are calculated in the same way except that those
amounts shall exclude the net movement in the regulatory deferral account
balances Consistent with the requirement in paragraph 73 of IAS 33 an entity
shall present the earnings per share required by paragraph 26 of this Standard
with equal prominence to the earnings per share required by IAS 33 for all
periods presented
Application of IAS 36 Impairment of Assets
B15 Paragraphs 11–12 require an entity to continue to apply its previous GAAP
accounting policies for the identification recognition measurement and
IFRS 14
IFRS FoundationA666reversal of any impairment of its recognised regulatory deferral account
balances Consequently IAS 36 does not apply to the separate regulatory
deferral account balances recognised
B16 However IAS 36 might require an entity to perform an impairment test on a
cashgenerating unit (CGU) that includes regulatory deferral account balances
This test might be required because the CGU contains goodwill or because one
or more of the impairment indicators described in IAS 36 have been identified
relating to the CGU In such situations paragraphs 74–79 of IAS 36 contain
requirements for identifying the recoverable amount and the carrying amount
of a CGU An entity shall apply those requirements to decide whether any of the
regulatory deferral account balances recognised are included in the carrying
amount of the CGU for the purpose of the impairment test The remaining
requirements of IAS 36 shall then be applied to any impairment loss that is
recognised as a result of this test
Application of IFRS 3 Business Combinations
B17 The core principle of IFRS 3 is that an acquirer of a business recognises the assets
acquired and the liabilities assumed at their acquisitiondate fair values IFRS 3
provides limited exceptions to its recognition and measurement principles
Paragraph B18 of this Standard provides an additional exception
B18 Paragraphs 11–12 require an entity to continue to apply its previous GAAP
accounting policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances Consequently if an
entity acquires a business it shall apply in its consolidated financial statements
its accounting policies established in accordance with paragraphs 11–12 for the
recognition and measurement of the acquiree’s regulatory deferral account
balances at the date of acquisition The acquiree’s regulatory deferral account
balances shall be recognised in the consolidated financial statements of the
acquirer in accordance with the acquirer’s policies irrespective of whether the
acquiree recognises those balances in its own financial statements
Application of IFRS 5 Noncurrent Assets Held for Sale
and Discontinued Operations
B19 Paragraphs 11–12 require an entity to continue to apply its previous accounting
policies for the recognition measurement impairment and derecognition of
regulatory deferral account balances Consequently the measurement
requirements of IFRS 5 shall not apply to the regulatory deferral account
balances recognised
B20 Paragraph 33 of IFRS 5 requires a single amount to be presented for
discontinued operations in the statement(s) of profit or loss and other
comprehensive income Notwithstanding the requirements of that paragraph
when an entity that elects to apply this Standard presents a discontinued
operation it shall not include the movement in regulatory deferral account
balances that arose from the rateregulated activities of the discontinued
operation within the line items that are required by paragraph 33 of IFRS 5
IFRS 14
IFRS Foundation A667Instead the entity shall present the movement in regulatory deferral account
balances that arose from the rateregulated activities of the discontinued
operation either
(a) within the line item that is presented for movements in the regulatory
deferral account balances related to profit or loss or
(b) as a separate line item alongside the related line item that is presented
for movements in the regulatory deferral account balances related to
profit or loss
B21 Similarly notwithstanding the requirements of paragraph 38 of IFRS 5 when an
entity presents a disposal group the entity shall not include the total of the
regulatory deferral account debit balances and credit balances that are part of
the disposal group within the line items that are required by paragraph 38 of
IFRS 5 Instead the entity shall present the total of the regulatory deferral
account debit balances and credit balances that are part of the disposal group
either
(a) within the line items that are presented for the regulatory deferral
account debit balances and credit balances or
(b) as separate line items alongside the other regulatory deferral account
debit balances and credit balances
B22 If the entity chooses to include the regulatory deferral account balances and
movements in those balances that are related to the disposal group or
discontinued operation within the related regulated deferral account line items
it may be necessary to disclose them separately as part of the analysis of the
regulatory deferral account line items described by paragraph 33 of this
Standard
Application of IFRS 10 Consolidated Financial
Statements and IAS 28 Investments in Associates and
Joint Ventures
B23 Paragraph 19 of IFRS 10 requires that a parent shall prepare consolidated
financial statements using uniform accounting policies for like transactions and
other events in similar circumstances Paragraph 8 of this Standard requires
that an entity that is within the scope of and elects to apply this Standard shall
apply all of its requirements to all regulatory deferral account balances arising
from all of the entity’s rateregulated activities Consequently if a parent
recognises regulatory deferral account balances in its consolidated financial
statements in accordance with this Standard it shall apply the same accounting
policies to the regulatory deferral account balances arising in all of its
subsidiaries This shall apply irrespective of whether the subsidiaries recognise
those balances in their own financial statements
B24 Similarly paragraphs 35–36 of IAS 28 require that in applying the equity
method an entity’s financial statements shall be prepared using uniform
accounting policies for like transactions and events in similar circumstances
Consequently adjustments shall be made to make the associate’s or joint
venture’s accounting policies for the recognition measurement impairment
IFRS 14
IFRS FoundationA668and derecognition of regulatory deferral account balances conform to those of
the investing entity in applying the equity method
Application of IFRS 12 Disclosure of Interests in Other
Entities
B25 Paragraph 12(e) of IFRS 12 requires an entity to disclose for each of its
subsidiaries that have noncontrolling interests that are material to the
reporting entity the profit or loss that was allocated to noncontrolling interests
of the subsidiary during the reporting period An entity that recognises
regulatory deferral account balances in accordance with this Standard shall
disclose the net movement in regulatory deferral account balances that is
included within the amounts that are required to be disclosed by
paragraph 12(e) of IFRS 12
B26 Paragraph 12(g) of IFRS 12 requires an entity to disclose for each of its
subsidiaries that have noncontrolling interests that are material to the
reporting entity summarised financial information about the subsidiary as
specified in paragraph B10 of IFRS 12 Similarly paragraph 21(b)(ii) of IFRS 12
requires an entity to disclose for each joint venture and associate that is
material to the reporting entity summarised financial information as specified
in paragraphs B12–B13 of IFRS 12 Paragraph B16 of IFRS 12 specifies the
summary financial information that an entity is required to disclose for all other
associates and joint ventures that are not individually material in accordance
with paragraph 21(c) of IFRS 12
B27 In addition to the information specified in paragraphs 12 21 B10 B12–B13 and
B16 of IFRS 12 an entity that recognises regulatory deferral account balances in
accordance with this Standard shall also disclose the total regulatory deferral
account debit balance the total regulatory deferral account credit balance and
the net movements in those balances split between amounts recognised in
profit or loss and amounts recognised in other comprehensive income for each
entity for which those IFRS 12 disclosures are required
B28 Paragraph 19 of IFRS 12 specifies the information that an entity is required to
disclose when the entity recognises a gain or loss on losing control of a
subsidiary calculated in accordance with paragraph 25 of IFRS 10 In addition to
the information required by paragraph 19 of IFRS 12 an entity that elects to
apply this Standard shall disclose the portion of that gain or loss that is
attributable to derecognising regulatory deferral account balances in the former
subsidiary at the date when control is lost
IFRS 14
IFRS Foundation A669Appendix C
Effective date and transition
This appendix is an integral part of the Standard
Effective date and transition
Effective date
C1 An entity shall apply this Standard if its first annual IFRS financial statements
are for a period beginning on or after 1 January 2016 Earlier application is
permitted If an entity applies this Standard in its first annual IFRS financial
statements for an earlier period it shall disclose that fact
IFRS 14
IFRS FoundationA670Appendix D
Consequential amendments to IFRS 1 Firsttime Adoption
of International Financial Reporting Standards
This appendix sets out an amendment to IFRS 1 Firsttime Adoption of International
Financial Reporting Standards that is a consequence of the IASB issuing IFRS 14 An entity
shall apply the amendment for annual periods beginning on or after 1 January 2016 Earlier
application is permitted If an entity applies IFRS 14 for an earlier period the amendment shall be
applied for that earlier period
*****
The amendment contained in this appendix when this IFRS was issued in 2014 has been incorporated into
the text of IFRS 1 published in this volume
IFRS 14
IFRS Foundation A671IFRS Standard 15
Revenue from Contracts with Customers
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 11
Construction Contracts and IAS 18 Revenue both of which had originally been issued by the
International Accounting Standards Committee (IASC) in December 1993 IAS 18 replaced a
previous version Revenue Recognition (issued in December 1982) IAS 11 replaced parts of
IAS 11 Accounting for Construction Contracts (issued in March 1979)
In December 2001 the Board issued SIC31 Revenue—Barter Transactions Involving Advertising
Services The Interpretation was originally developed by the Standards Interpretations
Committee of the IASC to determine the circumstances in which a seller of advertising
services can reliably measure revenue at the fair value of advertising services provided in a
barter transaction
In June 2007 the Board issued IFRIC 13 Customer Loyalty Programmes The Interpretation was
developed by the IFRS Interpretations Committee (the Interpretations Committee’) to
address the accounting by the entity that grants award credits to its customers
In July 2008 the Board issued IFRIC 15 Agreements for the Construction of Real Estate The
Interpretation was developed by the Interpretations Committee to apply to the accounting
for revenue and associated expenses by entities that undertake the construction of real
estate directly or through subcontractors
In January 2009 the Board issued IFRIC 18 Transfers of Assets from Customers The
Interpretation was developed by the Interpretations Committee to apply to the accounting
for transfers of items of property plant and equipment by entities that receive such
transfers from their customers
In May 2014 the Board issued IFRS 15 Revenue from Contracts with Customers together with the
introduction of Topic 606 into the Financial Accounting Standards Board’s Accounting
Standards Codification® IFRS 15 replaces IAS 11 IAS 18 IFRIC 13 IFRIC 15 IFRIC 18 and
SIC31 IFRS 15 provides a comprehensive framework for recognising revenue from
contracts with customers
In September 2015 the mandatory effective date of IFRS 15 was deferred to 1 January 2018
by Effective Date of IFRS 15
Other Standards have made minor consequential amendments to IFRS 15 including IFRS 16
Leases (issued January 2016)
IFRS 15
IFRS Foundation A673CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 15
REVENUE FROM CONTRACTS WITH CUSTOMERS
OBJECTIVE 1
Meeting the objective 2
SCOPE 5
RECOGNITION 9
Identifying the contract 9
Combination of contracts 17
Contract modifications 18
Identifying performance obligations 22
Satisfaction of performance obligations 31
MEASUREMENT 46
Determining the transaction price 47
Allocating the transaction price to performance obligations 73
Changes in the transaction price 87
CONTRACT COSTS 91
Incremental costs of obtaining a contract 91
Costs to fulfil a contract 95
Amortisation and impairment 99
PRESENTATION 105
DISCLOSURE 110
Contracts with customers 113
Significant judgements in the application of this Standard 123
Assets recognised from the costs to obtain or fulfil a contract with a
customer 127
Practical expedients 129
APPENDICES
A Defined terms
B Application Guidance
C Effective date and transition
D Amendments to other Standards
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 15 REVENUE FROM CONTRACTS WITH
CUSTOMERS ISSUED IN MAY 2014
BASIS FOR CONCLUSIONS
IFRS 15
IFRS FoundationA674APPENDICES
A Comparison of IFRS 15 and Topic 606
B Amendments to the Basis for Conclusions on other Standards
ILLUSTRATIVE EXAMPLES
APPENDIX
Amendments to the guidance on other Standards
IFRS 15
IFRS Foundation A675International Financial Reporting Standard 15 Revenue from Contracts with Customers
(IFRS 15) is set out in paragraphs 1–129 and Appendices A–D All the paragraphs have
equal authority Paragraphs in bold type state the main principles Terms defined in
Appendix A are in italics the first time that they appear in the Standard Definitions of
other terms are given in the Glossary for International Financial Reporting Standards
The Standard should be read in the context of its objective and the Basis for Conclusions
the Preface to International Financial Reporting Standards and the Conceptual Framework for
Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
provides a basis for selecting and applying accounting policies in the absence of explicit
guidance
IFRS 15
IFRS FoundationA676Introduction
Overview
IN1 International Financial Reporting Standard 15 Revenue from Contracts with
Customers (IFRS 15) establishes principles for reporting useful information to
users of financial statements about the nature amount timing and uncertainty
of revenue and cash flows arising from an entity’s contracts with customers
IN2 IFRS 15 is effective for annual periods beginning on or after 1 January 2018
Earlier application is permitted
IN3 IFRS 15 supersedes
(a) IAS 11 Construction Contracts
(b) IAS 18 Revenue
(c) IFRIC 13 Customer Loyalty Programmes
(d) IFRIC 15 Agreements for the Construction of Real Estate
(e) IFRIC 18 Transfers of Assets from Customers and
(f) SIC31 Revenue—Barter Transactions Involving Advertising Services
Reasons for issuing the IFRS
IN4 Revenue is an important number to users of financial statements in assessing an
entity’s financial performance and position However previous revenue
recognition requirements in International Financial Reporting Standards (IFRS)
differed from those in US Generally Accepted Accounting Principles (US GAAP)
and both sets of requirements were in need of improvement Previous revenue
recognition requirements in IFRS provided limited guidance and consequently
the two main revenue recognition Standards IAS 18 and IAS 11 could be
difficult to apply to complex transactions In addition IAS 18 provided limited
guidance on many important revenue topics such as accounting for
multipleelement arrangements In contrast US GAAP comprised broad revenue
recognition concepts together with numerous revenue requirements for
particular industries or transactions which sometimes resulted in different
accounting for economically similar transactions
IN5 Accordingly the International Accounting Standards Board (IASB) and the US
national standardsetter the Financial Accounting Standards Board (FASB)
initiated a joint project to clarify the principles for recognising revenue and to
develop a common revenue standard for IFRS and US GAAP that would
(a) remove inconsistencies and weaknesses in previous revenue
requirements
(b) provide a more robust framework for addressing revenue issues
(c) improve comparability of revenue recognition practices across entities
industries jurisdictions and capital markets
IFRS 15
IFRS Foundation A677(d) provide more useful information to users of financial statements
through improved disclosure requirements and
(e) simplify the preparation of financial statements by reducing the number
of requirements to which an entity must refer
IN6 IFRS 15 together with Topic 606 that was introduced into the FASB Accounting
Standards Codification® by Accounting Standards Update 201409 Revenue from
Contracts with Customers (Topic 606) completes the joint effort by the IASB and the
FASB to meet those objectives and improve financial reporting by creating a
common revenue recognition standard for IFRS and US GAAP
Main features
IN7 The core principle of IFRS 15 is that an entity recognises revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for
those goods or services An entity recognises revenue in accordance with that
core principle by applying the following steps
(a) Step 1 Identify the contract(s) with a customer—a contract is an
agreement between two or more parties that creates enforceable rights
and obligations The requirements of IFRS 15 apply to each contract that
has been agreed upon with a customer and meets specified criteria In
some cases IFRS 15 requires an entity to combine contracts and account
for them as one contract IFRS 15 also provides requirements for the
accounting for contract modifications
(b) Step 2 Identify the performance obligations in the contract—a
contract includes promises to transfer goods or services to a customer If
those goods or services are distinct the promises are performance
obligations and are accounted for separately A good or service is distinct
if the customer can benefit from the good or service on its own or
together with other resources that are readily available to the customer
and the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract
(c) Step 3 Determine the transaction price—the transaction price is the
amount of consideration in a contract to which an entity expects to be
entitled in exchange for transferring promised goods or services to a
customer The transaction price can be a fixed amount of customer
consideration but it may sometimes include variable consideration or
consideration in a form other than cash The transaction price is also
adjusted for the effects of the time value of money if the contract
includes a significant financing component and for any consideration
payable to the customer If the consideration is variable an entity
estimates the amount of consideration to which it will be entitled in
exchange for the promised goods or services The estimated amount of
variable consideration will be included in the transaction price only to
the extent that it is highly probable that a significant reversal in the
IFRS 15
IFRS FoundationA678amount of cumulative revenue recognised will not occur when the
uncertainty associated with the variable consideration is subsequently
resolved
(d) Step 4 Allocate the transaction price to the performance
obligations in the contract—an entity typically allocates the
transaction price to each performance obligation on the basis of the
relative standalone selling prices of each distinct good or service
promised in the contract If a standalone selling price is not observable
an entity estimates it Sometimes the transaction price includes a
discount or a variable amount of consideration that relates entirely to a
part of the contract The requirements specify when an entity allocates
the discount or variable consideration to one or more but not all
performance obligations (or distinct goods or services) in the contract
(e) Step 5 Recognise revenue when (or as) the entity satisfies a
performance obligation—an entity recognises revenue when (or as) it
satisfies a performance obligation by transferring a promised good or
service to a customer (which is when the customer obtains control of
that good or service) The amount of revenue recognised is the amount
allocated to the satisfied performance obligation A performance
obligation may be satisfied at a point in time (typically for promises to
transfer goods to a customer) or over time (typically for promises to
transfer services to a customer) For performance obligations satisfied
over time an entity recognises revenue over time by selecting an
appropriate method for measuring the entity’s progress towards
complete satisfaction of that performance obligation
IN8 IFRS 15 also includes a cohesive set of disclosure requirements that would result
in an entity providing users of financial statements with comprehensive
information about the nature amount timing and uncertainty of revenue and
cash flows arising from the entity’s contracts with customers Specifically
IFRS 15 requires an entity to provide information about
(a) revenue recognised from contracts with customers including the
disaggregation of revenue into appropriate categories
(b) contract balances including the opening and closing balances of
receivables contract assets and contract liabilities
(c) performance obligations including when the entity typically satisfies its
performance obligations and the transaction price that is allocated to
the remaining performance obligations in a contract
(d) significant judgements and changes in judgements made in applying
the requirements to those contracts and
(e) assets recognised from the costs to obtain or fulfil a contract with a
customer
IN9 The IASB and the FASB achieved their goal of reaching the same conclusions on
all requirements for the accounting for revenue from contracts with customers
IFRS 15
IFRS Foundation A679As a result IFRS 15 and Topic 606 are substantially the same However there are
some minor differences which are outlined in the appendix to the Basis for
Conclusions
IFRS 15
IFRS FoundationA680International Financial Reporting Standard 15
Revenue from Contracts with Customers
Objective
1 The objective of this Standard is to establish the principles that an entity
shall apply to report useful information to users of financial statements
about the nature amount timing and uncertainty of revenue and cash
flows arising from a contract with a customer
Meeting the objective
2 To meet the objective in paragraph 1 the core principle of this Standard is that
an entity shall recognise revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services
3 An entity shall consider the terms of the contract and all relevant facts and
circumstances when applying this Standard An entity shall apply this Standard
including the use of any practical expedients consistently to contracts with
similar characteristics and in similar circumstances
4 This Standard specifies the accounting for an individual contract with a
customer However as a practical expedient an entity may apply this Standard
to a portfolio of contracts (or performance obligations) with similar characteristics
if the entity reasonably expects that the effects on the financial statements of
applying this Standard to the portfolio would not differ materially from
applying this Standard to the individual contracts (or performance obligations)
within that portfolio When accounting for a portfolio an entity shall use
estimates and assumptions that reflect the size and composition of the portfolio
Scope
5 An entity shall apply this Standard to all contracts with customers except the
following
(a) lease contracts within the scope of IFRS 16 Leases
(b) insurance contracts within the scope of IFRS 4 Insurance Contracts
(c) financial instruments and other contractual rights or obligations within
the scope of IFRS 9 Financial Instruments IFRS 10 Consolidated Financial
Statements IFRS 11 Joint Arrangements IAS 27 Separate Financial Statements
and IAS 28 Investments in Associates and Joint Ventures and
(d) nonmonetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers For example this
Standard would not apply to a contract between two oil companies that
agree to an exchange of oil to fulfil demand from their customers in
different specified locations on a timely basis
IFRS 15
IFRS Foundation A6816 An entity shall apply this Standard to a contract (other than a contract listed in
paragraph 5) only if the counterparty to the contract is a customer A customer
is a party that has contracted with an entity to obtain goods or services that are
an output of the entity’s ordinary activities in exchange for consideration A
counterparty to the contract would not be a customer if for example the
counterparty has contracted with the entity to participate in an activity or
process in which the parties to the contract share in the risks and benefits that
result from the activity or process (such as developing an asset in a collaboration
arrangement) rather than to obtain the output of the entity’s ordinary activities
7 A contract with a customer may be partially within the scope of this Standard
and partially within the scope of other Standards listed in paragraph 5
(a) If the other Standards specify how to separate andor initially measure
one or more parts of the contract then an entity shall first apply the
separation andor measurement requirements in those Standards An
entity shall exclude from the transaction price the amount of the part (or
parts) of the contract that are initially measured in accordance with
other Standards and shall apply paragraphs 73–86 to allocate the
amount of the transaction price that remains (if any) to each
performance obligation within the scope of this Standard and to any
other parts of the contract identified by paragraph 7(b)
(b) If the other Standards do not specify how to separate andor initially
measure one or more parts of the contract then the entity shall apply
this Standard to separate andor initially measure the part (or parts) of
the contract
8 This Standard specifies the accounting for the incremental costs of obtaining a
contract with a customer and for the costs incurred to fulfil a contract with a
customer if those costs are not within the scope of another Standard (see
paragraphs 91–104) An entity shall apply those paragraphs only to the costs
incurred that relate to a contract with a customer (or part of that contract) that
is within the scope of this Standard
Recognition
Identifying the contract
9 An entity shall account for a contract with a customer that is within the
scope of this Standard only when all of the following criteria are met
(a) the parties to the contract have approved the contract (in writing
orally or in accordance with other customary business practices)
and are committed to perform their respective obligations
(b) the entity can identify each party’s rights regarding the goods or
services to be transferred
(c) the entity can identify the payment terms for the goods or services
to be transferred
IFRS 15
IFRS FoundationA682(d) the contract has commercial substance (ie the risk timing or
amount of the entity’s future cash flows is expected to change as a
result of the contract) and
(e) it is probable that the entity will collect the consideration to which
it will be entitled in exchange for the goods or services that will be
transferred to the customer In evaluating whether collectability
of an amount of consideration is probable an entity shall consider
only the customer’s ability and intention to pay that amount of
consideration when it is due The amount of consideration to
which the entity will be entitled may be less than the price stated
in the contract if the consideration is variable because the entity
may offer the customer a price concession (see paragraph 52)
10 A contract is an agreement between two or more parties that creates enforceable
rights and obligations Enforceability of the rights and obligations in a contract
is a matter of law Contracts can be written oral or implied by an entity’s
customary business practices The practices and processes for establishing
contracts with customers vary across legal jurisdictions industries and entities
In addition they may vary within an entity (for example they may depend on
the class of customer or the nature of the promised goods or services) An entity
shall consider those practices and processes in determining whether and when
an agreement with a customer creates enforceable rights and obligations
11 Some contracts with customers may have no fixed duration and can be
terminated or modified by either party at any time Other contracts may
automatically renew on a periodic basis that is specified in the contract An
entity shall apply this Standard to the duration of the contract (ie the
contractual period) in which the parties to the contract have present enforceable
rights and obligations
12 For the purpose of applying this Standard a contract does not exist if each party
to the contract has the unilateral enforceable right to terminate a wholly
unperformed contract without compensating the other party (or parties) A
contract is wholly unperformed if both of the following criteria are met
(a) the entity has not yet transferred any promised goods or services to the
customer and
(b) the entity has not yet received and is not yet entitled to receive any
consideration in exchange for promised goods or services
13 If a contract with a customer meets the criteria in paragraph 9 at contract
inception an entity shall not reassess those criteria unless there is an indication
of a significant change in facts and circumstances For example if a customer’s
ability to pay the consideration deteriorates significantly an entity would
reassess whether it is probable that the entity will collect the consideration to
which the entity will be entitled in exchange for the remaining goods or services
that will be transferred to the customer
14 If a contract with a customer does not meet the criteria in paragraph 9 an entity
shall continue to assess the contract to determine whether the criteria in
paragraph 9 are subsequently met
IFRS 15
IFRS Foundation A68315 When a contract with a customer does not meet the criteria in paragraph 9 and
an entity receives consideration from the customer the entity shall recognise
the consideration received as revenue only when either of the following events
has occurred
(a) the entity has no remaining obligations to transfer goods or services to
the customer and all or substantially all of the consideration promised
by the customer has been received by the entity and is nonrefundable or
(b) the contract has been terminated and the consideration received from
the customer is nonrefundable
16 An entity shall recognise the consideration received from a customer as a
liability until one of the events in paragraph 15 occurs or until the criteria in
paragraph 9 are subsequently met (see paragraph 14) Depending on the facts
and circumstances relating to the contract the liability recognised represents
the entity’s obligation to either transfer goods or services in the future or refund
the consideration received In either case the liability shall be measured at the
amount of consideration received from the customer
Combination of contracts
17 An entity shall combine two or more contracts entered into at or near the same
time with the same customer (or related parties of the customer) and account for
the contracts as a single contract if one or more of the following criteria are met
(a) the contracts are negotiated as a package with a single commercial
objective
(b) the amount of consideration to be paid in one contract depends on the
price or performance of the other contract or
(c) the goods or services promised in the contracts (or some goods or services
promised in each of the contracts) are a single performance obligation in
accordance with paragraphs 22–30
Contract modifications
18 A contract modification is a change in the scope or price (or both) of a contract
that is approved by the parties to the contract In some industries and
jurisdictions a contract modification may be described as a change order a
variation or an amendment A contract modification exists when the parties to
a contract approve a modification that either creates new or changes existing
enforceable rights and obligations of the parties to the contract A contract
modification could be approved in writing by oral agreement or implied by
customary business practices If the parties to the contract have not approved a
contract modification an entity shall continue to apply this Standard to the
existing contract until the contract modification is approved
19 A contract modification may exist even though the parties to the contract have a
dispute about the scope or price (or both) of the modification or the parties have
approved a change in the scope of the contract but have not yet determined the
corresponding change in price In determining whether the rights and
obligations that are created or changed by a modification are enforceable an
entity shall consider all relevant facts and circumstances including the terms of
IFRS 15
IFRS FoundationA684the contract and other evidence If the parties to a contract have approved a
change in the scope of the contract but have not yet determined the
corresponding change in price an entity shall estimate the change to the
transaction price arising from the modification in accordance with
paragraphs 50–54 on estimating variable consideration and paragraphs 56–58
on constraining estimates of variable consideration
20 An entity shall account for a contract modification as a separate contract if both
of the following conditions are present
(a) the scope of the contract increases because of the addition of promised
goods or services that are distinct (in accordance with paragraphs 26–30)
and
(b) the price of the contract increases by an amount of consideration that
reflects the entity’s standalone selling prices of the additional promised
goods or services and any appropriate adjustments to that price to reflect
the circumstances of the particular contract For example an entity may
adjust the standalone selling price of an additional good or service for a
discount that the customer receives because it is not necessary for the
entity to incur the sellingrelated costs that it would incur when selling a
similar good or service to a new customer
21 If a contract modification is not accounted for as a separate contract in
accordance with paragraph 20 an entity shall account for the promised goods or
services not yet transferred at the date of the contract modification (ie the
remaining promised goods or services) in whichever of the following ways is
applicable
(a) An entity shall account for the contract modification as if it were a
termination of the existing contract and the creation of a new contract
if the remaining goods or services are distinct from the goods or services
transferred on or before the date of the contract modification The
amount of consideration to be allocated to the remaining performance
obligations (or to the remaining distinct goods or services in a single
performance obligation identified in accordance with paragraph 22(b)) is
the sum of
(i) the consideration promised by the customer (including amounts
already received from the customer) that was included in the
estimate of the transaction price and that had not been
recognised as revenue and
(ii) the consideration promised as part of the contract modification
(b) An entity shall account for the contract modification as if it were a part
of the existing contract if the remaining goods or services are not
distinct and therefore form part of a single performance obligation that
is partially satisfied at the date of the contract modification The effect
that the contract modification has on the transaction price and on the
entity’s measure of progress towards complete satisfaction of the
performance obligation is recognised as an adjustment to revenue
IFRS 15
IFRS Foundation A685(either as an increase in or a reduction of revenue) at the date of the
contract modification (ie the adjustment to revenue is made on a
cumulative catchup basis)
(c) If the remaining goods or services are a combination of items (a) and (b)
then the entity shall account for the effects of the modification on the
unsatisfied (including partially unsatisfied) performance obligations in
the modified contract in a manner that is consistent with the objectives
of this paragraph
Identifying performance obligations
22 At contract inception an entity shall assess the goods or services
promised in a contract with a customer and shall identify as a
performance obligation each promise to transfer to the customer either
(a) a good or service (or a bundle of goods or services) that is distinct
or
(b) a series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the customer
(see paragraph 23)
23 A series of distinct goods or services has the same pattern of transfer to the
customer if both of the following criteria are met
(a) each distinct good or service in the series that the entity promises to
transfer to the customer would meet the criteria in paragraph 35 to be a
performance obligation satisfied over time and
(b) in accordance with paragraphs 39–40 the same method would be used
to measure the entity’s progress towards complete satisfaction of the
performance obligation to transfer each distinct good or service in the
series to the customer
Promises in contracts with customers
24 A contract with a customer generally explicitly states the goods or services that
an entity promises to transfer to a customer However the performance
obligations identified in a contract with a customer may not be limited to the
goods or services that are explicitly stated in that contract This is because a
contract with a customer may also include promises that are implied by an
entity’s customary business practices published policies or specific statements
if at the time of entering into the contract those promises create a valid
expectation of the customer that the entity will transfer a good or service to the
customer
25 Performance obligations do not include activities that an entity must undertake
to fulfil a contract unless those activities transfer a good or service to a
customer For example a services provider may need to perform various
administrative tasks to set up a contract The performance of those tasks does
not transfer a service to the customer as the tasks are performed Therefore
those setup activities are not a performance obligation
IFRS 15
IFRS FoundationA686Distinct goods or services
26 Depending on the contract promised goods or services may include but are not
limited to the following
(a) sale of goods produced by an entity (for example inventory of a
manufacturer)
(b) resale of goods purchased by an entity (for example merchandise of a
retailer)
(c) resale of rights to goods or services purchased by an entity (for example
a ticket resold by an entity acting as a principal as described in
paragraphs B34–B38)
(d) performing a contractually agreedupon task (or tasks) for a customer
(e) providing a service of standing ready to provide goods or services (for
example unspecified updates to software that are provided on a
whenandifavailable basis) or of making goods or services available for a
customer to use as and when the customer decides
(f) providing a service of arranging for another party to transfer goods or
services to a customer (for example acting as an agent of another party
as described in paragraphs B34–B38)
(g) granting rights to goods or services to be provided in the future that a
customer can resell or provide to its customer (for example an entity
selling a product to a retailer promises to transfer an additional good or
service to an individual who purchases the product from the retailer)
(h) constructing manufacturing or developing an asset on behalf of a
customer
(i) granting licences (see paragraphs B52–B63) and
(j) granting options to purchase additional goods or services (when those
options provide a customer with a material right as described in
paragraphs B39–B43)
27 A good or service that is promised to a customer is distinct if both of the
following criteria are met
(a) the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer
(ie the good or service is capable of being distinct) and
(b) the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (ie the good
or service is distinct within the context of the contract)
28 A customer can benefit from a good or service in accordance with
paragraph 27(a) if the good or service could be used consumed sold for an
amount that is greater than scrap value or otherwise held in a way that
generates economic benefits For some goods or services a customer may be
able to benefit from a good or service on its own For other goods or services a
customer may be able to benefit from the good or service only in conjunction
with other readily available resources A readily available resource is a good or
IFRS 15
IFRS Foundation A687service that is sold separately (by the entity or another entity) or a resource that
the customer has already obtained from the entity (including goods or services
that the entity will have already transferred to the customer under the contract)
or from other transactions or events Various factors may provide evidence that
the customer can benefit from a good or service either on its own or in
conjunction with other readily available resources For example the fact that
the entity regularly sells a good or service separately would indicate that a
customer can benefit from the good or service on its own or with other readily
available resources
29 Factors that indicate that an entity’s promise to transfer a good or service to a
customer is separately identifiable (in accordance with paragraph 27(b)) include
but are not limited to the following
(a) the entity does not provide a significant service of integrating the good
or service with other goods or services promised in the contract into a
bundle of goods or services that represent the combined output for
which the customer has contracted In other words the entity is not
using the good or service as an input to produce or deliver the combined
output specified by the customer
(b) the good or service does not significantly modify or customise another
good or service promised in the contract
(c) the good or service is not highly dependent on or highly interrelated
with other goods or services promised in the contract For example the
fact that a customer could decide to not purchase the good or service
without significantly affecting the other promised goods or services in
the contract might indicate that the good or service is not highly
dependent on or highly interrelated with those other promised goods
or services
30 If a promised good or service is not distinct an entity shall combine that good or
service with other promised goods or services until it identifies a bundle of
goods or services that is distinct In some cases that would result in the entity
accounting for all the goods or services promised in a contract as a single
performance obligation
Satisfaction of performance obligations
31 An entity shall recognise revenue when (or as) the entity satisfies a
performance obligation by transferring a promised good or service (ie an
asset) to a customer An asset is transferred when (or as) the customer
obtains control of that asset
32 For each performance obligation identified in accordance with
paragraphs 22–30 an entity shall determine at contract inception whether it
satisfies the performance obligation over time (in accordance with
paragraphs 35–37) or satisfies the performance obligation at a point in time (in
accordance with paragraph 38) If an entity does not satisfy a performance
obligation over time the performance obligation is satisfied at a point in time
33 Goods and services are assets even if only momentarily when they are received
and used (as in the case of many services) Control of an asset refers to the ability
IFRS 15
IFRS FoundationA688to direct the use of and obtain substantially all of the remaining benefits from
the asset Control includes the ability to prevent other entities from directing
the use of and obtaining the benefits from an asset The benefits of an asset are
the potential cash flows (inflows or savings in outflows) that can be obtained
directly or indirectly in many ways such as by
(a) using the asset to produce goods or provide services (including public
services)
(b) using the asset to enhance the value of other assets
(c) using the asset to settle liabilities or reduce expenses
(d) selling or exchanging the asset
(e) pledging the asset to secure a loan and
(f) holding the asset
34 When evaluating whether a customer obtains control of an asset an entity shall
consider any agreement to repurchase the asset (see paragraphs B64–B76)
Performance obligations satisfied over time
35 An entity transfers control of a good or service over time and therefore satisfies
a performance obligation and recognises revenue over time if one of the
following criteria is met
(a) the customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs (see
paragraphs B3–B4)
(b) the entity’s performance creates or enhances an asset (for example work
in progress) that the customer controls as the asset is created or
enhanced (see paragraph B5) or
(c) the entity’s performance does not create an asset with an alternative use
to the entity (see paragraph 36) and the entity has an enforceable right to
payment for performance completed to date (see paragraph 37)
36 An asset created by an entity’s performance does not have an alternative use to
an entity if the entity is either restricted contractually from readily directing the
asset for another use during the creation or enhancement of that asset or
limited practically from readily directing the asset in its completed state for
another use The assessment of whether an asset has an alternative use to the
entity is made at contract inception After contract inception an entity shall
not update the assessment of the alternative use of an asset unless the parties to
the contract approve a contract modification that substantively changes the
performance obligation Paragraphs B6–B8 provide guidance for assessing
whether an asset has an alternative use to an entity
37 An entity shall consider the terms of the contract as well as any laws that apply
to the contract when evaluating whether it has an enforceable right to payment
for performance completed to date in accordance with paragraph 35(c) The
right to payment for performance completed to date does not need to be for a
fixed amount However at all times throughout the duration of the contract
the entity must be entitled to an amount that at least compensates the entity for
IFRS 15
IFRS Foundation A689performance completed to date if the contract is terminated by the customer or
another party for reasons other than the entity’s failure to perform as promised
Paragraphs B9–B13 provide guidance for assessing the existence and
enforceability of a right to payment and whether an entity’s right to payment
would entitle the entity to be paid for its performance completed to date
Performance obligations satisfied at a point in time
38 If a performance obligation is not satisfied over time in accordance with
paragraphs 35–37 an entity satisfies the performance obligation at a point in
time To determine the point in time at which a customer obtains control of a
promised asset and the entity satisfies a performance obligation the entity shall
consider the requirements for control in paragraphs 31–34 In addition an
entity shall consider indicators of the transfer of control which include but are
not limited to the following
(a) The entity has a present right to payment for the asset—if a customer is
presently obliged to pay for an asset then that may indicate that the
customer has obtained the ability to direct the use of and obtain
substantially all of the remaining benefits from the asset in exchange
(b) The customer has legal title to the asset—legal title may indicate which
party to a contract has the ability to direct the use of and obtain
substantially all of the remaining benefits from an asset or to restrict
the access of other entities to those benefits Therefore the transfer of
legal title of an asset may indicate that the customer has obtained
control of the asset If an entity retains legal title solely as protection
against the customer’s failure to pay those rights of the entity would not
preclude the customer from obtaining control of an asset
(c) The entity has transferred physical possession of the asset—the
customer’s physical possession of an asset may indicate that the
customer has the ability to direct the use of and obtain substantially all
of the remaining benefits from the asset or to restrict the access of other
entities to those benefits However physical possession may not coincide
with control of an asset For example in some repurchase agreements
and in some consignment arrangements a customer or consignee may
have physical possession of an asset that the entity controls Conversely
in some billandhold arrangements the entity may have physical
possession of an asset that the customer controls Paragraphs B64–B76
B77–B78 and B79–B82 provide guidance on accounting for repurchase
agreements consignment arrangements and billandhold arrangements
respectively
(d) The customer has the significant risks and rewards of ownership of the
asset—the transfer of the significant risks and rewards of ownership of an
asset to the customer may indicate that the customer has obtained the
ability to direct the use of and obtain substantially all of the remaining
benefits from the asset However when evaluating the risks and
rewards of ownership of a promised asset an entity shall exclude any
risks that give rise to a separate performance obligation in addition to
the performance obligation to transfer the asset For example an entity
IFRS 15
IFRS FoundationA690may have transferred control of an asset to a customer but not yet
satisfied an additional performance obligation to provide maintenance
services related to the transferred asset
(e) The customer has accepted the asset—the customer’s acceptance of an
asset may indicate that it has obtained the ability to direct the use of
and obtain substantially all of the remaining benefits from the asset To
evaluate the effect of a contractual customer acceptance clause on when
control of an asset is transferred an entity shall consider the guidance in
paragraphs B83–B86
Measuring progress towards complete satisfaction of a
performance obligation
39 For each performance obligation satisfied over time in accordance with
paragraphs 35–37 an entity shall recognise revenue over time by measuring the
progress towards complete satisfaction of that performance obligation The
objective when measuring progress is to depict an entity’s performance in
transferring control of goods or services promised to a customer (ie the
satisfaction of an entity’s performance obligation)
40 An entity shall apply a single method of measuring progress for each
performance obligation satisfied over time and the entity shall apply that
method consistently to similar performance obligations and in similar
circumstances At the end of each reporting period an entity shall remeasure its
progress towards complete satisfaction of a performance obligation satisfied
over time
Methods for measuring progress
41 Appropriate methods of measuring progress include output methods and input
methods Paragraphs B14–B19 provide guidance for using output methods and
input methods to measure an entity’s progress towards complete satisfaction of
a performance obligation In determining the appropriate method for
measuring progress an entity shall consider the nature of the good or service
that the entity promised to transfer to the customer
42 When applying a method for measuring progress an entity shall exclude from
the measure of progress any goods or services for which the entity does not
transfer control to a customer Conversely an entity shall include in the
measure of progress any goods or services for which the entity does transfer
control to a customer when satisfying that performance obligation
43 As circumstances change over time an entity shall update its measure of
progress to reflect any changes in the outcome of the performance obligation
Such changes to an entity’s measure of progress shall be accounted for as a
change in accounting estimate in accordance with IAS 8 Accounting Policies
Changes in Accounting Estimates and Errors
Reasonable measures of progress
44 An entity shall recognise revenue for a performance obligation satisfied over
time only if the entity can reasonably measure its progress towards complete
satisfaction of the performance obligation An entity would not be able to
IFRS 15
IFRS Foundation A691reasonably measure its progress towards complete satisfaction of a performance
obligation if it lacks reliable information that would be required to apply an
appropriate method of measuring progress
45 In some circumstances (for example in the early stages of a contract) an entity
may not be able to reasonably measure the outcome of a performance
obligation but the entity expects to recover the costs incurred in satisfying the
performance obligation In those circumstances the entity shall recognise
revenue only to the extent of the costs incurred until such time that it can
reasonably measure the outcome of the performance obligation
Measurement
46 When (or as) a performance obligation is satisfied an entity shall
recognise as revenue the amount of the transaction price (which excludes
estimates of variable consideration that are constrained in accordance
with paragraphs 56–58) that is allocated to that performance obligation
Determining the transaction price
47 An entity shall consider the terms of the contract and its customary
business practices to determine the transaction price The transaction
price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a
customer excluding amounts collected on behalf of third parties (for
example some sales taxes) The consideration promised in a contract
with a customer may include fixed amounts variable amounts or both
48 The nature timing and amount of consideration promised by a customer affect
the estimate of the transaction price When determining the transaction price
an entity shall consider the effects of all of the following
(a) variable consideration (see paragraphs 50–55 and 59)
(b) constraining estimates of variable consideration (see paragraphs 56–58)
(c) the existence of a significant financing component in the contract (see
paragraphs 60–65)
(d) noncash consideration (see paragraphs 66–69) and
(e) consideration payable to a customer (see paragraphs 70–72)
49 For the purpose of determining the transaction price an entity shall assume
that the goods or services will be transferred to the customer as promised in
accordance with the existing contract and that the contract will not be
cancelled renewed or modified
Variable consideration
50 If the consideration promised in a contract includes a variable amount an entity
shall estimate the amount of consideration to which the entity will be entitled
in exchange for transferring the promised goods or services to a customer
51 An amount of consideration can vary because of discounts rebates refunds
credits price concessions incentives performance bonuses penalties or other
IFRS 15
IFRS FoundationA692similar items The promised consideration can also vary if an entity’s
entitlement to the consideration is contingent on the occurrence or
nonoccurrence of a future event For example an amount of consideration
would be variable if either a product was sold with a right of return or a fixed
amount is promised as a performance bonus on achievement of a specified
milestone
52 The variability relating to the consideration promised by a customer may be
explicitly stated in the contract In addition to the terms of the contract the
promised consideration is variable if either of the following circumstances
exists
(a) the customer has a valid expectation arising from an entity’s customary
business practices published policies or specific statements that the
entity will accept an amount of consideration that is less than the price
stated in the contract That is it is expected that the entity will offer a
price concession Depending on the jurisdiction industry or customer
this offer may be referred to as a discount rebate refund or credit
(b) other facts and circumstances indicate that the entity’s intention when
entering into the contract with the customer is to offer a price
concession to the customer
53 An entity shall estimate an amount of variable consideration by using either of
the following methods depending on which method the entity expects to better
predict the amount of consideration to which it will be entitled
(a) The expected value—the expected value is the sum of
probabilityweighted amounts in a range of possible consideration
amounts An expected value may be an appropriate estimate of the
amount of variable consideration if an entity has a large number of
contracts with similar characteristics
(b) The most likely amount—the most likely amount is the single most likely
amount in a range of possible consideration amounts (ie the single most
likely outcome of the contract) The most likely amount may be an
appropriate estimate of the amount of variable consideration if the
contract has only two possible outcomes (for example an entity either
achieves a performance bonus or does not)
54 An entity shall apply one method consistently throughout the contract when
estimating the effect of an uncertainty on an amount of variable consideration
to which the entity will be entitled In addition an entity shall consider all the
information (historical current and forecast) that is reasonably available to the
entity and shall identify a reasonable number of possible consideration
amounts The information that an entity uses to estimate the amount of
variable consideration would typically be similar to the information that the
entity’s management uses during the bidandproposal process and in
establishing prices for promised goods or services
Refund liabilities
55 An entity shall recognise a refund liability if the entity receives consideration
from a customer and expects to refund some or all of that consideration to the
IFRS 15
IFRS Foundation A693customer A refund liability is measured at the amount of consideration
received (or receivable) for which the entity does not expect to be entitled
(ie amounts not included in the transaction price) The refund liability (and
corresponding change in the transaction price and therefore the contract
liability) shall be updated at the end of each reporting period for changes in
circumstances To account for a refund liability relating to a sale with a right of
return an entity shall apply the guidance in paragraphs B20–B27
Constraining estimates of variable consideration
56 An entity shall include in the transaction price some or all of an amount of
variable consideration estimated in accordance with paragraph 53 only to the
extent that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur when the uncertainty associated
with the variable consideration is subsequently resolved
57 In assessing whether it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur once the uncertainty
related to the variable consideration is subsequently resolved an entity shall
consider both the likelihood and the magnitude of the revenue reversal Factors
that could increase the likelihood or the magnitude of a revenue reversal
include but are not limited to any of the following
(a) the amount of consideration is highly susceptible to factors outside the
entity’s influence Those factors may include volatility in a market the
judgement or actions of third parties weather conditions and a high risk
of obsolescence of the promised good or service
(b) the uncertainty about the amount of consideration is not expected to be
resolved for a long period of time
(c) the entity’s experience (or other evidence) with similar types of contracts
is limited or that experience (or other evidence) has limited predictive
value
(d) the entity has a practice of either offering a broad range of price
concessions or changing the payment terms and conditions of similar
contracts in similar circumstances
(e) the contract has a large number and broad range of possible
consideration amounts
58 An entity shall apply paragraph B63 to account for consideration in the form of
a salesbased or usagebased royalty that is promised in exchange for a licence of
intellectual property
Reassessment of variable consideration
59 At the end of each reporting period an entity shall update the estimated
transaction price (including updating its assessment of whether an estimate of
variable consideration is constrained) to represent faithfully the circumstances
present at the end of the reporting period and the changes in circumstances
during the reporting period The entity shall account for changes in the
transaction price in accordance with paragraphs 87–90
IFRS 15
IFRS FoundationA694The existence of a significant financing component in the contract
60 In determining the transaction price an entity shall adjust the promised
amount of consideration for the effects of the time value of money if the timing
of payments agreed to by the parties to the contract (either explicitly or
implicitly) provides the customer or the entity with a significant benefit of
financing the transfer of goods or services to the customer In those
circumstances the contract contains a significant financing component A
significant financing component may exist regardless of whether the promise of
financing is explicitly stated in the contract or implied by the payment terms
agreed to by the parties to the contract
61 The objective when adjusting the promised amount of consideration for a
significant financing component is for an entity to recognise revenue at an
amount that reflects the price that a customer would have paid for the promised
goods or services if the customer had paid cash for those goods or services when
(or as) they transfer to the customer (ie the cash selling price) An entity shall
consider all relevant facts and circumstances in assessing whether a contract
contains a financing component and whether that financing component is
significant to the contract including both of the following
(a) the difference if any between the amount of promised consideration
and the cash selling price of the promised goods or services and
(b) the combined effect of both of the following
(i) the expected length of time between when the entity transfers
the promised goods or services to the customer and when the
customer pays for those goods or services and
(ii) the prevailing interest rates in the relevant market
62 Notwithstanding the assessment in paragraph 61 a contract with a customer
would not have a significant financing component if any of the following factors
exist
(a) the customer paid for the goods or services in advance and the timing of
the transfer of those goods or services is at the discretion of the
customer
(b) a substantial amount of the consideration promised by the customer is
variable and the amount or timing of that consideration varies on the
basis of the occurrence or nonoccurrence of a future event that is not
substantially within the control of the customer or the entity (for
example if the consideration is a salesbased royalty)
(c) the difference between the promised consideration and the cash selling
price of the good or service (as described in paragraph 61) arises for
reasons other than the provision of finance to either the customer or the
entity and the difference between those amounts is proportional to the
reason for the difference For example the payment terms might
provide the entity or the customer with protection from the other party
failing to adequately complete some or all of its obligations under the
contract
IFRS 15
IFRS Foundation A69563 As a practical expedient an entity need not adjust the promised amount of
consideration for the effects of a significant financing component if the entity
expects at contract inception that the period between when the entity transfers
a promised good or service to a customer and when the customer pays for that
good or service will be one year or less
64 To meet the objective in paragraph 61 when adjusting the promised amount of
consideration for a significant financing component an entity shall use the
discount rate that would be reflected in a separate financing transaction
between the entity and its customer at contract inception That rate would
reflect the credit characteristics of the party receiving financing in the contract
as well as any collateral or security provided by the customer or the entity
including assets transferred in the contract An entity may be able to determine
that rate by identifying the rate that discounts the nominal amount of the
promised consideration to the price that the customer would pay in cash for the
goods or services when (or as) they transfer to the customer After contract
inception an entity shall not update the discount rate for changes in interest
rates or other circumstances (such as a change in the assessment of the
customer’s credit risk)
65 An entity shall present the effects of financing (interest revenue or interest
expense) separately from revenue from contracts with customers in the
statement of comprehensive income Interest revenue or interest expense is
recognised only to the extent that a contract asset (or receivable) or a contract
liability is recognised in accounting for a contract with a customer
Noncash consideration
66 To determine the transaction price for contracts in which a customer promises
consideration in a form other than cash an entity shall measure the noncash
consideration (or promise of noncash consideration) at fair value
67 If an entity cannot reasonably estimate the fair value of the noncash
consideration the entity shall measure the consideration indirectly by reference
to the standalone selling price of the goods or services promised to the customer
(or class of customer) in exchange for the consideration
68 The fair value of the noncash consideration may vary because of the form of the
consideration (for example a change in the price of a share to which an entity is
entitled to receive from a customer) If the fair value of the noncash
consideration promised by a customer varies for reasons other than only the
form of the consideration (for example the fair value could vary because of the
entity’s performance) an entity shall apply the requirements in
paragraphs 56–58
69 If a customer contributes goods or services (for example materials equipment
or labour) to facilitate an entity’s fulfilment of the contract the entity shall
assess whether it obtains control of those contributed goods or services If so
the entity shall account for the contributed goods or services as noncash
consideration received from the customer
IFRS 15
IFRS FoundationA696Consideration payable to a customer
70 Consideration payable to a customer includes cash amounts that an entity pays
or expects to pay to the customer (or to other parties that purchase the entity’s
goods or services from the customer) Consideration payable to a customer also
includes credit or other items (for example a coupon or voucher) that can be
applied against amounts owed to the entity (or to other parties that purchase
the entity’s goods or services from the customer) An entity shall account for
consideration payable to a customer as a reduction of the transaction price and
therefore of revenue unless the payment to the customer is in exchange for a
distinct good or service (as described in paragraphs 26–30) that the customer
transfers to the entity If the consideration payable to a customer includes a
variable amount an entity shall estimate the transaction price (including
assessing whether the estimate of variable consideration is constrained) in
accordance with paragraphs 50–58
71 If consideration payable to a customer is a payment for a distinct good or service
from the customer then an entity shall account for the purchase of the good or
service in the same way that it accounts for other purchases from suppliers If
the amount of consideration payable to the customer exceeds the fair value of
the distinct good or service that the entity receives from the customer then the
entity shall account for such an excess as a reduction of the transaction price If
the entity cannot reasonably estimate the fair value of the good or service
received from the customer it shall account for all of the consideration payable
to the customer as a reduction of the transaction price
72 Accordingly if consideration payable to a customer is accounted for as a
reduction of the transaction price an entity shall recognise the reduction of
revenue when (or as) the later of either of the following events occurs
(a) the entity recognises revenue for the transfer of the related goods or
services to the customer and
(b) the entity pays or promises to pay the consideration (even if the payment
is conditional on a future event) That promise might be implied by the
entity’s customary business practices
Allocating the transaction price to performance
obligations
73 The objective when allocating the transaction price is for an entity to
allocate the transaction price to each performance obligation (or distinct
good or service) in an amount that depicts the amount of consideration
to which the entity expects to be entitled in exchange for transferring the
promised goods or services to the customer
74 To meet the allocation objective an entity shall allocate the transaction price to
each performance obligation identified in the contract on a relative standalone
selling price basis in accordance with paragraphs 76–80 except as specified in
paragraphs 81–83 (for allocating discounts) and paragraphs 84–86 (for allocating
consideration that includes variable amounts)
75 Paragraphs 76–86 do not apply if a contract has only one performance
obligation However paragraphs 84–86 may apply if an entity promises to
IFRS 15
IFRS Foundation A697transfer a series of distinct goods or services identified as a single performance
obligation in accordance with paragraph 22(b) and the promised consideration
includes variable amounts
Allocation based on standalone selling prices
76 To allocate the transaction price to each performance obligation on a relative
standalone selling price basis an entity shall determine the standalone selling
price at contract inception of the distinct good or service underlying each
performance obligation in the contract and allocate the transaction price in
proportion to those standalone selling prices
77 The standalone selling price is the price at which an entity would sell a
promised good or service separately to a customer The best evidence of a
standalone selling price is the observable price of a good or service when the
entity sells that good or service separately in similar circumstances and to
similar customers A contractually stated price or a list price for a good or
service may be (but shall not be presumed to be) the standalone selling price of
that good or service
78 If a standalone selling price is not directly observable an entity shall estimate
the standalone selling price at an amount that would result in the allocation of
the transaction price meeting the allocation objective in paragraph 73 When
estimating a standalone selling price an entity shall consider all information
(including market conditions entityspecific factors and information about the
customer or class of customer) that is reasonably available to the entity In
doing so an entity shall maximise the use of observable inputs and apply
estimation methods consistently in similar circumstances
79 Suitable methods for estimating the standalone selling price of a good or service
include but are not limited to the following
(a) Adjusted market assessment approach—an entity could evaluate the
market in which it sells goods or services and estimate the price that a
customer in that market would be willing to pay for those goods or
services That approach might also include referring to prices from the
entity’s competitors for similar goods or services and adjusting those
prices as necessary to reflect the entity’s costs and margins
(b) Expected cost plus a margin approach—an entity could forecast its
expected costs of satisfying a performance obligation and then add an
appropriate margin for that good or service
(c) Residual approach—an entity may estimate the standalone selling price
by reference to the total transaction price less the sum of the observable
standalone selling prices of other goods or services promised in the
contract However an entity may use a residual approach to estimate in
accordance with paragraph 78 the standalone selling price of a good or
service only if one of the following criteria is met
(i) the entity sells the same good or service to different customers (at
or near the same time) for a broad range of amounts (ie the
selling price is highly variable because a representative
IFRS 15
IFRS FoundationA698standalone selling price is not discernible from past transactions
or other observable evidence) or
(ii) the entity has not yet established a price for that good or service
and the good or service has not previously been sold on a
standalone basis (ie the selling price is uncertain)
80 A combination of methods may need to be used to estimate the standalone
selling prices of the goods or services promised in the contract if two or more of
those goods or services have highly variable or uncertain standalone selling
prices For example an entity may use a residual approach to estimate the
aggregate standalone selling price for those promised goods or services with
highly variable or uncertain standalone selling prices and then use another
method to estimate the standalone selling prices of the individual goods or
services relative to that estimated aggregate standalone selling price
determined by the residual approach When an entity uses a combination of
methods to estimate the standalone selling price of each promised good or
service in the contract the entity shall evaluate whether allocating the
transaction price at those estimated standalone selling prices would be
consistent with the allocation objective in paragraph 73 and the requirements
for estimating standalone selling prices in paragraph 78
Allocation of a discount
81 A customer receives a discount for purchasing a bundle of goods or services if
the sum of the standalone selling prices of those promised goods or services in
the contract exceeds the promised consideration in a contract Except when an
entity has observable evidence in accordance with paragraph 82 that the entire
discount relates to only one or more but not all performance obligations in a
contract the entity shall allocate a discount proportionately to all performance
obligations in the contract The proportionate allocation of the discount in
those circumstances is a consequence of the entity allocating the transaction
price to each performance obligation on the basis of the relative standalone
selling prices of the underlying distinct goods or services
82 An entity shall allocate a discount entirely to one or more but not all
performance obligations in the contract if all of the following criteria are met
(a) the entity regularly sells each distinct good or service (or each bundle of
distinct goods or services) in the contract on a standalone basis
(b) the entity also regularly sells on a standalone basis a bundle (or bundles)
of some of those distinct goods or services at a discount to the
standalone selling prices of the goods or services in each bundle and
(c) the discount attributable to each bundle of goods or services described in
paragraph 82(b) is substantially the same as the discount in the contract
and an analysis of the goods or services in each bundle provides
observable evidence of the performance obligation (or performance
obligations) to which the entire discount in the contract belongs
83 If a discount is allocated entirely to one or more performance obligations in the
contract in accordance with paragraph 82 an entity shall allocate the discount
IFRS 15
IFRS Foundation A699before using the residual approach to estimate the standalone selling price of a
good or service in accordance with paragraph 79(c)
Allocation of variable consideration
84 Variable consideration that is promised in a contract may be attributable to the
entire contract or to a specific part of the contract such as either of the
following
(a) one or more but not all performance obligations in the contract (for
example a bonus may be contingent on an entity transferring a
promised good or service within a specified period of time) or
(b) one or more but not all distinct goods or services promised in a series of
distinct goods or services that forms part of a single performance
obligation in accordance with paragraph 22(b) (for example the
consideration promised for the second year of a twoyear cleaning service
contract will increase on the basis of movements in a specified inflation
index)
85 An entity shall allocate a variable amount (and subsequent changes to that
amount) entirely to a performance obligation or to a distinct good or service that
forms part of a single performance obligation in accordance with
paragraph 22(b) if both of the following criteria are met
(a) the terms of a variable payment relate specifically to the entity’s efforts
to satisfy the performance obligation or transfer the distinct good or
service (or to a specific outcome from satisfying the performance
obligation or transferring the distinct good or service) and
(b) allocating the variable amount of consideration entirely to the
performance obligation or the distinct good or service is consistent with
the allocation objective in paragraph 73 when considering all of the
performance obligations and payment terms in the contract
86 The allocation requirements in paragraphs 73–83 shall be applied to allocate the
remaining amount of the transaction price that does not meet the criteria in
paragraph 85
Changes in the transaction price
87 After contract inception the transaction price can change for various reasons
including the resolution of uncertain events or other changes in circumstances
that change the amount of consideration to which an entity expects to be
entitled in exchange for the promised goods or services
88 An entity shall allocate to the performance obligations in the contract any
subsequent changes in the transaction price on the same basis as at contract
inception Consequently an entity shall not reallocate the transaction price to
reflect changes in standalone selling prices after contract inception Amounts
allocated to a satisfied performance obligation shall be recognised as revenue or
as a reduction of revenue in the period in which the transaction price changes
89 An entity shall allocate a change in the transaction price entirely to one or more
but not all performance obligations or distinct goods or services promised in a
IFRS 15
IFRS FoundationA700series that forms part of a single performance obligation in accordance with
paragraph 22(b) only if the criteria in paragraph 85 on allocating variable
consideration are met
90 An entity shall account for a change in the transaction price that arises as a
result of a contract modification in accordance with paragraphs 18–21
However for a change in the transaction price that occurs after a contract
modification an entity shall apply paragraphs 87–89 to allocate the change in
the transaction price in whichever of the following ways is applicable
(a) An entity shall allocate the change in the transaction price to the
performance obligations identified in the contract before the
modification if and to the extent that the change in the transaction
price is attributable to an amount of variable consideration promised
before the modification and the modification is accounted for in
accordance with paragraph 21(a)
(b) In all other cases in which the modification was not accounted for as a
separate contract in accordance with paragraph 20 an entity shall
allocate the change in the transaction price to the performance
obligations in the modified contract (ie the performance obligations that
were unsatisfied or partially unsatisfied immediately after the
modification)
Contract costs
Incremental costs of obtaining a contract
91 An entity shall recognise as an asset the incremental costs of obtaining a
contract with a customer if the entity expects to recover those costs
92 The incremental costs of obtaining a contract are those costs that an entity
incurs to obtain a contract with a customer that it would not have incurred if
the contract had not been obtained (for example a sales commission)
93 Costs to obtain a contract that would have been incurred regardless of whether
the contract was obtained shall be recognised as an expense when incurred
unless those costs are explicitly chargeable to the customer regardless of
whether the contract is obtained
94 As a practical expedient an entity may recognise the incremental costs of
obtaining a contract as an expense when incurred if the amortisation period of
the asset that the entity otherwise would have recognised is one year or less
Costs to fulfil a contract
95 If the costs incurred in fulfilling a contract with a customer are not
within the scope of another Standard (for example IAS 2 Inventories
IAS 16 Property Plant and Equipment or IAS 38 Intangible Assets) an
entity shall recognise an asset from the costs incurred to fulfil a contract
only if those costs meet all of the following criteria
IFRS 15
IFRS Foundation A701(a) the costs relate directly to a contract or to an anticipated contract
that the entity can specifically identify (for example costs relating
to services to be provided under renewal of an existing contract or
costs of designing an asset to be transferred under a specific
contract that has not yet been approved)
(b) the costs generate or enhance resources of the entity that will be
used in satisfying (or in continuing to satisfy) performance
obligations in the future and
(c) the costs are expected to be recovered
96 For costs incurred in fulfilling a contract with a customer that are within the
scope of another Standard an entity shall account for those costs in accordance
with those other Standards
97 Costs that relate directly to a contract (or a specific anticipated contract) include
any of the following
(a) direct labour (for example salaries and wages of employees who provide
the promised services directly to the customer)
(b) direct materials (for example supplies used in providing the promised
services to a customer)
(c) allocations of costs that relate directly to the contract or to contract
activities (for example costs of contract management and supervision
insurance and depreciation of tools equipment and rightofuse assets
used in fulfilling the contract)
(d) costs that are explicitly chargeable to the customer under the contract
and
(e) other costs that are incurred only because an entity entered into the
contract (for example payments to subcontractors)
98 An entity shall recognise the following costs as expenses when incurred
(a) general and administrative costs (unless those costs are explicitly
chargeable to the customer under the contract in which case an entity
shall evaluate those costs in accordance with paragraph 97)
(b) costs of wasted materials labour or other resources to fulfil the contract
that were not reflected in the price of the contract
(c) costs that relate to satisfied performance obligations (or partially
satisfied performance obligations) in the contract (ie costs that relate to
past performance) and
(d) costs for which an entity cannot distinguish whether the costs relate to
unsatisfied performance obligations or to satisfied performance
obligations (or partially satisfied performance obligations)
Amortisation and impairment
99 An asset recognised in accordance with paragraph 91 or 95 shall be amortised on
a systematic basis that is consistent with the transfer to the customer of the
IFRS 15
IFRS FoundationA702goods or services to which the asset relates The asset may relate to goods or
services to be transferred under a specific anticipated contract (as described in
paragraph 95(a))
100 An entity shall update the amortisation to reflect a significant change in the
entity’s expected timing of transfer to the customer of the goods or services to
which the asset relates Such a change shall be accounted for as a change in
accounting estimate in accordance with IAS 8
101 An entity shall recognise an impairment loss in profit or loss to the extent that
the carrying amount of an asset recognised in accordance with paragraph 91
or 95 exceeds
(a) the remaining amount of consideration that the entity expects to receive
in exchange for the goods or services to which the asset relates less
(b) the costs that relate directly to providing those goods or services and that
have not been recognised as expenses (see paragraph 97)
102 For the purposes of applying paragraph 101 to determine the amount of
consideration that an entity expects to receive an entity shall use the principles
for determining the transaction price (except for the requirements in
paragraphs 56–58 on constraining estimates of variable consideration) and
adjust that amount to reflect the effects of the customer’s credit risk
103 Before an entity recognises an impairment loss for an asset recognised in
accordance with paragraph 91 or 95 the entity shall recognise any impairment
loss for assets related to the contract that are recognised in accordance with
another Standard (for example IAS 2 IAS 16 and IAS 38) After applying the
impairment test in paragraph 101 an entity shall include the resulting carrying
amount of the asset recognised in accordance with paragraph 91 or 95 in the
carrying amount of the cashgenerating unit to which it belongs for the purpose
of applying IAS 36 Impairment of Assets to that cashgenerating unit
104 An entity shall recognise in profit or loss a reversal of some or all of an
impairment loss previously recognised in accordance with paragraph 101 when
the impairment conditions no longer exist or have improved The increased
carrying amount of the asset shall not exceed the amount that would have been
determined (net of amortisation) if no impairment loss had been recognised
previously
Presentation
105 When either party to a contract has performed an entity shall present the
contract in the statement of financial position as a contract asset or a
contract liability depending on the relationship between the entity’s
performance and the customer’s payment An entity shall present any
unconditional rights to consideration separately as a receivable
106 If a customer pays consideration or an entity has a right to an amount of
consideration that is unconditional (ie a receivable) before the entity transfers a
good or service to the customer the entity shall present the contract as a
contract liability when the payment is made or the payment is due (whichever is
IFRS 15
IFRS Foundation A703earlier) A contract liability is an entity’s obligation to transfer goods or services
to a customer for which the entity has received consideration (or an amount of
consideration is due) from the customer
107 If an entity performs by transferring goods or services to a customer before the
customer pays consideration or before payment is due the entity shall present
the contract as a contract asset excluding any amounts presented as a
receivable A contract asset is an entity’s right to consideration in exchange for
goods or services that the entity has transferred to a customer An entity shall
assess a contract asset for impairment in accordance with IFRS 9 An
impairment of a contract asset shall be measured presented and disclosed on
the same basis as a financial asset that is within the scope of IFRS 9 (see also
paragraph 113(b))
108 A receivable is an entity’s right to consideration that is unconditional A right to
consideration is unconditional if only the passage of time is required before
payment of that consideration is due For example an entity would recognise a
receivable if it has a present right to payment even though that amount may be
subject to refund in the future An entity shall account for a receivable in
accordance with IFRS 9 Upon initial recognition of a receivable from a contract
with a customer any difference between the measurement of the receivable in
accordance with IFRS 9 and the corresponding amount of revenue recognised
shall be presented as an expense (for example as an impairment loss)
109 This Standard uses the terms contract asset’ and contract liability’ but does not
prohibit an entity from using alternative descriptions in the statement of
financial position for those items If an entity uses an alternative description for
a contract asset the entity shall provide sufficient information for a user of the
financial statements to distinguish between receivables and contract assets
Disclosure
110 The objective of the disclosure requirements is for an entity to disclose
sufficient information to enable users of financial statements to
understand the nature amount timing and uncertainty of revenue and
cash flows arising from contracts with customers To achieve that
objective an entity shall disclose qualitative and quantitative
information about all of the following
(a) its contracts with customers (see paragraphs 113–122)
(b) the significant judgements and changes in the judgements made
in applying this Standard to those contracts (see
paragraphs 123–126) and
(c) any assets recognised from the costs to obtain or fulfil a contract
with a customer in accordance with paragraph 91 or 95 (see
paragraphs 127–128)
111 An entity shall consider the level of detail necessary to satisfy the disclosure
objective and how much emphasis to place on each of the various requirements
An entity shall aggregate or disaggregate disclosures so that useful information
IFRS 15
IFRS FoundationA704is not obscured by either the inclusion of a large amount of insignificant detail
or the aggregation of items that have substantially different characteristics
112 An entity need not disclose information in accordance with this Standard if it
has provided the information in accordance with another Standard
Contracts with customers
113 An entity shall disclose all of the following amounts for the reporting period
unless those amounts are presented separately in the statement of
comprehensive income in accordance with other Standards
(a) revenue recognised from contracts with customers which the entity
shall disclose separately from its other sources of revenue and
(b) any impairment losses recognised (in accordance with IFRS 9) on any
receivables or contract assets arising from an entity’s contracts with
customers which the entity shall disclose separately from impairment
losses from other contracts
Disaggregation of revenue
114 An entity shall disaggregate revenue recognised from contracts with customers
into categories that depict how the nature amount timing and uncertainty of
revenue and cash flows are affected by economic factors An entity shall apply
the guidance in paragraphs B87–B89 when selecting the categories to use to
disaggregate revenue
115 In addition an entity shall disclose sufficient information to enable users of
financial statements to understand the relationship between the disclosure of
disaggregated revenue (in accordance with paragraph 114) and revenue
information that is disclosed for each reportable segment if the entity applies
IFRS 8 Operating Segments
Contract balances
116 An entity shall disclose all of the following
(a) the opening and closing balances of receivables contract assets and
contract liabilities from contracts with customers if not otherwise
separately presented or disclosed
(b) revenue recognised in the reporting period that was included in the
contract liability balance at the beginning of the period and
(c) revenue recognised in the reporting period from performance
obligations satisfied (or partially satisfied) in previous periods (for
example changes in transaction price)
117 An entity shall explain how the timing of satisfaction of its performance
obligations (see paragraph 119(a)) relates to the typical timing of payment (see
paragraph 119(b)) and the effect that those factors have on the contract asset and
the contract liability balances The explanation provided may use qualitative
information
118 An entity shall provide an explanation of the significant changes in the contract
asset and the contract liability balances during the reporting period The
IFRS 15
IFRS Foundation A705explanation shall include qualitative and quantitative information Examples of
changes in the entity’s balances of contract assets and contract liabilities include
any of the following
(a) changes due to business combinations
(b) cumulative catchup adjustments to revenue that affect the
corresponding contract asset or contract liability including adjustments
arising from a change in the measure of progress a change in an
estimate of the transaction price (including any changes in the
assessment of whether an estimate of variable consideration is
constrained) or a contract modification
(c) impairment of a contract asset
(d) a change in the time frame for a right to consideration to become
unconditional (ie for a contract asset to be reclassified to a receivable)
and
(e) a change in the time frame for a performance obligation to be satisfied
(ie for the recognition of revenue arising from a contract liability)
Performance obligations
119 An entity shall disclose information about its performance obligations in
contracts with customers including a description of all of the following
(a) when the entity typically satisfies its performance obligations (for
example upon shipment upon delivery as services are rendered or
upon completion of service) including when performance obligations
are satisfied in a billandhold arrangement
(b) the significant payment terms (for example when payment is typically
due whether the contract has a significant financing component
whether the consideration amount is variable and whether the estimate
of variable consideration is typically constrained in accordance with
paragraphs 56–58)
(c) the nature of the goods or services that the entity has promised to
transfer highlighting any performance obligations to arrange for
another party to transfer goods or services (ie if the entity is acting as an
agent)
(d) obligations for returns refunds and other similar obligations and
(e) types of warranties and related obligations
Transaction price allocated to the remaining performance
obligations
120 An entity shall disclose the following information about its remaining
performance obligations
(a) the aggregate amount of the transaction price allocated to the
performance obligations that are unsatisfied (or partially unsatisfied) as
of the end of the reporting period and
IFRS 15
IFRS FoundationA706(b) an explanation of when the entity expects to recognise as revenue the
amount disclosed in accordance with paragraph 120(a) which the entity
shall disclose in either of the following ways
(i) on a quantitative basis using the time bands that would be most
appropriate for the duration of the remaining performance
obligations or
(ii) by using qualitative information
121 As a practical expedient an entity need not disclose the information in
paragraph 120 for a performance obligation if either of the following conditions
is met
(a) the performance obligation is part of a contract that has an original
expected duration of one year or less or
(b) the entity recognises revenue from the satisfaction of the performance
obligation in accordance with paragraph B16
122 An entity shall explain qualitatively whether it is applying the practical
expedient in paragraph 121 and whether any consideration from contracts with
customers is not included in the transaction price and therefore not included
in the information disclosed in accordance with paragraph 120 For example an
estimate of the transaction price would not include any estimated amounts of
variable consideration that are constrained (see paragraphs 56–58)
Significant judgements in the application of this
Standard
123 An entity shall disclose the judgements and changes in the judgements made
in applying this Standard that significantly affect the determination of the
amount and timing of revenue from contracts with customers In particular an
entity shall explain the judgements and changes in the judgements used in
determining both of the following
(a) the timing of satisfaction of performance obligations (see
paragraphs 124–125) and
(b) the transaction price and the amounts allocated to performance
obligations (see paragraph 126)
Determining the timing of satisfaction of performance obligations
124 For performance obligations that an entity satisfies over time an entity shall
disclose both of the following
(a) the methods used to recognise revenue (for example a description of the
output methods or input methods used and how those methods are
applied) and
(b) an explanation of why the methods used provide a faithful depiction of
the transfer of goods or services
125 For performance obligations satisfied at a point in time an entity shall disclose
the significant judgements made in evaluating when a customer obtains control
of promised goods or services
IFRS 15
IFRS Foundation A707Determining the transaction price and the amounts allocated to
performance obligations
126 An entity shall disclose information about the methods inputs and assumptions
used for all of the following
(a) determining the transaction price which includes but is not limited to
estimating variable consideration adjusting the consideration for the
effects of the time value of money and measuring noncash
consideration
(b) assessing whether an estimate of variable consideration is constrained
(c) allocating the transaction price including estimating standalone selling
prices of promised goods or services and allocating discounts and
variable consideration to a specific part of the contract (if applicable)
and
(d) measuring obligations for returns refunds and other similar obligations
Assets recognised from the costs to obtain or fulfil a
contract with a customer
127 An entity shall describe both of the following
(a) the judgements made in determining the amount of the costs incurred
to obtain or fulfil a contract with a customer (in accordance with
paragraph 91 or 95) and
(b) the method it uses to determine the amortisation for each reporting
period
128 An entity shall disclose all of the following
(a) the closing balances of assets recognised from the costs incurred to
obtain or fulfil a contract with a customer (in accordance with
paragraph 91 or 95) by main category of asset (for example costs to
obtain contracts with customers precontract costs and setup costs) and
(b) the amount of amortisation and any impairment losses recognised in the
reporting period
Practical expedients
129 If an entity elects to use the practical expedient in either paragraph 63 (about
the existence of a significant financing component) or paragraph 94 (about the
incremental costs of obtaining a contract) the entity shall disclose that fact
IFRS 15
IFRS FoundationA708Appendix A
Defined terms
This appendix is an integral part of the Standard
contract An agreement between two or more parties that creates
enforceable rights and obligations
contract asset An entity’s right to consideration in exchange for goods or
services that the entity has transferred to a customer when that
right is conditioned on something other than the passage of time
(for example the entity’s future performance)
contract liability An entity’s obligation to transfer goods or services to a customer
for which the entity has received consideration (or the amount is
due) from the customer
customer A party that has contracted with an entity to obtain goods or
services that are an output of the entity’s ordinary activities in
exchange for consideration
income Increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of
liabilities that result in an increase in equity other than those
relating to contributions from equity participants
performance
obligation
A promise in a contract with a customer to transfer to the
customer either
(a) a good or service (or a bundle of goods or services) that is
distinct or
(b) a series of distinct goods or services that are substantially
the same and that have the same pattern of transfer to the
customer
revenue Income arising in the course of an entity’s ordinary activities
standalone selling
price
(of a good or service)
The price at which an entity would sell a promised good or
service separately to a customer
transaction price
(for a contract with a
customer)
The amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services
to a customer excluding amounts collected on behalf of third
parties
IFRS 15
IFRS Foundation A709Appendix B
Application Guidance
This appendix is an integral part of the Standard It describes the application of paragraphs 1–129
and has the same authority as the other parts of the Standard
B1 This application guidance is organised into the following categories
(a) performance obligations satisfied over time (paragraphs B2–B13)
(b) methods for measuring progress towards complete satisfaction of a
performance obligation (paragraphs B14–B19)
(c) sale with a right of return (paragraphs B20–B27)
(d) warranties (paragraphs B28–B33)
(e) principal versus agent considerations (paragraphs B34–B38)
(f) customer options for additional goods or services (paragraphs B39–B43)
(g) customers’ unexercised rights (paragraphs B44–B47)
(h) nonrefundable upfront fees (and some related costs)
(paragraphs B48–B51)
(i) licensing (paragraphs B52–B63)
(j) repurchase agreements (paragraphs B64–B76)
(k) consignment arrangements (paragraphs B77–B78)
(l) billandhold arrangements (paragraphs B79–B82)
(m) customer acceptance (paragraphs B83–B86) and
(n) disclosure of disaggregated revenue (paragraphs B87–B89)
Performance obligations satisfied over time
B2 In accordance with paragraph 35 a performance obligation is satisfied over time
if one of the following criteria is met
(a) the customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs (see
paragraphs B3–B4)
(b) the entity’s performance creates or enhances an asset (for example work
in progress) that the customer controls as the asset is created or
enhanced (see paragraph B5) or
(c) the entity’s performance does not create an asset with an alternative use
to the entity (see paragraphs B6–B8) and the entity has an enforceable
right to payment for performance completed to date (see
paragraphs B9–B13)
Simultaneous receipt and consumption of the benefits of the
entity’s performance (paragraph 35(a))
B3 For some types of performance obligations the assessment of whether a
customer receives the benefits of an entity’s performance as the entity performs
IFRS 15
IFRS FoundationA710and simultaneously consumes those benefits as they are received will be
straightforward Examples include routine or recurring services (such as a
cleaning service) in which the receipt and simultaneous consumption by the
customer of the benefits of the entity’s performance can be readily identified
B4 For other types of performance obligations an entity may not be able to readily
identify whether a customer simultaneously receives and consumes the benefits
from the entity’s performance as the entity performs In those circumstances a
performance obligation is satisfied over time if an entity determines that
another entity would not need to substantially reperform the work that the
entity has completed to date if that other entity were to fulfil the remaining
performance obligation to the customer In determining whether another
entity would not need to substantially reperform the work the entity has
completed to date an entity shall make both of the following assumptions
(a) disregard potential contractual restrictions or practical limitations that
otherwise would prevent the entity from transferring the remaining
performance obligation to another entity and
(b) presume that another entity fulfilling the remainder of the performance
obligation would not have the benefit of any asset that is presently
controlled by the entity and that would remain controlled by the entity
if the performance obligation were to transfer to another entity
Customer controls the asset as it is created or enhanced
(paragraph 35(b))
B5 In determining whether a customer controls an asset as it is created or enhanced
in accordance with paragraph 35(b) an entity shall apply the requirements for
control in paragraphs 31–34 and 38 The asset that is being created or enhanced
(for example a workinprogress asset) could be either tangible or intangible
Entity’s performance does not create an asset with an alternative
use (paragraph 35(c))
B6 In assessing whether an asset has an alternative use to an entity in accordance
with paragraph 36 an entity shall consider the effects of contractual restrictions
and practical limitations on the entity’s ability to readily direct that asset for
another use such as selling it to a different customer The possibility of the
contract with the customer being terminated is not a relevant consideration in
assessing whether the entity would be able to readily direct the asset for another
use
B7 A contractual restriction on an entity’s ability to direct an asset for another use
must be substantive for the asset not to have an alternative use to the entity A
contractual restriction is substantive if a customer could enforce its rights to the
promised asset if the entity sought to direct the asset for another use In
contrast a contractual restriction is not substantive if for example an asset is
largely interchangeable with other assets that the entity could transfer to
another customer without breaching the contract and without incurring
significant costs that otherwise would not have been incurred in relation to that
contract
IFRS 15
IFRS Foundation A711B8 A practical limitation on an entity’s ability to direct an asset for another use
exists if an entity would incur significant economic losses to direct the asset for
another use A significant economic loss could arise because the entity either
would incur significant costs to rework the asset or would only be able to sell the
asset at a significant loss For example an entity may be practically limited from
redirecting assets that either have design specifications that are unique to a
customer or are located in remote areas
Right to payment for performance completed to date
(paragraph 35(c))
B9 In accordance with paragraph 37 an entity has a right to payment for
performance completed to date if the entity would be entitled to an amount that
at least compensates the entity for its performance completed to date in the
event that the customer or another party terminates the contract for reasons
other than the entity’s failure to perform as promised An amount that would
compensate an entity for performance completed to date would be an amount
that approximates the selling price of the goods or services transferred to date
(for example recovery of the costs incurred by an entity in satisfying the
performance obligation plus a reasonable profit margin) rather than
compensation for only the entity’s potential loss of profit if the contract were to
be terminated Compensation for a reasonable profit margin need not equal the
profit margin expected if the contract was fulfilled as promised but an entity
should be entitled to compensation for either of the following amounts
(a) a proportion of the expected profit margin in the contract that
reasonably reflects the extent of the entity’s performance under the
contract before termination by the customer (or another party) or
(b) a reasonable return on the entity’s cost of capital for similar contracts (or
the entity’s typical operating margin for similar contracts) if the
contractspecific margin is higher than the return the entity usually
generates from similar contracts
B10 An entity’s right to payment for performance completed to date need not be a
present unconditional right to payment In many cases an entity will have an
unconditional right to payment only at an agreedupon milestone or upon
complete satisfaction of the performance obligation In assessing whether it has
a right to payment for performance completed to date an entity shall consider
whether it would have an enforceable right to demand or retain payment for
performance completed to date if the contract were to be terminated before
completion for reasons other than the entity’s failure to perform as promised
B11 In some contracts a customer may have a right to terminate the contract only at
specified times during the life of the contract or the customer might not have
any right to terminate the contract If a customer acts to terminate a contract
without having the right to terminate the contract at that time (including when
a customer fails to perform its obligations as promised) the contract (or other
laws) might entitle the entity to continue to transfer to the customer the goods
or services promised in the contract and require the customer to pay the
consideration promised in exchange for those goods or services In those
circumstances an entity has a right to payment for performance completed to
IFRS 15
IFRS FoundationA712date because the entity has a right to continue to perform its obligations in
accordance with the contract and to require the customer to perform its
obligations (which include paying the promised consideration)
B12 In assessing the existence and enforceability of a right to payment for
performance completed to date an entity shall consider the contractual terms
as well as any legislation or legal precedent that could supplement or override
those contractual terms This would include an assessment of whether
(a) legislation administrative practice or legal precedent confers upon the
entity a right to payment for performance to date even though that right
is not specified in the contract with the customer
(b) relevant legal precedent indicates that similar rights to payment for
performance completed to date in similar contracts have no binding
legal effect or
(c) an entity’s customary business practices of choosing not to enforce a
right to payment has resulted in the right being rendered unenforceable
in that legal environment However notwithstanding that an entity may
choose to waive its right to payment in similar contracts an entity would
continue to have a right to payment to date if in the contract with the
customer its right to payment for performance to date remains
enforceable
B13 The payment schedule specified in a contract does not necessarily indicate
whether an entity has an enforceable right to payment for performance
completed to date Although the payment schedule in a contract specifies the
timing and amount of consideration that is payable by a customer the payment
schedule might not necessarily provide evidence of the entity’s right to payment
for performance completed to date This is because for example the contract
could specify that the consideration received from the customer is refundable
for reasons other than the entity failing to perform as promised in the contract
Methods for measuring progress towards complete
satisfaction of a performance obligation
B14 Methods that can be used to measure an entity’s progress towards complete
satisfaction of a performance obligation satisfied over time in accordance with
paragraphs 35–37 include the following
(a) output methods (see paragraphs B15–B17) and
(b) input methods (see paragraphs B18–B19)
Output methods
B15 Output methods recognise revenue on the basis of direct measurements of the
value to the customer of the goods or services transferred to date relative to the
remaining goods or services promised under the contract Output methods
include methods such as surveys of performance completed to date appraisals
of results achieved milestones reached time elapsed and units produced or
units delivered When an entity evaluates whether to apply an output method
to measure its progress the entity shall consider whether the output selected
would faithfully depict the entity’s performance towards complete satisfaction
IFRS 15
IFRS Foundation A713of the performance obligation An output method would not provide a faithful
depiction of the entity’s performance if the output selected would fail to
measure some of the goods or services for which control has transferred to the
customer For example output methods based on units produced or units
delivered would not faithfully depict an entity’s performance in satisfying a
performance obligation if at the end of the reporting period the entity’s
performance has produced work in progress or finished goods controlled by the
customer that are not included in the measurement of the output
B16 As a practical expedient if an entity has a right to consideration from a
customer in an amount that corresponds directly with the value to the customer
of the entity’s performance completed to date (for example a service contract in
which an entity bills a fixed amount for each hour of service provided) the
entity may recognise revenue in the amount to which the entity has a right to
invoice
B17 The disadvantages of output methods are that the outputs used to measure
progress may not be directly observable and the information required to apply
them may not be available to an entity without undue cost Therefore an input
method may be necessary
Input methods
B18 Input methods recognise revenue on the basis of the entity’s efforts or inputs to
the satisfaction of a performance obligation (for example resources consumed
labour hours expended costs incurred time elapsed or machine hours used)
relative to the total expected inputs to the satisfaction of that performance
obligation If the entity’s efforts or inputs are expended evenly throughout the
performance period it may be appropriate for the entity to recognise revenue on
a straightline basis
B19 A shortcoming of input methods is that there may not be a direct relationship
between an entity’s inputs and the transfer of control of goods or services to a
customer Therefore an entity shall exclude from an input method the effects of
any inputs that in accordance with the objective of measuring progress in
paragraph 39 do not depict the entity’s performance in transferring control of
goods or services to the customer For instance when using a costbased input
method an adjustment to the measure of progress may be required in the
following circumstances
(a) When a cost incurred does not contribute to an entity’s progress in
satisfying the performance obligation For example an entity would not
recognise revenue on the basis of costs incurred that are attributable to
significant inefficiencies in the entity’s performance that were not
reflected in the price of the contract (for example the costs of
unexpected amounts of wasted materials labour or other resources that
were incurred to satisfy the performance obligation)
(b) When a cost incurred is not proportionate to the entity’s progress in
satisfying the performance obligation In those circumstances the best
depiction of the entity’s performance may be to adjust the input method
to recognise revenue only to the extent of that cost incurred For
example a faithful depiction of an entity’s performance might be to
IFRS 15
IFRS FoundationA714recognise revenue at an amount equal to the cost of a good used to
satisfy a performance obligation if the entity expects at contract
inception that all of the following conditions would be met
(i) the good is not distinct
(ii) the customer is expected to obtain control of the good
significantly before receiving services related to the good
(iii) the cost of the transferred good is significant relative to the total
expected costs to completely satisfy the performance obligation
and
(iv) the entity procures the good from a third party and is not
significantly involved in designing and manufacturing the good
(but the entity is acting as a principal in accordance with
paragraphs B34–B38)
Sale with a right of return
B20 In some contracts an entity transfers control of a product to a customer and also
grants the customer the right to return the product for various reasons (such as
dissatisfaction with the product) and receive any combination of the following
(a) a full or partial refund of any consideration paid
(b) a credit that can be applied against amounts owed or that will be owed
to the entity and
(c) another product in exchange
B21 To account for the transfer of products with a right of return (and for some
services that are provided subject to a refund) an entity shall recognise all of the
following
(a) revenue for the transferred products in the amount of consideration to
which the entity expects to be entitled (therefore revenue would not be
recognised for the products expected to be returned)
(b) a refund liability and
(c) an asset (and corresponding adjustment to cost of sales) for its right to
recover products from customers on settling the refund liability
B22 An entity’s promise to stand ready to accept a returned product during the
return period shall not be accounted for as a performance obligation in addition
to the obligation to provide a refund
B23 An entity shall apply the requirements in paragraphs 47–72 (including the
requirements for constraining estimates of variable consideration in
paragraphs 56–58) to determine the amount of consideration to which the entity
expects to be entitled (ie excluding the products expected to be returned) For
any amounts received (or receivable) for which an entity does not expect to be
entitled the entity shall not recognise revenue when it transfers products to
customers but shall recognise those amounts received (or receivable) as a refund
liability Subsequently at the end of each reporting period the entity shall
update its assessment of amounts for which it expects to be entitled in exchange
IFRS 15
IFRS Foundation A715for the transferred products and make a corresponding change to the
transaction price and therefore in the amount of revenue recognised
B24 An entity shall update the measurement of the refund liability at the end of each
reporting period for changes in expectations about the amount of refunds An
entity shall recognise corresponding adjustments as revenue (or reductions of
revenue)
B25 An asset recognised for an entity’s right to recover products from a customer on
settling a refund liability shall initially be measured by reference to the former
carrying amount of the product (for example inventory) less any expected costs
to recover those products (including potential decreases in the value to the
entity of returned products) At the end of each reporting period an entity shall
update the measurement of the asset arising from changes in expectations about
products to be returned An entity shall present the asset separately from the
refund liability
B26 Exchanges by customers of one product for another of the same type quality
condition and price (for example one colour or size for another) are not
considered returns for the purposes of applying this Standard
B27 Contracts in which a customer may return a defective product in exchange for a
functioning product shall be evaluated in accordance with the guidance on
warranties in paragraphs B28–B33
Warranties
B28 It is common for an entity to provide (in accordance with the contract the law
or the entity’s customary business practices) a warranty in connection with the
sale of a product (whether a good or service) The nature of a warranty can vary
significantly across industries and contracts Some warranties provide a
customer with assurance that the related product will function as the parties
intended because it complies with agreedupon specifications Other warranties
provide the customer with a service in addition to the assurance that the
product complies with agreedupon specifications
B29 If a customer has the option to purchase a warranty separately (for example
because the warranty is priced or negotiated separately) the warranty is a
distinct service because the entity promises to provide the service to the
customer in addition to the product that has the functionality described in the
contract In those circumstances an entity shall account for the promised
warranty as a performance obligation in accordance with paragraphs 22–30 and
allocate a portion of the transaction price to that performance obligation in
accordance with paragraphs 73–86
B30 If a customer does not have the option to purchase a warranty separately an
entity shall account for the warranty in accordance with IAS 37 Provisions
Contingent Liabilities and Contingent Assets unless the promised warranty or a part
of the promised warranty provides the customer with a service in addition to
the assurance that the product complies with agreedupon specifications
B31 In assessing whether a warranty provides a customer with a service in addition
to the assurance that the product complies with agreedupon specifications an
entity shall consider factors such as
IFRS 15
IFRS FoundationA716(a) Whether the warranty is required by law—if the entity is required by law
to provide a warranty the existence of that law indicates that the
promised warranty is not a performance obligation because such
requirements typically exist to protect customers from the risk of
purchasing defective products
(b) The length of the warranty coverage period—the longer the coverage
period the more likely it is that the promised warranty is a performance
obligation because it is more likely to provide a service in addition to the
assurance that the product complies with agreedupon specifications
(c) The nature of the tasks that the entity promises to perform—if it is
necessary for an entity to perform specified tasks to provide the
assurance that a product complies with agreedupon specifications (for
example a return shipping service for a defective product) then those
tasks likely do not give rise to a performance obligation
B32 If a warranty or a part of a warranty provides a customer with a service in
addition to the assurance that the product complies with agreedupon
specifications the promised service is a performance obligation Therefore an
entity shall allocate the transaction price to the product and the service If an
entity promises both an assurancetype warranty and a servicetype warranty but
cannot reasonably account for them separately the entity shall account for both
of the warranties together as a single performance obligation
B33 A law that requires an entity to pay compensation if its products cause harm or
damage does not give rise to a performance obligation For example a
manufacturer might sell products in a jurisdiction in which the law holds the
manufacturer liable for any damages (for example to personal property) that
might be caused by a consumer using a product for its intended purpose
Similarly an entity’s promise to indemnify the customer for liabilities and
damages arising from claims of patent copyright trademark or other
infringement by the entity’s products does not give rise to a performance
obligation The entity shall account for such obligations in accordance with
IAS 37
Principal versus agent considerations
B34 When another party is involved in providing goods or services to a customer the
entity shall determine whether the nature of its promise is a performance
obligation to provide the specified goods or services itself (ie the entity is a
principal) or to arrange for the other party to provide those goods or services
(ie the entity is an agent)
B35 An entity is a principal if the entity controls a promised good or service before
the entity transfers the good or service to a customer However an entity is not
necessarily acting as a principal if the entity obtains legal title of a product only
momentarily before legal title is transferred to a customer An entity that is a
principal in a contract may satisfy a performance obligation by itself or it may
engage another party (for example a subcontractor) to satisfy some or all of a
performance obligation on its behalf When an entity that is a principal satisfies
IFRS 15
IFRS Foundation A717a performance obligation the entity recognises revenue in the gross amount of
consideration to which it expects to be entitled in exchange for those goods or
services transferred
B36 An entity is an agent if the entity’s performance obligation is to arrange for the
provision of goods or services by another party When an entity that is an agent
satisfies a performance obligation the entity recognises revenue in the amount
of any fee or commission to which it expects to be entitled in exchange for
arranging for the other party to provide its goods or services An entity’s fee or
commission might be the net amount of consideration that the entity retains
after paying the other party the consideration received in exchange for the
goods or services to be provided by that party
B37 Indicators that an entity is an agent (and therefore does not control the good or
service before it is provided to a customer) include the following
(a) another party is primarily responsible for fulfilling the contract
(b) the entity does not have inventory risk before or after the goods have
been ordered by a customer during shipping or on return
(c) the entity does not have discretion in establishing prices for the other
party’s goods or services and therefore the benefit that the entity can
receive from those goods or services is limited
(d) the entity’s consideration is in the form of a commission and
(e) the entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party’s goods or services
B38 If another entity assumes the entity’s performance obligations and contractual
rights in the contract so that the entity is no longer obliged to satisfy the
performance obligation to transfer the promised good or service to the customer
(ie the entity is no longer acting as the principal) the entity shall not recognise
revenue for that performance obligation Instead the entity shall evaluate
whether to recognise revenue for satisfying a performance obligation to obtain a
contract for the other party (ie whether the entity is acting as an agent)
Customer options for additional goods or services
B39 Customer options to acquire additional goods or services for free or at a discount
come in many forms including sales incentives customer award credits (or
points) contract renewal options or other discounts on future goods or services
B40 If in a contract an entity grants a customer the option to acquire additional
goods or services that option gives rise to a performance obligation in the
contract only if the option provides a material right to the customer that it
would not receive without entering into that contract (for example a discount
that is incremental to the range of discounts typically given for those goods or
services to that class of customer in that geographical area or market) If the
option provides a material right to the customer the customer in effect pays the
entity in advance for future goods or services and the entity recognises revenue
when those future goods or services are transferred or when the option expires
IFRS 15
IFRS FoundationA718B41 If a customer has the option to acquire an additional good or service at a price
that would reflect the standalone selling price for that good or service that
option does not provide the customer with a material right even if the option
can be exercised only by entering into a previous contract In those cases the
entity has made a marketing offer that it shall account for in accordance with
this Standard only when the customer exercises the option to purchase the
additional goods or services
B42 Paragraph 74 requires an entity to allocate the transaction price to performance
obligations on a relative standalone selling price basis If the standalone selling
price for a customer’s option to acquire additional goods or services is not
directly observable an entity shall estimate it That estimate shall reflect the
discount that the customer would obtain when exercising the option adjusted
for both of the following
(a) any discount that the customer could receive without exercising the
option and
(b) the likelihood that the option will be exercised
B43 If a customer has a material right to acquire future goods or services and those
goods or services are similar to the original goods or services in the contract and
are provided in accordance with the terms of the original contract then an
entity may as a practical alternative to estimating the standalone selling price
of the option allocate the transaction price to the optional goods or services by
reference to the goods or services expected to be provided and the corresponding
expected consideration Typically those types of options are for contract
renewals
Customers’ unexercised rights
B44 In accordance with paragraph 106 upon receipt of a prepayment from a
customer an entity shall recognise a contract liability in the amount of the
prepayment for its performance obligation to transfer or to stand ready to
transfer goods or services in the future An entity shall derecognise that
contract liability (and recognise revenue) when it transfers those goods or
services and therefore satisfies its performance obligation
B45 A customer’s nonrefundable prepayment to an entity gives the customer a right
to receive a good or service in the future (and obliges the entity to stand ready to
transfer a good or service) However customers may not exercise all of their
contractual rights Those unexercised rights are often referred to as breakage
B46 If an entity expects to be entitled to a breakage amount in a contract liability
the entity shall recognise the expected breakage amount as revenue in
proportion to the pattern of rights exercised by the customer If an entity does
not expect to be entitled to a breakage amount the entity shall recognise the
expected breakage amount as revenue when the likelihood of the customer
exercising its remaining rights becomes remote To determine whether an
entity expects to be entitled to a breakage amount the entity shall consider the
requirements in paragraphs 56–58 on constraining estimates of variable
consideration
IFRS 15
IFRS Foundation A719B47 An entity shall recognise a liability (and not revenue) for any consideration
received that is attributable to a customer’s unexercised rights for which the
entity is required to remit to another party for example a government entity in
accordance with applicable unclaimed property laws
Nonrefundable upfront fees (and some related costs)
B48 In some contracts an entity charges a customer a nonrefundable upfront fee at
or near contract inception Examples include joining fees in health club
membership contracts activation fees in telecommunication contracts setup
fees in some services contracts and initial fees in some supply contracts
B49 To identify performance obligations in such contracts an entity shall assess
whether the fee relates to the transfer of a promised good or service In many
cases even though a nonrefundable upfront fee relates to an activity that the
entity is required to undertake at or near contract inception to fulfil the
contract that activity does not result in the transfer of a promised good or
service to the customer (see paragraph 25) Instead the upfront fee is an
advance payment for future goods or services and therefore would be
recognised as revenue when those future goods or services are provided The
revenue recognition period would extend beyond the initial contractual period
if the entity grants the customer the option to renew the contract and that
option provides the customer with a material right as described in
paragraph B40
B50 If the nonrefundable upfront fee relates to a good or service the entity shall
evaluate whether to account for the good or service as a separate performance
obligation in accordance with paragraphs 22–30
B51 An entity may charge a nonrefundable fee in part as compensation for costs
incurred in setting up a contract (or other administrative tasks as described in
paragraph 25) If those setup activities do not satisfy a performance obligation
the entity shall disregard those activities (and related costs) when measuring
progress in accordance with paragraph B19 That is because the costs of setup
activities do not depict the transfer of services to the customer The entity shall
assess whether costs incurred in setting up a contract have resulted in an asset
that shall be recognised in accordance with paragraph 95
Licensing
B52 A licence establishes a customer’s rights to the intellectual property of an entity
Licences of intellectual property may include but are not limited to any of the
following
(a) software and technology
(b) motion pictures music and other forms of media and entertainment
(c) franchises and
(d) patents trademarks and copyrights
B53 In addition to a promise to grant a licence to a customer an entity may also
promise to transfer other goods or services to the customer Those promises may
be explicitly stated in the contract or implied by an entity’s customary business
IFRS 15
IFRS FoundationA720practices published policies or specific statements (see paragraph 24) As with
other types of contracts when a contract with a customer includes a promise to
grant a licence in addition to other promised goods or services an entity applies
paragraphs 22–30 to identify each of the performance obligations in the
contract
B54 If the promise to grant a licence is not distinct from other promised goods or
services in the contract in accordance with paragraphs 26–30 an entity shall
account for the promise to grant a licence and those other promised goods or
services together as a single performance obligation Examples of licences that
are not distinct from other goods or services promised in the contract include
the following
(a) a licence that forms a component of a tangible good and that is integral
to the functionality of the good and
(b) a licence that the customer can benefit from only in conjunction with a
related service (such as an online service provided by the entity that
enables by granting a licence the customer to access content)
B55 If the licence is not distinct an entity shall apply paragraphs 31–38 to determine
whether the performance obligation (which includes the promised licence) is a
performance obligation that is satisfied over time or satisfied at a point in time
B56 If the promise to grant the licence is distinct from the other promised goods or
services in the contract and therefore the promise to grant the licence is a
separate performance obligation an entity shall determine whether the licence
transfers to a customer either at a point in time or over time In making this
determination an entity shall consider whether the nature of the entity’s
promise in granting the licence to a customer is to provide the customer with
either
(a) a right to access the entity’s intellectual property as it exists throughout
the licence period or
(b) a right to use the entity’s intellectual property as it exists at the point in
time at which the licence is granted
Determining the nature of the entity’s promise
B57 To determine whether an entity’s promise to grant a licence provides a customer
with either a right to access an entity’s intellectual property or a right to use an
entity’s intellectual property an entity shall consider whether a customer can
direct the use of and obtain substantially all of the remaining benefits from a
licence at the point in time at which the licence is granted A customer cannot
direct the use of and obtain substantially all of the remaining benefits from a
licence at the point in time at which the licence is granted if the intellectual
property to which the customer has rights changes throughout the licence
period The intellectual property will change (and thus affect the entity’s
assessment of when the customer controls the licence) when the entity
continues to be involved with its intellectual property and the entity undertakes
activities that significantly affect the intellectual property to which the
customer has rights In these cases the licence provides the customer with a
right to access the entity’s intellectual property (see paragraph B58) In contrast
IFRS 15
IFRS Foundation A721a customer can direct the use of and obtain substantially all of the remaining
benefits from the licence at the point in time at which the licence is granted if
the intellectual property to which the customer has rights will not change (see
paragraph B61) In those cases any activities undertaken by the entity merely
change its own asset (ie the underlying intellectual property) which may affect
the entity’s ability to provide future licences however those activities would not
affect the determination of what the licence provides or what the customer
controls
B58 The nature of an entity’s promise in granting a licence is a promise to provide a
right to access the entity’s intellectual property if all of the following criteria are
met
(a) the contract requires or the customer reasonably expects that the entity
will undertake activities that significantly affect the intellectual property
to which the customer has rights (see paragraph B59)
(b) the rights granted by the licence directly expose the customer to any
positive or negative effects of the entity’s activities identified in
paragraph B58(a) and
(c) those activities do not result in the transfer of a good or a service to the
customer as those activities occur (see paragraph 25)
B59 Factors that may indicate that a customer could reasonably expect that an entity
will undertake activities that significantly affect the intellectual property
include the entity’s customary business practices published policies or specific
statements Although not determinative the existence of a shared economic
interest (for example a salesbased royalty) between the entity and the customer
related to the intellectual property to which the customer has rights may also
indicate that the customer could reasonably expect that the entity will
undertake such activities
B60 If the criteria in paragraph B58 are met an entity shall account for the promise
to grant a licence as a performance obligation satisfied over time because the
customer will simultaneously receive and consume the benefit from the entity’s
performance of providing access to its intellectual property as the performance
occurs (see paragraph 35(a)) An entity shall apply paragraphs 39–45 to select an
appropriate method to measure its progress towards complete satisfaction of
that performance obligation to provide access
B61 If the criteria in paragraph B58 are not met the nature of an entity’s promise is
to provide a right to use the entity’s intellectual property as that intellectual
property exists (in terms of form and functionality) at the point in time at which
the licence is granted to the customer This means that the customer can direct
the use of and obtain substantially all of the remaining benefits from the
licence at the point in time at which the licence transfers An entity shall
account for the promise to provide a right to use the entity’s intellectual
property as a performance obligation satisfied at a point in time An entity shall
apply paragraph 38 to determine the point in time at which the licence transfers
to the customer However revenue cannot be recognised for a licence that
provides a right to use the entity’s intellectual property before the beginning of
the period during which the customer is able to use and benefit from the
IFRS 15
IFRS FoundationA722licence For example if a software licence period begins before an entity
provides (or otherwise makes available) to the customer a code that enables the
customer to immediately use the software the entity would not recognise
revenue before that code has been provided (or otherwise made available)
B62 An entity shall disregard the following factors when determining whether a
licence provides a right to access the entity’s intellectual property or a right to
use the entity’s intellectual property
(a) Restrictions of time geographical region or use—those restrictions define
the attributes of the promised licence rather than define whether the
entity satisfies its performance obligation at a point in time or over time
(b) Guarantees provided by the entity that it has a valid patent to
intellectual property and that it will defend that patent from
unauthorised use—a promise to defend a patent right is not a
performance obligation because the act of defending a patent protects
the value of the entity’s intellectual property assets and provides
assurance to the customer that the licence transferred meets the
specifications of the licence promised in the contract
Salesbased or usagebased royalties
B63 Notwithstanding the requirements in paragraphs 56–59 an entity shall
recognise revenue for a salesbased or usagebased royalty promised in exchange
for a licence of intellectual property only when (or as) the later of the following
events occurs
(a) the subsequent sale or usage occurs and
(b) the performance obligation to which some or all of the salesbased or
usagebased royalty has been allocated has been satisfied (or partially
satisfied)
Repurchase agreements
B64 A repurchase agreement is a contract in which an entity sells an asset and also
promises or has the option (either in the same contract or in another contract)
to repurchase the asset The repurchased asset may be the asset that was
originally sold to the customer an asset that is substantially the same as that
asset or another asset of which the asset that was originally sold is a component
B65 Repurchase agreements generally come in three forms
(a) an entity’s obligation to repurchase the asset (a forward)
(b) an entity’s right to repurchase the asset (a call option) and
(c) an entity’s obligation to repurchase the asset at the customer’s request
(a put option)
A forward or a call option
B66 If an entity has an obligation or a right to repurchase the asset (a forward or a
call option) a customer does not obtain control of the asset because the
customer is limited in its ability to direct the use of and obtain substantially all
IFRS 15
IFRS Foundation A723of the remaining benefits from the asset even though the customer may have
physical possession of the asset Consequently the entity shall account for the
contract as either of the following
(a) a lease in accordance with IFRS 16 Leases if the entity can or must
repurchase the asset for an amount that is less than the original selling
price of the asset unless the contract is part of a sale and leaseback
transaction If the contract is part of a sale and leaseback transaction
the entity shall continue to recognise the asset and shall recognise a
financial liability for any consideration received from the customer The
entity shall account for the financial liability in accordance with IFRS 9
or
(b) a financing arrangement in accordance with paragraph B68 if the entity
can or must repurchase the asset for an amount that is equal to or more
than the original selling price of the asset
B67 When comparing the repurchase price with the selling price an entity shall
consider the time value of money
B68 If the repurchase agreement is a financing arrangement the entity shall
continue to recognise the asset and also recognise a financial liability for any
consideration received from the customer The entity shall recognise the
difference between the amount of consideration received from the customer and
the amount of consideration to be paid to the customer as interest and if
applicable as processing or holding costs (for example insurance)
B69 If the option lapses unexercised an entity shall derecognise the liability and
recognise revenue
A put option
B70 If an entity has an obligation to repurchase the asset at the customer’s request
(a put option) at a price that is lower than the original selling price of the asset
the entity shall consider at contract inception whether the customer has a
significant economic incentive to exercise that right The customer’s exercising
of that right results in the customer effectively paying the entity consideration
for the right to use a specified asset for a period of time Therefore if the
customer has a significant economic incentive to exercise that right the entity
shall account for the agreement as a lease in accordance with IFRS 16 unless the
contract is part of a sale and leaseback transaction If the contract is part of a
sale and leaseback transaction the entity shall continue to recognise the asset
and shall recognise a financial liability for any consideration received from the
customer The entity shall account for the financial liability in accordance with
IFRS 9
B71 To determine whether a customer has a significant economic incentive to
exercise its right an entity shall consider various factors including the
relationship of the repurchase price to the expected market value of the asset at
the date of the repurchase and the amount of time until the right expires For
example if the repurchase price is expected to significantly exceed the market
value of the asset this may indicate that the customer has a significant
economic incentive to exercise the put option
IFRS 15
IFRS FoundationA724B72 If the customer does not have a significant economic incentive to exercise its
right at a price that is lower than the original selling price of the asset the entity
shall account for the agreement as if it were the sale of a product with a right of
return as described in paragraphs B20–B27
B73 If the repurchase price of the asset is equal to or greater than the original selling
price and is more than the expected market value of the asset the contract is in
effect a financing arrangement and therefore shall be accounted for as
described in paragraph B68
B74 If the repurchase price of the asset is equal to or greater than the original selling
price and is less than or equal to the expected market value of the asset and the
customer does not have a significant economic incentive to exercise its right
then the entity shall account for the agreement as if it were the sale of a product
with a right of return as described in paragraphs B20–B27
B75 When comparing the repurchase price with the selling price an entity shall
consider the time value of money
B76 If the option lapses unexercised an entity shall derecognise the liability and
recognise revenue
Consignment arrangements
B77 When an entity delivers a product to another party (such as a dealer or a
distributor) for sale to end customers the entity shall evaluate whether that
other party has obtained control of the product at that point in time A product
that has been delivered to another party may be held in a consignment
arrangement if that other party has not obtained control of the product
Accordingly an entity shall not recognise revenue upon delivery of a product to
another party if the delivered product is held on consignment
B78 Indicators that an arrangement is a consignment arrangement include but are
not limited to the following
(a) the product is controlled by the entity until a specified event occurs
such as the sale of the product to a customer of the dealer or until a
specified period expires
(b) the entity is able to require the return of the product or transfer the
product to a third party (such as another dealer) and
(c) the dealer does not have an unconditional obligation to pay for the
product (although it might be required to pay a deposit)
Billandhold arrangements
B79 A billandhold arrangement is a contract under which an entity bills a customer
for a product but the entity retains physical possession of the product until it is
transferred to the customer at a point in time in the future For example a
customer may request an entity to enter into such a contract because of the
customer’s lack of available space for the product or because of delays in the
customer’s production schedules
B80 An entity shall determine when it has satisfied its performance obligation to
transfer a product by evaluating when a customer obtains control of that
IFRS 15
IFRS Foundation A725product (see paragraph 38) For some contracts control is transferred either
when the product is delivered to the customer’s site or when the product is
shipped depending on the terms of the contract (including delivery and
shipping terms) However for some contracts a customer may obtain control of
a product even though that product remains in an entity’s physical possession
In that case the customer has the ability to direct the use of and obtain
substantially all of the remaining benefits from the product even though it has
decided not to exercise its right to take physical possession of that product
Consequently the entity does not control the product Instead the entity
provides custodial services to the customer over the customer’s asset
B81 In addition to applying the requirements in paragraph 38 for a customer to
have obtained control of a product in a billandhold arrangement all of the
following criteria must be met
(a) the reason for the billandhold arrangement must be substantive
(for example the customer has requested the arrangement)
(b) the product must be identified separately as belonging to the customer
(c) the product currently must be ready for physical transfer to the
customer and
(d) the entity cannot have the ability to use the product or to direct it to
another customer
B82 If an entity recognises revenue for the sale of a product on a billandhold basis
the entity shall consider whether it has remaining performance obligations
(for example for custodial services) in accordance with paragraphs 22–30 to
which the entity shall allocate a portion of the transaction price in accordance
with paragraphs 73–86
Customer acceptance
B83 In accordance with paragraph 38(e) a customer’s acceptance of an asset may
indicate that the customer has obtained control of the asset Customer
acceptance clauses allow a customer to cancel a contract or require an entity to
take remedial action if a good or service does not meet agreedupon
specifications An entity shall consider such clauses when evaluating when a
customer obtains control of a good or service
B84 If an entity can objectively determine that control of a good or service has been
transferred to the customer in accordance with the agreedupon specifications
in the contract then customer acceptance is a formality that would not affect
the entity’s determination of when the customer has obtained control of the
good or service For example if the customer acceptance clause is based on
meeting specified size and weight characteristics an entity would be able to
determine whether those criteria have been met before receiving confirmation
of the customer’s acceptance The entity’s experience with contracts for similar
goods or services may provide evidence that a good or service provided to the
customer is in accordance with the agreedupon specifications in the contract If
revenue is recognised before customer acceptance the entity still must consider
whether there are any remaining performance obligations (for example
installation of equipment) and evaluate whether to account for them separately
IFRS 15
IFRS FoundationA726B85 However if an entity cannot objectively determine that the good or service
provided to the customer is in accordance with the agreedupon specifications in
the contract then the entity would not be able to conclude that the customer
has obtained control until the entity receives the customer’s acceptance That is
because in that circumstance the entity cannot determine that the customer has
the ability to direct the use of and obtain substantially all of the remaining
benefits from the good or service
B86 If an entity delivers products to a customer for trial or evaluation purposes and
the customer is not committed to pay any consideration until the trial period
lapses control of the product is not transferred to the customer until either the
customer accepts the product or the trial period lapses
Disclosure of disaggregated revenue
B87 Paragraph 114 requires an entity to disaggregate revenue from contracts with
customers into categories that depict how the nature amount timing and
uncertainty of revenue and cash flows are affected by economic factors
Consequently the extent to which an entity’s revenue is disaggregated for the
purposes of this disclosure depends on the facts and circumstances that pertain
to the entity’s contracts with customers Some entities may need to use more
than one type of category to meet the objective in paragraph 114 for
disaggregating revenue Other entities may meet the objective by using only one
type of category to disaggregate revenue
B88 When selecting the type of category (or categories) to use to disaggregate
revenue an entity shall consider how information about the entity’s revenue
has been presented for other purposes including all of the following
(a) disclosures presented outside the financial statements (for example in
earnings releases annual reports or investor presentations)
(b) information regularly reviewed by the chief operating decision maker
for evaluating the financial performance of operating segments and
(c) other information that is similar to the types of information identified in
paragraph B88(a) and (b) and that is used by the entity or users of the
entity’s financial statements to evaluate the entity’s financial
performance or make resource allocation decisions
B89 Examples of categories that might be appropriate include but are not limited to
all of the following
(a) type of good or service (for example major product lines)
(b) geographical region (for example country or region)
(c) market or type of customer (for example government and
nongovernment customers)
(d) type of contract (for example fixedprice and timeandmaterials
contracts)
(e) contract duration (for example shortterm and longterm contracts)
IFRS 15
IFRS Foundation A727(f) timing of transfer of goods or services (for example revenue from goods
or services transferred to customers at a point in time and revenue from
goods or services transferred over time) and
(g) sales channels (for example goods sold directly to consumers and goods
sold through intermediaries)
IFRS 15
IFRS FoundationA728Appendix C
Effective date and transition
This appendix is an integral part of the Standard and has the same authority as the other parts of
the Standard
Effective date
C1 An entity shall apply this Standard for annual reporting periods beginning on or
after 1 January 2018 Earlier application is permitted If an entity applies this
Standard earlier it shall disclose that fact
C1A IFRS 16 Leases issued in January 2016 amended paragraphs 5 97 B66 and B70
An entity shall apply those amendments when it applies IFRS 16
Transition
C2 For the purposes of the transition requirements in paragraphs C3–C8
(a) the date of initial application is the start of the reporting period in
which an entity first applies this Standard and
(b) a completed contract is a contract for which the entity has transferred all
of the goods or services identified in accordance with IAS 11 Construction
Contracts IAS 18 Revenue and related Interpretations
C3 An entity shall apply this Standard using one of the following two methods
(a) retrospectively to each prior reporting period presented in accordance
with IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
subject to the expedients in paragraph C5 or
(b) retrospectively with the cumulative effect of initially applying this
Standard recognised at the date of initial application in accordance with
paragraphs C7–C8
C4 Notwithstanding the requirements of paragraph 28 of IAS 8 when this Standard
is first applied an entity need only present the quantitative information
required by paragraph 28(f) of IAS 8 for the annual period immediately
preceding the first annual period for which this Standard is applied (the
immediately preceding period’) and only if the entity applies this Standard
retrospectively in accordance with paragraph C3(a) An entity may also present
this information for the current period or for earlier comparative periods but is
not required to do so
C5 An entity may use one or more of the following practical expedients when
applying this Standard retrospectively in accordance with paragraph C3(a)
(a) for completed contracts an entity need not restate contracts that begin
and end within the same annual reporting period
(b) for completed contracts that have variable consideration an entity may
use the transaction price at the date the contract was completed rather
than estimating variable consideration amounts in the comparative
reporting periods and
IFRS 15
IFRS Foundation A729(c) for all reporting periods presented before the date of initial application
an entity need not disclose the amount of the transaction price allocated
to the remaining performance obligations and an explanation of when
the entity expects to recognise that amount as revenue (see
paragraph 120)
C6 For any of the practical expedients in paragraph C5 that an entity uses the
entity shall apply that expedient consistently to all contracts within all
reporting periods presented In addition the entity shall disclose all of the
following information
(a) the expedients that have been used and
(b) to the extent reasonably possible a qualitative assessment of the
estimated effect of applying each of those expedients
C7 If an entity elects to apply this Standard retrospectively in accordance with
paragraph C3(b) the entity shall recognise the cumulative effect of initially
applying this Standard as an adjustment to the opening balance of retained
earnings (or other component of equity as appropriate) of the annual reporting
period that includes the date of initial application Under this transition
method an entity shall apply this Standard retrospectively only to contracts that
are not completed contracts at the date of initial application (for example
1 January 2018 for an entity with a 31 December yearend)
C8 For reporting periods that include the date of initial application an entity shall
provide both of the following additional disclosures if this Standard is applied
retrospectively in accordance with paragraph C3(b)
(a) the amount by which each financial statement line item is affected in
the current reporting period by the application of this Standard as
compared to IAS 11 IAS 18 and related Interpretations that were in effect
before the change and
(b) an explanation of the reasons for significant changes identified in C8(a)
References to IFRS 9
C9 If an entity applies this Standard but does not yet apply IFRS 9 Financial
Instruments any reference in this Standard to IFRS 9 shall be read as a reference
to IAS 39 Financial Instruments Recognition and Measurement
Withdrawal of other Standards
C10 This Standard supersedes the following Standards
(a) IAS 11 Construction Contracts
(b) IAS 18 Revenue
(c) IFRIC 13 Customer Loyalty Programmes
(d) IFRIC 15 Agreements for the Construction of Real Estate
(e) IFRIC 18 Transfers of Assets from Customers and
(f) SIC31 Revenue—Barter Transactions Involving Advertising Services
IFRS 15
IFRS FoundationA730Appendix D
Amendments to other Standards
This Appendix describes the amendments to other Standards that the IASB made when it finalised
IFRS 15 An entity shall apply the amendments for annual periods beginning on or after 1 January
2017 If an entity applies IFRS 15 for an earlier period these amendments shall be applied for that
earlier period
*****
The amendments contained in this appendix when this Standard was issued in 2014 have been
incorporated into the text of the relevant Standards included in this volume
IFRS 15
IFRS Foundation A731IFRS Standard 16
Leases
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 17 Leases
which had originally been issued by the International Accounting Standards Committee
(IASC) in December 1997 IAS 17 Leases replaced IAS 17 Accounting for Leases that was issued in
September 1982
In April 2001 the IASB adopted SIC15 Operating Leases—Incentives which had originally been
issued by the Standing Interpretations Committee of the IASC in December 1998
In December 2001 the IASB issued SIC27 Evaluating the Substance of Transactions Involving the
Legal Form of a Lease SIC27 had originally been developed by the Standing Interpretations
Committee of the IASC to provide guidance on determining amongst other things whether
an arrangement that involves the legal form of a lease meet the definition of a lease under
IAS 17
In December 2003 the IASB issued a revised IAS 17 as part of its initial agenda of technical
projects
In December 2004 the IASB issued IFRIC 4 Determining whether an Arrangement contains a Lease
The Interpretation was developed by the Interpretations Committee to provide guidance on
determining whether transactions that do not take the legal form of a lease but convey the
right to use an asset in return for a payment or series of payments are or contain leases
that should be accounted for in accordance with IAS 17
In January 2016 the IASB issued IFRS 16 Leases IFRS 16 replaces IAS 17 IFRIC 4 SIC15 and
SIC27 IFRS 16 sets out the principles for the recognition measurement presentation and
disclosure of leases
IFRS 16
IFRS Foundation A733CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 16
LEASES
INTRODUCTION
OBJECTIVE 1
SCOPE 3
RECOGNITION EXEMPTIONS 5
IDENTIFYING A LEASE 9
Separating components of a contract 12
LEASE TERM 18
LESSEE 22
Recognition 22
Measurement 22
Presentation 47
Disclosure 51
LESSOR 61
Classification of leases 61
Finance leases 67
Operating leases 81
Disclosure 89
SALE AND LEASEBACK TRANSACTIONS 98
Assessing whether the transfer of the asset is a sale 99
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other Standards
IFRS 16
IFRS FoundationA734International Financial Reporting Standard 16 Leases (IFRS 16) is set out in paragraphs
1–103 and Appendices A–D All the paragraphs have equal authority Paragraphs in
bold type state the main principles Terms defined in Appendix A are in italics the first
time that they appear in the Standard Definitions of other terms are given in the
Glossary for International Financial Reporting Standards The Standard should be read
in the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 16
IFRS Foundation A735Introduction
Overview
IN1 International Financial Reporting Standard 16 Leases (IFRS 16) sets out the
principles for the recognition measurement presentation and disclosure of
leases The objective is to ensure that lessees and lessors provide relevant
information in a manner that faithfully represents those transactions This
information gives a basis for users of financial statements to assess the effect
that leases have on the financial position financial performance and cash flows
of the entity
IN2 IFRS 16 is effective for annual periods beginning on or after 1 January 2019
Earlier application is permitted for entities that apply IFRS 15 Revenue from
Contracts with Customers at or before the date of initial application of IFRS 16
IN3 IFRS 16 supersedes
(a) IAS 17 Leases
(b) IFRIC 4 Determining whether an Arrangement contains a Lease
(c) SIC15 Operating Leases—Incentives and
(d) SIC27 Evaluating the Substance of Transactions Involving the Legal Form of a
Lease
Reasons for issuing IFRS 16
IN4 Leasing is an important activity for many entities It is a means of gaining access
to assets of obtaining finance and of reducing an entity’s exposure to the risks
of asset ownership The prevalence of leasing means that it is important that
users of financial statements have a complete and understandable picture of an
entity’s leasing activities
IN5 The previous accounting model for leases required lessees and lessors to classify
their leases as either finance leases or operating leases and account for those two
types of leases differently That model was criticised for failing to meet the
needs of users of financial statements because it did not always provide a
faithful representation of leasing transactions In particular it did not require
lessees to recognise assets and liabilities arising from operating leases
IN6 Accordingly the International Accounting Standards Board (IASB) and the US
national standardsetter the Financial Accounting Standards Board (FASB)
initiated a joint project to develop a new approach to lease accounting that
requires a lessee to recognise assets and liabilities for the rights and obligations
created by leases This approach will result in a more faithful representation of
a lessee’s assets and liabilities and together with enhanced disclosures will
provide greater transparency of a lessee’s financial leverage and capital
employed
IN7 Both Boards decided that a lessee should be required to recognise assets and
liabilities for all leases (with limited exceptions) and both Boards have defined
IFRS 16
IFRS FoundationA736leases in the same way The Boards reached similar decisions regarding the
measurement of lease liabilities and how to account for leases that were
formerly classified as finance leases In addition both Boards decided not to
substantially change lessor accounting
IN8 However the Boards reached different decisions for leases that were formerly
classified as operating leases with respect to the recognition of lease expenses
and the reporting of leaserelated cash flows The IASB decided to adopt a single
lessee accounting model whereby a lessee accounts for all leases in the same
way The FASB decided to adopt a dual lessee accounting model classifying
leases in a similar manner to the previous requirements in US Generally
Accepted Accounting Principles (US GAAP) for distinguishing between operating
leases and capital leases and to account for those two types of leases differently
IN9 IFRS 16 completes the IASB’s project to improve the financial reporting of leases
Main features
Lessee accounting
IN10 IFRS 16 introduces a single lessee accounting model and requires a lessee to
recognise assets and liabilities for all leases with a term of more than 12 months
unless the underlying asset is of low value A lessee is required to recognise a
rightofuse asset representing its right to use the underlying leased asset and a
lease liability representing its obligation to make lease payments
IN11 A lessee measures rightofuse assets similarly to other nonfinancial assets (such
as property plant and equipment) and lease liabilities similarly to other
financial liabilities As a consequence a lessee recognises depreciation of the
rightofuse asset and interest on the lease liability and also classifies cash
repayments of the lease liability into a principal portion and an interest portion
and presents them in the statement of cash flows applying IAS 7 Statement of Cash
Flows
IN12 Assets and liabilities arising from a lease are initially measured on a present
value basis The measurement includes noncancellable lease payments
(including inflationlinked payments) and also includes payments to be made in
optional periods if the lessee is reasonably certain to exercise an option to
extend the lease or not to exercise an option to terminate the lease
IN13 IFRS 16 contains disclosure requirements for lessees Lessees will need to apply
judgement in deciding upon the information to disclose to meet the objective of
providing a basis for users of financial statements to assess the effect that leases
have on the financial position financial performance and cash flows of the
lessee
Lessor accounting
IN14 IFRS 16 substantially carries forward the lessor accounting requirements in
IAS 17 Accordingly a lessor continues to classify its leases as operating leases or
finance leases and to account for those two types of leases differently
IFRS 16
IFRS Foundation A737IN15 IFRS 16 also requires enhanced disclosures to be provided by lessors that will
improve information disclosed about a lessor’s risk exposure particularly to
residual value risk
IFRS 16
IFRS FoundationA738International Financial Reporting Standard 16
Leases
Objective
1 This Standard sets out the principles for the recognition measurement
presentation and disclosure of leases The objective is to ensure that
lessees and lessors provide relevant information in a manner that
faithfully represents those transactions This information gives a basis
for users of financial statements to assess the effect that leases have on
the financial position financial performance and cash flows of an entity
2 An entity shall consider the terms and conditions of contracts and all relevant
facts and circumstances when applying this Standard An entity shall apply this
Standard consistently to contracts with similar characteristics and in similar
circumstances
Scope
3 An entity shall apply this Standard to all leases including leases of rightofuse
assets in a sublease except for
(a) leases to explore for or use minerals oil natural gas and similar
nonregenerative resources
(b) leases of biological assets within the scope of IAS 41 Agriculture held by a
lessee
(c) service concession arrangements within the scope of IFRIC 12 Service
Concession Arrangements
(d) licences of intellectual property granted by a lessor within the scope of
IFRS 15 Revenue from Contracts with Customers and
(e) rights held by a lessee under licensing agreements within the scope of
IAS 38 Intangible Assets for such items as motion picture films video
recordings plays manuscripts patents and copyrights
4 A lessee may but is not required to apply this Standard to leases of intangible
assets other than those described in paragraph 3(e)
Recognition exemptions (paragraphs B3–B8)
5 A lessee may elect not to apply the requirements in paragraphs 22–49 to
(a) shortterm leases and
(b) leases for which the underlying asset is of low value (as described in
paragraphs B3–B8)
6 If a lessee elects not to apply the requirements in paragraphs 22–49 to either
shortterm leases or leases for which the underlying asset is of low value the
lessee shall recognise the lease payments associated with those leases as an
IFRS 16
IFRS Foundation A739expense on either a straightline basis over the lease term or another systematic
basis The lessee shall apply another systematic basis if that basis is more
representative of the pattern of the lessee’s benefit
7 If a lessee accounts for shortterm leases applying paragraph 6 the lessee shall
consider the lease to be a new lease for the purposes of this Standard if
(a) there is a lease modificationor
(b) there is any change in the lease term (for example the lessee exercises an
option not previously included in its determination of the lease term)
8 The election for shortterm leases shall be made by class of underlying asset to
which the right of use relates A class of underlying asset is a grouping of
underlying assets of a similar nature and use in an entity’s operations The
election for leases for which the underlying asset is of low value can be made on
a leasebylease basis
Identifying a lease (paragraphs B9–B33)
9 At inception of a contract an entity shall assess whether the contract is
or contains a lease A contract is or contains a lease if the contract
conveys the right to control the use of an identified asset for a period of
time in exchange for consideration Paragraphs B9–B31 set out guidance
on the assessment of whether a contract is or contains a lease
10 A period of time may be described in terms of the amount of use of an identified
asset (for example the number of production units that an item of equipment
will be used to produce)
11 An entity shall reassess whether a contract is or contains a lease only if the
terms and conditions of the contract are changed
Separating components of a contract
12 For a contract that is or contains a lease an entity shall account for each lease
component within the contract as a lease separately from nonlease components
of the contract unless the entity applies the practical expedient in
paragraph 15 Paragraphs B32–B33 set out guidance on separating components
of a contract
Lessee
13 For a contract that contains a lease component and one or more additional lease
or nonlease components a lessee shall allocate the consideration in the contract
to each lease component on the basis of the relative standalone price of the
lease component and the aggregate standalone price of the nonlease
components
14 The relative standalone price of lease and nonlease components shall be
determined on the basis of the price the lessor or a similar supplier would
charge an entity for that component or a similar component separately If an
observable standalone price is not readily available the lessee shall estimate the
standalone price maximising the use of observable information
IFRS 16
IFRS FoundationA74015 As a practical expedient a lessee may elect by class of underlying asset not to
separate nonlease components from lease components and instead account for
each lease component and any associated nonlease components as a single lease
component A lessee shall not apply this practical expedient to embedded
derivatives that meet the criteria in paragraph 433 of IFRS 9 Financial
Instruments
16 Unless the practical expedient in paragraph 15 is applied a lessee shall account
for nonlease components applying other applicable Standards
Lessor
17 For a contract that contains a lease component and one or more additional lease
or nonlease components a lessor shall allocate the consideration in the contract
applying paragraphs 73–90 of IFRS 15
Lease term (paragraphs B34–B41)
18 An entity shall determine the lease term as the noncancellable period of a lease
together with both
(a) periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option and
(b) periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option
19 In assessing whether a lessee is reasonably certain to exercise an option to
extend a lease or not to exercise an option to terminate a lease an entity shall
consider all relevant facts and circumstances that create an economic incentive
for the lessee to exercise the option to extend the lease or not to exercise the
option to terminate the lease as described in paragraphs B37–B40
20 A lessee shall reassess whether it is reasonably certain to exercise an extension
option or not to exercise a termination option upon the occurrence of either a
significant event or a significant change in circumstances that
(a) is within the control of the lessee and
(b) affects whether the lessee is reasonably certain to exercise an option not
previously included in its determination of the lease term or not to
exercise an option previously included in its determination of the lease
term (as described in paragraph B41)
21 An entity shall revise the lease term if there is a change in the noncancellable
period of a lease For example the noncancellable period of a lease will change
if
(a) the lessee exercises an option not previously included in the entity’s
determination of the lease term
(b) the lessee does not exercise an option previously included in the entity’s
determination of the lease term
IFRS 16
IFRS Foundation A741(c) an event occurs that contractually obliges the lessee to exercise an option
not previously included in the entity’s determination of the lease term
or
(d) an event occurs that contractually prohibits the lessee from exercising
an option previously included in the entity’s determination of the lease
term
Lessee
Recognition
22 At the commencement date a lessee shall recognise a rightofuse asset
and a lease liability
Measurement
Initial measurement
Initial measurement of the rightofuse asset
23 At the commencement date a lessee shall measure the rightofuse asset
at cost
24 The cost of the rightofuse asset shall comprise
(a) the amount of the initial measurement of the lease liability as described
in paragraph 26
(b) any lease payments made at or before the commencement date less any
lease incentives received
(c) any initial direct costs incurred by the lessee and
(d) an estimate of costs to be incurred by the lessee in dismantling and
removing the underlying asset restoring the site on which it is located
or restoring the underlying asset to the condition required by the terms
and conditions of the lease unless those costs are incurred to produce
inventories The lessee incurs the obligation for those costs either at the
commencement date or as a consequence of having used the underlying
asset during a particular period
25 A lessee shall recognise the costs described in paragraph 24(d) as part of the cost
of the rightofuse asset when it incurs an obligation for those costs A lessee
applies IAS 2 Inventories to costs that are incurred during a particular period as a
consequence of having used the rightofuse asset to produce inventories during
that period The obligations for such costs accounted for applying this Standard
or IAS 2 are recognised and measured applying IAS 37 Provisions Contingent
Liabilities and Contingent Assets
Initial measurement of the lease liability
26 At the commencement date a lessee shall measure the lease liability at
the present value of the lease payments that are not paid at that date The
lease payments shall be discounted using the interest rate implicit in the
IFRS 16
IFRS FoundationA742lease if that rate can be readily determined If that rate cannot be readily
determined the lessee shall use the lessee’s incremental borrowing rate
27 At the commencement date the lease payments included in the measurement of
the lease liability comprise the following payments for the right to use the
underlying asset during the lease term that are not paid at the commencement
date
(a) fixed payments (including insubstance fixed payments as described in
paragraph B42) less any lease incentives receivable
(b) variable lease payments that depend on an index or a rate initially
measured using the index or rate as at the commencement date (as
described in paragraph 28)
(c) amounts expected to be payable by the lessee under residual value
guarantees
(d) the exercise price of a purchase option if the lessee is reasonably certain
to exercise that option (assessed considering the factors described in
paragraphs B37–B40) and
(e) payments of penalties for terminating the lease if the lease term reflects
the lessee exercising an option to terminate the lease
28 Variable lease payments that depend on an index or a rate described in
paragraph 27(b) include for example payments linked to a consumer price
index payments linked to a benchmark interest rate (such as LIBOR) or
payments that vary to reflect changes in market rental rates
Subsequent measurement
Subsequent measurement of the rightofuse asset
29 After the commencement date a lessee shall measure the rightofuse
asset applying a cost model unless it applies either of the measurement
models described in paragraphs 34 and 35
Cost model
30 To apply a cost model a lessee shall measure the rightofuse asset at cost
(a) less any accumulated depreciation and any accumulated impairment
losses and
(b) adjusted for any remeasurement of the lease liability specified in
paragraph 36(c)
31 A lessee shall apply the depreciation requirements in IAS 16 Property Plant and
Equipment in depreciating the rightofuse asset subject to the requirements in
paragraph 32
32 If the lease transfers ownership of the underlying asset to the lessee by the end
of the lease term or if the cost of the rightofuse asset reflects that the lessee will
exercise a purchase option the lessee shall depreciate the rightofuse asset from
the commencement date to the end of the useful life of the underlying asset
IFRS 16
IFRS Foundation A743Otherwise the lessee shall depreciate the rightofuse asset from the
commencement date to the earlier of the end of the useful life of the rightofuse
asset or the end of the lease term
33 A lessee shall apply IAS 36 Impairment of Assets to determine whether the
rightofuse asset is impaired and to account for any impairment loss identified
Other measurement models
34 If a lessee applies the fair value model in IAS 40 Investment Property to its
investment property the lessee shall also apply that fair value model to
rightofuse assets that meet the definition of investment property in IAS 40
35 If rightofuse assets relate to a class of property plant and equipment to which
the lessee applies the revaluation model in IAS 16 a lessee may elect to apply
that revaluation model to all of the rightofuse assets that relate to that class of
property plant and equipment
Subsequent measurement of the lease liability
36 After the commencement date a lessee shall measure the lease liability
by
(a) increasing the carrying amount to reflect interest on the lease
liability
(b) reducing the carrying amount to reflect the lease payments made
and
(c) remeasuring the carrying amount to reflect any reassessment or
lease modifications specified in paragraphs 39–46 or to reflect
revised insubstance fixed lease payments (see paragraph B42)
37 Interest on the lease liability in each period during the lease term shall be the
amount that produces a constant periodic rate of interest on the remaining
balance of the lease liability The periodic rate of interest is the discount rate
described in paragraph 26 or if applicable the revised discount rate described in
paragraph 41 paragraph 43 or paragraph 45(c)
38 After the commencement date a lessee shall recognise in profit or loss unless
the costs are included in the carrying amount of another asset applying other
applicable Standards both
(a) interest on the lease liability and
(b) variable lease payments not included in the measurement of the lease
liability in the period in which the event or condition that triggers those
payments occurs
Reassessment of the lease liability
39 After the commencement date a lessee shall apply paragraphs 40–43 to
remeasure the lease liability to reflect changes to the lease payments A lessee
shall recognise the amount of the remeasurement of the lease liability as an
adjustment to the rightofuse asset However if the carrying amount of the
rightofuse asset is reduced to zero and there is a further reduction in the
IFRS 16
IFRS FoundationA744measurement of the lease liability a lessee shall recognise any remaining
amount of the remeasurement in profit or loss
40 A lessee shall remeasure the lease liability by discounting the revised lease
payments using a revised discount rate if either
(a) there is a change in the lease term as described in paragraphs 20–21 A
lessee shall determine the revised lease payments on the basis of the
revised lease term or
(b) there is a change in the assessment of an option to purchase the
underlying asset assessed considering the events and circumstances
described in paragraphs 20–21 in the context of a purchase option A
lessee shall determine the revised lease payments to reflect the change in
amounts payable under the purchase option
41 In applying paragraph 40 a lessee shall determine the revised discount rate as
the interest rate implicit in the lease for the remainder of the lease term if that
rate can be readily determined or the lessee’s incremental borrowing rate at the
date of reassessment if the interest rate implicit in the lease cannot be readily
determined
42 A lessee shall remeasure the lease liability by discounting the revised lease
payments if either
(a) there is a change in the amounts expected to be payable under a residual
value guarantee A lessee shall determine the revised lease payments to
reflect the change in amounts expected to be payable under the residual
value guarantee
(b) there is a change in future lease payments resulting from a change in an
index or a rate used to determine those payments including for example
a change to reflect changes in market rental rates following a market
rent review The lessee shall remeasure the lease liability to reflect those
revised lease payments only when there is a change in the cash flows (ie
when the adjustment to the lease payments takes effect) A lessee shall
determine the revised lease payments for the remainder of the lease term
based on the revised contractual payments
43 In applying paragraph 42 a lessee shall use an unchanged discount rate unless
the change in lease payments results from a change in floating interest rates In
that case the lessee shall use a revised discount rate that reflects changes in the
interest rate
Lease modifications
44 A lessee shall account for a lease modification as a separate lease if both
(a) the modification increases the scope of the lease by adding the right to
use one or more underlying assets and
(b) the consideration for the lease increases by an amount commensurate
with the standalone price for the increase in scope and any appropriate
adjustments to that standalone price to reflect the circumstances of the
particular contract
IFRS 16
IFRS Foundation A74545 For a lease modification that is not accounted for as a separate lease at the
effective date of the lease modification a lessee shall
(a) allocate the consideration in the modified contract applying paragraphs
13–16
(b) determine the lease term of the modified lease applying paragraphs
18–19 and
(c) remeasure the lease liability by discounting the revised lease payments
using a revised discount rate The revised discount rate is determined as
the interest rate implicit in the lease for the remainder of the lease term
if that rate can be readily determined or the lessee’s incremental
borrowing rate at the effective date of the modification if the interest
rate implicit in the lease cannot be readily determined
46 For a lease modification that is not accounted for as a separate lease the lessee
shall account for the remeasurement of the lease liability by
(a) decreasing the carrying amount of the rightofuse asset to reflect the
partial or full termination of the lease for lease modifications that
decrease the scope of the lease The lessee shall recognise in profit or loss
any gain or loss relating to the partial or full termination of the lease
(b) making a corresponding adjustment to the rightofuse asset for all other
lease modifications
Presentation
47 A lessee shall either present in the statement of financial position or disclose in
the notes
(a) rightofuse assets separately from other assets If a lessee does not
present rightofuse assets separately in the statement of financial
position the lessee shall
(i) include rightofuse assets within the same line item as that
within which the corresponding underlying assets would be
presented if they were owned and
(ii) disclose which line items in the statement of financial position
include those rightofuse assets
(b) lease liabilities separately from other liabilities If the lessee does not
present lease liabilities separately in the statement of financial position
the lessee shall disclose which line items in the statement of financial
position include those liabilities
48 The requirement in paragraph 47(a) does not apply to rightofuse assets that
meet the definition of investment property which shall be presented in the
statement of financial position as investment property
49 In the statement of profit or loss and other comprehensive income a lessee shall
present interest expense on the lease liability separately from the depreciation
charge for the rightofuse asset Interest expense on the lease liability is a
component of finance costs which paragraph 82(b) of IAS 1 Presentation of
IFRS 16
IFRS FoundationA746Financial Statements requires to be presented separately in the statement of profit
or loss and other comprehensive income
50 In the statement of cash flows a lessee shall classify
(a) cash payments for the principal portion of the lease liability within
financing activities
(b) cash payments for the interest portion of the lease liability applying the
requirements in IAS 7 Statement of Cash Flows for interest paid and
(c) shortterm lease payments payments for leases of lowvalue assets and
variable lease payments not included in the measurement of the lease
liability within operating activities
Disclosure
51 The objective of the disclosures is for lessees to disclose information in
the notes that together with the information provided in the statement
of financial position statement of profit or loss and statement of cash
flows gives a basis for users of financial statements to assess the effect
that leases have on the financial position financial performance and cash
flows of the lessee Paragraphs 52–60 specify requirements on how to
meet this objective
52 A lessee shall disclose information about its leases for which it is a lessee in a
single note or separate section in its financial statements However a lessee
need not duplicate information that is already presented elsewhere in the
financial statements provided that the information is incorporated by
crossreference in the single note or separate section about leases
53 A lessee shall disclose the following amounts for the reporting period
(a) depreciation charge for rightofuse assets by class of underlying asset
(b) interest expense on lease liabilities
(c) the expense relating to shortterm leases accounted for applying
paragraph 6 This expense need not include the expense relating to
leases with a lease term of one month or less
(d) the expense relating to leases of lowvalue assets accounted for applying
paragraph 6 This expense shall not include the expense relating to
shortterm leases of lowvalue assets included in paragraph 53(c)
(e) the expense relating to variable lease payments not included in the
measurement of lease liabilities
(f) income from subleasing rightofuse assets
(g) total cash outflow for leases
(h) additions to rightofuse assets
(i) gains or losses arising from sale and leaseback transactions and
(j) the carrying amount of rightofuse assets at the end of the reporting
period by class of underlying asset
IFRS 16
IFRS Foundation A74754 A lessee shall provide the disclosures specified in paragraph 53 in a tabular
format unless another format is more appropriate The amounts disclosed shall
include costs that a lessee has included in the carrying amount of another asset
during the reporting period
55 A lessee shall disclose the amount of its lease commitments for shortterm leases
accounted for applying paragraph 6 if the portfolio of shortterm leases to which
it is committed at the end of the reporting period is dissimilar to the portfolio of
shortterm leases to which the shortterm lease expense disclosed applying
paragraph 53(c) relates
56 If rightofuse assets meet the definition of investment property a lessee shall
apply the disclosure requirements in IAS 40 In that case a lessee is not required
to provide the disclosures in paragraph 53(a) (f) (h) or (j) for those rightofuse
assets
57 If a lessee measures rightofuse assets at revalued amounts applying IAS 16 the
lessee shall disclose the information required by paragraph 77 of IAS 16 for
those rightofuse assets
58 A lessee shall disclose a maturity analysis of lease liabilities applying paragraphs
39 and B11 of IFRS 7 Financial Instruments Disclosures separately from the maturity
analyses of other financial liabilities
59 In addition to the disclosures required in paragraphs 53–58 a lessee shall
disclose additional qualitative and quantitative information about its leasing
activities necessary to meet the disclosure objective in paragraph 51 (as
described in paragraph B48) This additional information may include but is
not limited to information that helps users of financial statements to assess
(a) the nature of the lessee’s leasing activities
(b) future cash outflows to which the lessee is potentially exposed that are
not reflected in the measurement of lease liabilities This includes
exposure arising from
(i) variable lease payments (as described in paragraph B49)
(ii) extension options and termination options (as described in
paragraph B50)
(iii) residual value guarantees (as described in paragraph B51) and
(iv) leases not yet commenced to which the lessee is committed
(c) restrictions or covenants imposed by leases and
(d) sale and leaseback transactions (as described in paragraph B52)
60 A lessee that accounts for shortterm leases or leases of lowvalue assets applying
paragraph 6 shall disclose that fact
Lessor
Classification of leases (paragraphs B53–B58)
61 A lessor shall classify each of its leases as either an operating lease or a
finance lease
IFRS 16
IFRS FoundationA74862 A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incidental to ownership of an underlying asset A lease
is classified as an operating lease if it does not transfer substantially all
the risks and rewards incidental to ownership of an underlying asset
63 Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the contract Examples of
situations that individually or in combination would normally lead to a lease
being classified as a finance lease are
(a) the lease transfers ownership of the underlying asset to the lessee by the
end of the lease term
(b) the lessee has the option to purchase the underlying asset at a price that
is expected to be sufficiently lower than the fair value at the date the
option becomes exercisable for it to be reasonably certain at the inception
date that the option will be exercised
(c) the lease term is for the major part of the economic life of the underlying
asset even if title is not transferred
(d) at the inception date the present value of the lease payments amounts to
at least substantially all of the fair value of the underlying asset and
(e) the underlying asset is of such a specialised nature that only the lessee
can use it without major modifications
64 Indicators of situations that individually or in combination could also lead to a
lease being classified as a finance lease are
(a) if the lessee can cancel the lease the lessor’s losses associated with the
cancellation are borne by the lessee
(b) gains or losses from the fluctuation in the fair value of the residual
accrue to the lessee (for example in the form of a rent rebate equaling
most of the sales proceeds at the end of the lease) and
(c) the lessee has the ability to continue the lease for a secondary period at a
rent that is substantially lower than market rent
65 The examples and indicators in paragraphs 63–64 are not always conclusive If it
is clear from other features that the lease does not transfer substantially all the
risks and rewards incidental to ownership of an underlying asset the lease is
classified as an operating lease For example this may be the case if ownership
of the underlying asset transfers at the end of the lease for a variable payment
equal to its then fair value or if there are variable lease payments as a result of
which the lessor does not transfer substantially all such risks and rewards
66 Lease classification is made at the inception date and is reassessed only if there is
a lease modification Changes in estimates (for example changes in estimates of
the economic life or of the residual value of the underlying asset) or changes in
circumstances (for example default by the lessee) do not give rise to a new
classification of a lease for accounting purposes
IFRS 16
IFRS Foundation A749Finance leases
Recognition and measurement
67 At the commencement date a lessor shall recognise assets held under a
finance lease in its statement of financial position and present them as a
receivable at an amount equal to the net investment in the lease
Initial measurement
68 The lessor shall use the interest rate implicit in the lease to measure the net
investment in the lease In the case of a sublease if the interest rate implicit in
the sublease cannot be readily determined an intermediate lessor may use the
discount rate used for the head lease (adjusted for any initial direct costs
associated with the sublease) to measure the net investment in the sublease
69 Initial direct costs other than those incurred by manufacturer or dealer lessors
are included in the initial measurement of the net investment in the lease and
reduce the amount of income recognised over the lease term The interest rate
implicit in the lease is defined in such a way that the initial direct costs are
included automatically in the net investment in the lease there is no need to
add them separately
Initial measurement of the lease payments included in the net investment
in the lease
70 At the commencement date the lease payments included in the measurement of
the net investment in the lease comprise the following payments for the right to
use the underlying asset during the lease term that are not received at the
commencement date
(a) fixed payments (including insubstance fixed payments as described in
paragraph B42) less any lease incentives payable
(b) variable lease payments that depend on an index or a rate initially
measured using the index or rate as at the commencement date
(c) any residual value guarantees provided to the lessor by the lessee a party
related to the lessee or a third party unrelated to the lessor that is
financially capable of discharging the obligations under the guarantee
(d) the exercise price of a purchase option if the lessee is reasonably certain
to exercise that option (assessed considering the factors described in
paragraph B37) and
(e) payments of penalties for terminating the lease if the lease term reflects
the lessee exercising an option to terminate the lease
Manufacturer or dealer lessors
71 At the commencement date a manufacturer or dealer lessor shall recognise the
following for each of its finance leases
(a) revenue being the fair value of the underlying asset or if lower the
present value of the lease payments accruing to the lessor discounted
using a market rate of interest
IFRS 16
IFRS FoundationA750(b) the cost of sale being the cost or carrying amount if different of the
underlying asset less the present value of the unguaranteed residual value
and
(c) selling profit or loss (being the difference between revenue and the cost
of sale) in accordance with its policy for outright sales to which IFRS 15
applies A manufacturer or dealer lessor shall recognise selling profit or
loss on a finance lease at the commencement date regardless of whether
the lessor transfers the underlying asset as described in IFRS 15
72 Manufacturers or dealers often offer to customers the choice of either buying or
leasing an asset A finance lease of an asset by a manufacturer or dealer lessor
gives rise to profit or loss equivalent to the profit or loss resulting from an
outright sale of the underlying asset at normal selling prices reflecting any
applicable volume or trade discounts
73 Manufacturer or dealer lessors sometimes quote artificially low rates of interest
in order to attract customers The use of such a rate would result in a lessor
recognising an excessive portion of the total income from the transaction at the
commencement date If artificially low rates of interest are quoted a
manufacturer or dealer lessor shall restrict selling profit to that which would
apply if a market rate of interest were charged
74 A manufacturer or dealer lessor shall recognise as an expense costs incurred in
connection with obtaining a finance lease at the commencement date because
they are mainly related to earning the manufacturer or dealer’s selling profit
Costs incurred by manufacturer or dealer lessors in connection with obtaining a
finance lease are excluded from the definition of initial direct costs and thus
are excluded from the net investment in the lease
Subsequent measurement
75 A lessor shall recognise finance income over the lease term based on a
pattern reflecting a constant periodic rate of return on the lessor’s net
investment in the lease
76 A lessor aims to allocate finance income over the lease term on a systematic and
rational basis A lessor shall apply the lease payments relating to the period
against the gross investment in the lease to reduce both the principal and the
unearned finance income
77 A lessor shall apply the derecognition and impairment requirements in IFRS 9 to
the net investment in the lease A lessor shall review regularly estimated
unguaranteed residual values used in computing the gross investment in the
lease If there has been a reduction in the estimated unguaranteed residual
value the lessor shall revise the income allocation over the lease term and
recognise immediately any reduction in respect of amounts accrued
78 A lessor that classifies an asset under a finance lease as held for sale (or includes
it in a disposal group that is classified as held for sale) applying IFRS 5 Noncurrent
Assets Held for Sale and Discontinued Operations shall account for the asset in
accordance with that Standard
IFRS 16
IFRS Foundation A751Lease modifications
79 A lessor shall account for a modification to a finance lease as a separate lease if
both
(a) the modification increases the scope of the lease by adding the right to
use one or more underlying assets and
(b) the consideration for the lease increases by an amount commensurate
with the standalone price for the increase in scope and any appropriate
adjustments to that standalone price to reflect the circumstances of the
particular contract
80 For a modification to a finance lease that is not accounted for as a separate lease
a lessor shall account for the modification as follows
(a) if the lease would have been classified as an operating lease had the
modification been in effect at the inception date the lessor shall
(i) account for the lease modification as a new lease from the
effective date of the modification and
(ii) measure the carrying amount of the underlying asset as the net
investment in the lease immediately before the effective date of
the lease modification
(b) otherwise the lessor shall apply the requirements of IFRS 9
Operating leases
Recognition and measurement
81 A lessor shall recognise lease payments from operating leases as income
on either a straightline basis or another systematic basis The lessor
shall apply another systematic basis if that basis is more representative of
the pattern in which benefit from the use of the underlying asset is
diminished
82 A lessor shall recognise costs including depreciation incurred in earning the
lease income as an expense
83 A lessor shall add initial direct costs incurred in obtaining an operating lease to
the carrying amount of the underlying asset and recognise those costs as an
expense over the lease term on the same basis as the lease income
84 The depreciation policy for depreciable underlying assets subject to operating
leases shall be consistent with the lessor’s normal depreciation policy for similar
assets A lessor shall calculate depreciation in accordance with IAS 16 and
IAS 38
85 A lessor shall apply IAS 36 to determine whether an underlying asset subject to
an operating lease is impaired and to account for any impairment loss
identified
86 A manufacturer or dealer lessor does not recognise any selling profit on entering
into an operating lease because it is not the equivalent of a sale
IFRS 16
IFRS FoundationA752Lease modifications
87 A lessor shall account for a modification to an operating lease as a new lease
from the effective date of the modification considering any prepaid or accrued
lease payments relating to the original lease as part of the lease payments for the
new lease
Presentation
88 A lessor shall present underlying assets subject to operating leases in its
statement of financial position according to the nature of the underlying asset
Disclosure
89 The objective of the disclosures is for lessors to disclose information in
the notes that together with the information provided in the statement
of financial position statement of profit or loss and statement of cash
flows gives a basis for users of financial statements to assess the effect
that leases have on the financial position financial performance and cash
flows of the lessor Paragraphs 90–97 specify requirements on how to
meet this objective
90 A lessor shall disclose the following amounts for the reporting period
(a) for finance leases
(i) selling profit or loss
(ii) finance income on the net investment in the lease and
(iii) income relating to variable lease payments not included in the
measurement of the net investment in the lease
(b) for operating leases lease income separately disclosing income relating
to variable lease payments that do not depend on an index or a rate
91 A lessor shall provide the disclosures specified in paragraph 90 in a tabular
format unless another format is more appropriate
92 A lessor shall disclose additional qualitative and quantitative information about
its leasing activities necessary to meet the disclosure objective in paragraph 89
This additional information includes but is not limited to information that
helps users of financial statements to assess
(a) the nature of the lessor’s leasing activities and
(b) how the lessor manages the risk associated with any rights it retains in
underlying assets In particular a lessor shall disclose its risk
management strategy for the rights it retains in underlying assets
including any means by which the lessor reduces that risk Such means
may include for example buyback agreements residual value
guarantees or variable lease payments for use in excess of specified
limits
IFRS 16
IFRS Foundation A753Finance leases
93 A lessor shall provide a qualitative and quantitative explanation of the
significant changes in the carrying amount of the net investment in finance
leases
94 A lessor shall disclose a maturity analysis of the lease payments receivable
showing the undiscounted lease payments to be received on an annual basis for
a minimum of each of the first five years and a total of the amounts for the
remaining years A lessor shall reconcile the undiscounted lease payments to
the net investment in the lease The reconciliation shall identify the unearned
finance income relating to the lease payments receivable and any discounted
unguaranteed residual value
Operating leases
95 For items of property plant and equipment subject to an operating lease a
lessor shall apply the disclosure requirements of IAS 16 In applying the
disclosure requirements in IAS 16 a lessor shall disaggregate each class of
property plant and equipment into assets subject to operating leases and assets
not subject to operating leases Accordingly a lessor shall provide the
disclosures required by IAS 16 for assets subject to an operating lease (by class of
underlying asset) separately from owned assets held and used by the lessor
96 A lessor shall apply the disclosure requirements in IAS 36 IAS 38 IAS 40 and
IAS 41 for assets subject to operating leases
97 A lessor shall disclose a maturity analysis of lease payments showing the
undiscounted lease payments to be received on an annual basis for a minimum
of each of the first five years and a total of the amounts for the remaining years
Sale and leaseback transactions
98 If an entity (the sellerlessee) transfers an asset to another entity (the
buyerlessor) and leases that asset back from the buyerlessor both the
sellerlessee and the buyerlessor shall account for the transfer contract and the
lease applying paragraphs 99–103
Assessing whether the transfer of the asset is a sale
99 An entity shall apply the requirements for determining when a performance
obligation is satisfied in IFRS 15 to determine whether the transfer of an asset is
accounted for as a sale of that asset
Transfer of the asset is a sale
100 If the transfer of an asset by the sellerlessee satisfies the requirements of IFRS 15
to be accounted for as a sale of the asset
(a) the sellerlessee shall measure the rightofuse asset arising from the
leaseback at the proportion of the previous carrying amount of the asset
that relates to the right of use retained by the sellerlessee Accordingly
the sellerlessee shall recognise only the amount of any gain or loss that
relates to the rights transferred to the buyerlessor
IFRS 16
IFRS FoundationA754(b) the buyerlessor shall account for the purchase of the asset applying
applicable Standards and for the lease applying the lessor accounting
requirements in this Standard
101 If the fair value of the consideration for the sale of an asset does not equal the
fair value of the asset or if the payments for the lease are not at market rates an
entity shall make the following adjustments to measure the sale proceeds at fair
value
(a) any belowmarket terms shall be accounted for as a prepayment of lease
payments and
(b) any abovemarket terms shall be accounted for as additional financing
provided by the buyerlessor to the sellerlessee
102 The entity shall measure any potential adjustment required by paragraph 101
on the basis of the more readily determinable of
(a) the difference between the fair value of the consideration for the sale
and the fair value of the asset and
(b) the difference between the present value of the contractual payments for
the lease and the present value of payments for the lease at market rates
Transfer of the asset is not a sale
103 If the transfer of an asset by the sellerlessee does not satisfy the requirements of
IFRS 15 to be accounted for as a sale of the asset
(a) the sellerlessee shall continue to recognise the transferred asset and
shall recognise a financial liability equal to the transfer proceeds It shall
account for the financial liability applying IFRS 9
(b) the buyerlessor shall not recognise the transferred asset and shall
recognise a financial asset equal to the transfer proceeds It shall
account for the financial asset applying IFRS 9
IFRS 16
IFRS Foundation A755Appendix A
Defined terms
This appendix is an integral part of the Standard
commencement date
of the lease
(commencement date)
The date on which a lessor makes an underlying asset available
for use by a lessee
economic life Either the period over which an asset is expected to be
economically usable by one or more users or the number of
production or similar units expected to be obtained from an asset
by one or more users
effective date of the
modification
The date when both parties agree to a lease modification
fair value For the purpose of applying the lessor accounting requirements
in this Standard the amount for which an asset could be
exchanged or a liability settled between knowledgeable willing
parties in an arm’s length transaction
finance lease A lease that transfers substantially all the risks and rewards
incidental to ownership of an underlying asset
fixed payments Payments made by a lessee to a lessor for the right to use an
underlying asset during the lease term excluding variable
lease payments
gross investment in
the lease
The sum of
(a) the lease payments receivable by a lessor under a
finance lease and
(b) any unguaranteed residual value accruing to the lessor
inception date of the
lease (inception date)
The earlier of the date of a lease agreement and the date of
commitment by the parties to the principal terms and conditions
of the lease
initial direct costs Incremental costs of obtaining a lease that would not have been
incurred if the lease had not been obtained except for such costs
incurred by a manufacturer or dealer lessor in connection with a
finance lease
interest rate implicit
in the lease
The rate of interest that causes the present value of (a) the lease
payments and (b) the unguaranteed residual value to equal
the sum of (i) the fair value of the underlying asset and (ii) any
initial direct costs of the lessor
lease A contract or part of a contract that conveys the right to use an
asset (the underlying asset) for a period of time in exchange for
consideration
lease incentives Payments made by a lessor to a lessee associated with a leaseor
the reimbursement or assumption by a lessor of costs of a lessee
IFRS 16
IFRS FoundationA756lease modification A change in the scope of a lease or the consideration for a lease
that was not part of the original terms and conditions of the lease
(for example adding or terminating the right to use one or more
underlying assets or extending or shortening the contractual
lease term)
lease payments Payments made by a lessee to a lessor relating to the right to use
an underlying asset during the lease term comprising the
following
(a) fixed payments (including insubstance fixed payments)
less any lease incentives
(b) variable lease payments that depend on an index or a
rate
(c) the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option and
(d) payments of penalties for terminating the leaseifthe
lease term reflects the lessee exercising an option to
terminate the lease
For the lessee lease payments also include amounts expected to
be payable by the lessee under residual value guarantees Lease
payments do not include payments allocated to nonlease
components of a contract unless the lessee elects to combine
nonlease components with a lease component and to account for
them as a single lease component
For the lessor lease payments also include any residual value
guarantees provided to the lessor by the lessee a party related to
the lessee or a third party unrelated to the lessor that is
financially capable of discharging the obligations under the
guarantee Lease payments do not include payments allocated to
nonlease components
lease term The noncancellable period for which a lessee has the right to use
an underlying asset together with both
(a) periods covered by an option to extend the lease if the
lessee is reasonably certain to exercise that option and
(b) periods covered by an option to terminate the lease if the
lessee is reasonably certain not to exercise that option
lessee An entity that obtains the right to use an underlying asset for a
period of time in exchange for consideration
lessee’s incremental
borrowing rate
The rate of interest that a lessee would have to pay to borrow
over a similar term and with a similar security the funds
necessary to obtain an asset of a similar value to the rightofuse
asset in a similar economic environment
lessor An entity that provides the right to use an underlying asset for
a period of time in exchange for consideration
IFRS 16
IFRS Foundation A757net investment in the
lease
The gross investment in the lease discounted at the interest
rate implicit in the lease
operating lease A lease that does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset
optional lease
payments
Payments to be made by a lessee to a lessor for the right to use
an underlying asset during periods covered by an option to
extend or terminate a lease that are not included in the lease
term
period of use The total period of time that an asset is used to fulfil a contract
with a customer (including any nonconsecutive periods of time)
residual value
guarantee
A guarantee made to a lessor by a party unrelated to the lessor
that the value (or part of the value) of an underlying asset at the
end of a lease will be at least a specified amount
rightofuse asset An asset that represents a lessee’s right to use an underlying
asset for the lease term
shortterm lease A lease that at the commencement date has a lease term of
12 months or less A lease that contains a purchase option is not
a shortterm lease
sublease A transaction for which an underlying asset is released by a
lessee (intermediate lessor’) to a third party and the lease
(head lease’) between the head lessor and lessee remains in effect
underlying asset An asset that is the subject of a lease for which the right to use
that asset has been provided by a lessor to a lessee
unearned finance
income
The difference between
(a) the gross investment in the lease and
(b) the net investment in the lease
unguaranteed residual
value
That portion of the residual value of the underlying asset the
realisation of which by a lessor is not assured or is guaranteed
solely by a party related to the lessor
variable lease
payments
The portion of payments made by a lessee to a lessor for the
right to use an underlying asset during the lease term that
varies because of changes in facts or circumstances occurring
after the commencement date other than the passage of time
Terms defined in other Standards and used in this Standard with
the same meaning
contract An agreement between two or more parties that creates
enforceable rights and obligations
useful life The period over which an asset is expected to be available for use
by an entity or the number of production or similar units
expected to be obtained from an asset by an entity
IFRS 16
IFRS FoundationA758Appendix B
Application guidance
This appendix is an integral part of the Standard It describes the application of paragraphs 1–103 and
has the same authority as the other parts of the Standard
Portfolio application
B1 This Standard specifies the accounting for an individual lease However as a
practical expedient an entity may apply this Standard to a portfolio of leases
with similar characteristics if the entity reasonably expects that the effects on
the financial statements of applying this Standard to the portfolio would not
differ materially from applying this Standard to the individual leases within
that portfolio If accounting for a portfolio an entity shall use estimates and
assumptions that reflect the size and composition of the portfolio
Combination of contracts
B2 In applying this Standard an entity shall combine two or more contracts
entered into at or near the same time with the same counterparty (or related
parties of the counterparty) and account for the contracts as a single contract if
one or more of the following criteria are met
(a) the contracts are negotiated as a package with an overall commercial
objective that cannot be understood without considering the contracts
together
(b) the amount of consideration to be paid in one contract depends on the
price or performance of the other contract or
(c) the rights to use underlying assets conveyed in the contracts (or some
rights to use underlying assets conveyed in each of the contracts) form a
single lease component as described in paragraph B32
Recognition exemption leases for which the underlying
asset is of low value (paragraphs 5–8)
B3 Except as specified in paragraph B7 this Standard permits a lessee to apply
paragraph 6 to account for leases for which the underlying asset is of low value
A lessee shall assess the value of an underlying asset based on the value of the
asset when it is new regardless of the age of the asset being leased
B4 The assessment of whether an underlying asset is of low value is performed on
an absolute basis Leases of lowvalue assets qualify for the accounting treatment
in paragraph 6 regardless of whether those leases are material to the lessee The
assessment is not affected by the size nature or circumstances of the lessee
Accordingly different lessees are expected to reach the same conclusions about
whether a particular underlying asset is of low value
B5 An underlying asset can be of low value only if
(a) the lessee can benefit from use of the underlying asset on its own or
together with other resources that are readily available to the lessee and
(b) the underlying asset is not highly dependent on or highly interrelated
with other assets
IFRS 16
IFRS Foundation A759B6 A lease of an underlying asset does not qualify as a lease of a lowvalue asset if
the nature of the asset is such that when new the asset is typically not of low
value For example leases of cars would not qualify as leases of lowvalue assets
because a new car would typically not be of low value
B7 If a lessee subleases an asset or expects to sublease an asset the head lease does
not qualify as a lease of a lowvalue asset
B8 Examples of lowvalue underlying assets can include tablet and personal
computers small items of office furniture and telephones
Identifying a lease (paragraphs 9–11)
B9 To assess whether a contract conveys the right to control the use of an identified
asset (see paragraphs B13–B20) for a period of time an entity shall assess
whether throughout the period of use the customer has both of the following
(a) the right to obtain substantially all of the economic benefits from use of
the identified asset (as described in paragraphs B21–B23) and
(b) the right to direct the use of the identified asset (as described in
paragraphs B24–B30)
B10 If the customer has the right to control the use of an identified asset for only a
portion of the term of the contract the contract contains a lease for that portion
of the term
B11 A contract to receive goods or services may be entered into by a joint
arrangement or on behalf of a joint arrangement as defined in IFRS 11 Joint
Arrangements In this case the joint arrangement is considered to be the
customer in the contract Accordingly in assessing whether such a contract
contains a lease an entity shall assess whether the joint arrangement has the
right to control the use of an identified asset throughout the period of use
B12 An entity shall assess whether a contract contains a lease for each potential
separate lease component Refer to paragraph B32 for guidance on separate
lease components
Identified asset
B13 An asset is typically identified by being explicitly specified in a contract
However an asset can also be identified by being implicitly specified at the time
that the asset is made available for use by the customer
Substantive substitution rights
B14 Even if an asset is specified a customer does not have the right to use an
identified asset if the supplier has the substantive right to substitute the asset
throughout the period of use A supplier’s right to substitute an asset is
substantive only if both of the following conditions exist
(a) the supplier has the practical ability to substitute alternative assets
throughout the period of use (for example the customer cannot prevent
the supplier from substituting the asset and alternative assets are readily
available to the supplier or could be sourced by the supplier within a
reasonable period of time) and
IFRS 16
IFRS FoundationA760(b) the supplier would benefit economically from the exercise of its right to
substitute the asset (ie the economic benefits associated with
substituting the asset are expected to exceed the costs associated with
substituting the asset)
B15 If the supplier has a right or an obligation to substitute the asset only on or after
either a particular date or the occurrence of a specified event the supplier’s
substitution right is not substantive because the supplier does not have the
practical ability to substitute alternative assets throughout the period of use
B16 An entity’s evaluation of whether a supplier’s substitution right is substantive is
based on facts and circumstances at inception of the contract and shall exclude
consideration of future events that at inception of the contract are not
considered likely to occur Examples of future events that at inception of the
contract would not be considered likely to occur and thus should be excluded
from the evaluation include
(a) an agreement by a future customer to pay an above market rate for use
of the asset
(b) the introduction of new technology that is not substantially developed at
inception of the contract
(c) a substantial difference between the customer’s use of the asset or the
performance of the asset and the use or performance considered likely
at inception of the contract and
(d) a substantial difference between the market price of the asset during the
period of use and the market price considered likely at inception of the
contract
B17 If the asset is located at the customer’s premises or elsewhere the costs
associated with substitution are generally higher than when located at the
supplier’s premises and therefore are more likely to exceed the benefits
associated with substituting the asset
B18 The supplier’s right or obligation to substitute the asset for repairs and
maintenance if the asset is not operating properly or if a technical upgrade
becomes available does not preclude the customer from having the right to use
an identified asset
B19 If the customer cannot readily determine whether the supplier has a substantive
substitution right the customer shall presume that any substitution right is not
substantive
Portions of assets
B20 A capacity portion of an asset is an identified asset if it is physically distinct (for
example a floor of a building) A capacity or other portion of an asset that is not
physically distinct (for example a capacity portion of a fibre optic cable) is not
an identified asset unless it represents substantially all of the capacity of the
asset and thereby provides the customer with the right to obtain substantially
all of the economic benefits from use of the asset
IFRS 16
IFRS Foundation A761Right to obtain economic benefits from use
B21 To control the use of an identified asset a customer is required to have the right
to obtain substantially all of the economic benefits from use of the asset
throughout the period of use (for example by having exclusive use of the asset
throughout that period) A customer can obtain economic benefits from use of
an asset directly or indirectly in many ways such as by using holding or
subleasing the asset The economic benefits from use of an asset include its
primary output and byproducts (including potential cash flows derived from
these items) and other economic benefits from using the asset that could be
realised from a commercial transaction with a third party
B22 When assessing the right to obtain substantially all of the economic benefits
from use of an asset an entity shall consider the economic benefits that result
from use of the asset within the defined scope of a customer’s right to use the
asset (see paragraph B30) For example
(a) if a contract limits the use of a motor vehicle to only one particular
territory during the period of use an entity shall consider only the
economic benefits from use of the motor vehicle within that territory
and not beyond
(b) if a contract specifies that a customer can drive a motor vehicle only up
to a particular number of miles during the period of use an entity shall
consider only the economic benefits from use of the motor vehicle for
the permitted mileage and not beyond
B23 If a contract requires a customer to pay the supplier or another party a portion
of the cash flows derived from use of an asset as consideration those cash flows
paid as consideration shall be considered to be part of the economic benefits
that the customer obtains from use of the asset For example if the customer is
required to pay the supplier a percentage of sales from use of retail space as
consideration for that use that requirement does not prevent the customer from
having the right to obtain substantially all of the economic benefits from use of
the retail space This is because the cash flows arising from those sales are
considered to be economic benefits that the customer obtains from use of the
retail space a portion of which it then pays to the supplier as consideration for
the right to use that space
Right to direct the use
B24 A customer has the right to direct the use of an identified asset throughout the
period of use only if either
(a) the customer has the right to direct how and for what purpose the asset
is used throughout the period of use (as described in paragraphs
B25–B30) or
(b) the relevant decisions about how and for what purpose the asset is used
are predetermined and
IFRS 16
IFRS FoundationA762(i) the customer has the right to operate the asset (or to direct others
to operate the asset in a manner that it determines) throughout
the period of use without the supplier having the right to
change those operating instructions or
(ii) the customer designed the asset (or specific aspects of the asset)
in a way that predetermines how and for what purpose the asset
will be used throughout the period of use
How and for what purpose the asset is used
B25 A customer has the right to direct how and for what purpose the asset is used if
within the scope of its right of use defined in the contract it can change how
and for what purpose the asset is used throughout the period of use In making
this assessment an entity considers the decisionmaking rights that are most
relevant to changing how and for what purpose the asset is used throughout the
period of use Decisionmaking rights are relevant when they affect the
economic benefits to be derived from use The decisionmaking rights that are
most relevant are likely to be different for different contracts depending on the
nature of the asset and the terms and conditions of the contract
B26 Examples of decisionmaking rights that depending on the circumstances grant
the right to change how and for what purpose the asset is used within the
defined scope of the customer’s right of use include
(a) rights to change the type of output that is produced by the asset (for
example to decide whether to use a shipping container to transport
goods or for storage or to decide upon the mix of products sold from
retail space)
(b) rights to change when the output is produced (for example to decide
when an item of machinery or a power plant will be used)
(c) rights to change where the output is produced (for example to decide
upon the destination of a truck or a ship or to decide where an item of
equipment is used) and
(d) rights to change whether the output is produced and the quantity of
that output (for example to decide whether to produce energy from a
power plant and how much energy to produce from that power plant)
B27 Examples of decisionmaking rights that do not grant the right to change how
and for what purpose the asset is used include rights that are limited to
operating or maintaining the asset Such rights can be held by the customer or
the supplier Although rights such as those to operate or maintain an asset are
often essential to the efficient use of an asset they are not rights to direct how
and for what purpose the asset is used and are often dependent on the decisions
about how and for what purpose the asset is used However rights to operate an
asset may grant the customer the right to direct the use of the asset if the
relevant decisions about how and for what purpose the asset is used are
predetermined (see paragraph B24(b)(i))
IFRS 16
IFRS Foundation A763Decisions determined during and before the period of use
B28 The relevant decisions about how and for what purpose the asset is used can be
predetermined in a number of ways For example the relevant decisions can be
predetermined by the design of the asset or by contractual restrictions on the
use of the asset
B29 In assessing whether a customer has the right to direct the use of an asset an
entity shall consider only rights to make decisions about the use of the asset
during the period of use unless the customer designed the asset (or specific
aspects of the asset) as described in paragraph B24(b)(ii) Consequently unless
the conditions in paragraph B24(b)(ii) exist an entity shall not consider
decisions that are predetermined before the period of use For example if a
customer is able only to specify the output of an asset before the period of use
the customer does not have the right to direct the use of that asset The ability
to specify the output in a contract before the period of use without any other
decisionmaking rights relating to the use of the asset gives a customer the same
rights as any customer that purchases goods or services
Protective rights
B30 A contract may include terms and conditions designed to protect the supplier’s
interest in the asset or other assets to protect its personnel or to ensure the
supplier’s compliance with laws or regulations These are examples of
protective rights For example a contract may (i) specify the maximum amount
of use of an asset or limit where or when the customer can use the asset (ii)
require a customer to follow particular operating practices or (iii) require a
customer to inform the supplier of changes in how an asset will be used
Protective rights typically define the scope of the customer’s right of use but do
not in isolation prevent the customer from having the right to direct the use of
an asset
IFRS 16
IFRS FoundationA764B31 The following flowchart may assist entities in making the assessment of whether
a contract is or contains a lease
No
No
Yes
Yes
Yes
Customer Supplier
No
Is there an identified asset
Consider paragraphs B13–B20
Does the customer have the right to
obtain substantially all of the economic
benefits from use of the asset throughout
the period of use
Consider paragraphs B21–B23
Does the customer the supplier or
neither party have the right to direct how
and for what purpose the asset is used
throughout the period of use
Consider paragraphs B25–B30
Neither how and for what
purpose the asset will be
used is predetermined
Does the customer have the right to
operate the asset throughout the period of
use without the supplier having the right
to change those operating instructions
Consider paragraph B24(b)(i)
The contract contains a lease The contract does not
contain a lease
No
Yes
Did the customer design the asset in a way
that predetermines how and for what
purpose the asset will be used throughout
the period of use
Consider paragraph B24(b)(ii)
IFRS 16
IFRS Foundation A765Separating components of a contract (paragraphs 12–17)
B32 The right to use an underlying asset is a separate lease component if both
(a) the lessee can benefit from use of the underlying asset either on its own
or together with other resources that are readily available to the lessee
Readily available resources are goods or services that are sold or leased
separately (by the lessor or other suppliers) or resources that the lessee
has already obtained (from the lessor or from other transactions or
events) and
(b) the underlying asset is neither highly dependent on nor highly
interrelated with the other underlying assets in the contract For
example the fact that a lessee could decide not to lease the underlying
asset without significantly affecting its rights to use other underlying
assets in the contract might indicate that the underlying asset is not
highly dependent on or highly interrelated with those other underlying
assets
B33 A contract may include an amount payable by the lessee for activities and costs
that do not transfer a good or service to the lessee For example a lessor may
include in the total amount payable a charge for administrative tasks or other
costs it incurs associated with the lease that do not transfer a good or service to
the lessee Such amounts payable do not give rise to a separate component of
the contract but are considered to be part of the total consideration that is
allocated to the separately identified components of the contract
Lease term (paragraphs 18–21)
B34 In determining the lease term and assessing the length of the noncancellable
period of a lease an entity shall apply the definition of a contract and determine
the period for which the contract is enforceable A lease is no longer enforceable
when the lessee and the lessor each has the right to terminate the lease without
permission from the other party with no more than an insignificant penalty
B35 If only a lessee has the right to terminate a lease that right is considered to be
an option to terminate the lease available to the lessee that an entity considers
when determining the lease term If only a lessor has the right to terminate a
lease the noncancellable period of the lease includes the period covered by the
option to terminate the lease
B36 The lease term begins at the commencement date and includes any rentfree
periods provided to the lessee by the lessor
B37 At the commencement date an entity assesses whether the lessee is reasonably
certain to exercise an option to extend the lease or to purchase the underlying
asset or not to exercise an option to terminate the lease The entity considers all
relevant facts and circumstances that create an economic incentive for the lessee
to exercise or not to exercise the option including any expected changes in
facts and circumstances from the commencement date until the exercise date of
the option Examples of factors to consider include but are not limited to
(a) contractual terms and conditions for the optional periods compared
with market rates such as
IFRS 16
IFRS FoundationA766(i) the amount of payments for the lease in any optional period
(ii) the amount of any variable payments for the lease or other
contingent payments such as payments resulting from
termination penalties and residual value guarantees and
(iii) the terms and conditions of any options that are exercisable after
initial optional periods (for example a purchase option that is
exercisable at the end of an extension period at a rate that is
currently below market rates)
(b) significant leasehold improvements undertaken (or expected to be
undertaken) over the term of the contract that are expected to have
significant economic benefit for the lessee when the option to extend or
terminate the lease or to purchase the underlying asset becomes
exercisable
(c) costs relating to the termination of the lease such as negotiation costs
relocation costs costs of identifying another underlying asset suitable
for the lessee’s needs costs of integrating a new asset into the lessee’s
operations or termination penalties and similar costs including costs
associated with returning the underlying asset in a contractually
specified condition or to a contractually specified location
(d) the importance of that underlying asset to the lessee’s operations
considering for example whether the underlying asset is a specialised
asset the location of the underlying asset and the availability of suitable
alternatives and
(e) conditionality associated with exercising the option (ie when the option
can be exercised only if one or more conditions are met) and the
likelihood that those conditions will exist
B38 An option to extend or terminate a lease may be combined with one or more
other contractual features (for example a residual value guarantee) such that
the lessee guarantees the lessor a minimum or fixed cash return that is
substantially the same regardless of whether the option is exercised In such
cases and notwithstanding the guidance on insubstance fixed payments in
paragraph B42 an entity shall assume that the lessee is reasonably certain to
exercise the option to extend the lease or not to exercise the option to terminate
the lease
B39 The shorter the noncancellable period of a lease the more likely a lessee is to
exercise an option to extend the lease or not to exercise an option to terminate
the lease This is because the costs associated with obtaining a replacement asset
are likely to be proportionately higher the shorter the noncancellable period
B40 A lessee’s past practice regarding the period over which it has typically used
particular types of assets (whether leased or owned) and its economic reasons
for doing so may provide information that is helpful in assessing whether the
lessee is reasonably certain to exercise or not to exercise an option For
example if a lessee has typically used particular types of assets for a particular
period of time or if the lessee has a practice of frequently exercising options on
leases of particular types of underlying assets the lessee shall consider the
IFRS 16
IFRS Foundation A767economic reasons for that past practice in assessing whether it is reasonably
certain to exercise an option on leases of those assets
B41 Paragraph 20 specifies that after the commencement date a lessee reassesses
the lease term upon the occurrence of a significant event or a significant change
in circumstances that is within the control of the lessee and affects whether the
lessee is reasonably certain to exercise an option not previously included in its
determination of the lease term or not to exercise an option previously included
in its determination of the lease term Examples of significant events or changes
in circumstances include
(a) significant leasehold improvements not anticipated at the
commencement date that are expected to have significant economic
benefit for the lessee when the option to extend or terminate the lease
or to purchase the underlying asset becomes exercisable
(b) a significant modification to or customisation of the underlying asset
that was not anticipated at the commencement date
(c) the inception of a sublease of the underlying asset for a period beyond
the end of the previously determined lease term and
(d) a business decision of the lessee that is directly relevant to exercising or
not exercising an option (for example a decision to extend the lease of a
complementary asset to dispose of an alternative asset or to dispose of a
business unit within which the rightofuse asset is employed)
Insubstance fixed lease payments (paragraphs 27(a)
36(c) and 70(a))
B42 Lease payments include any insubstance fixed lease payments Insubstance
fixed lease payments are payments that may in form contain variability but
that in substance are unavoidable Insubstance fixed lease payments exist for
example if
(a) payments are structured as variable lease payments but there is no
genuine variability in those payments Those payments contain variable
clauses that do not have real economic substance Examples of those
types of payments include
(i) payments that must be made only if an asset is proven to be
capable of operating during the lease or only if an event occurs
that has no genuine possibility of not occurring or
(ii) payments that are initially structured as variable lease payments
linked to the use of the underlying asset but for which the
variability will be resolved at some point after the
commencement date so that the payments become fixed for the
remainder of the lease term Those payments become
insubstance fixed payments when the variability is resolved
(b) there is more than one set of payments that a lessee could make but only
one of those sets of payments is realistic In this case an entity shall
consider the realistic set of payments to be lease payments
IFRS 16
IFRS FoundationA768(c) there is more than one realistic set of payments that a lessee could make
but it must make at least one of those sets of payments In this case an
entity shall consider the set of payments that aggregates to the lowest
amount (on a discounted basis) to be lease payments
Lessee involvement with the underlying asset before the
commencement date
Costs of the lessee relating to the construction or design of the
underlying asset
B43 An entity may negotiate a lease before the underlying asset is available for use by
the lessee For some leases the underlying asset may need to be constructed or
redesigned for use by the lessee Depending on the terms and conditions of the
contract a lessee may be required to make payments relating to the
construction or design of the asset
B44 If a lessee incurs costs relating to the construction or design of an underlying
asset the lessee shall account for those costs applying other applicable
Standards such as IAS 16 Costs relating to the construction or design of an
underlying asset do not include payments made by the lessee for the right to use
the underlying asset Payments for the right to use an underlying asset are
payments for a lease regardless of the timing of those payments
Legal title to the underlying asset
B45 A lessee may obtain legal title to an underlying asset before that legal title is
transferred to the lessor and the asset is leased to the lessee Obtaining legal title
does not in itself determine how to account for the transaction
B46 If the lessee controls (or obtains control of) the underlying asset before that asset
is transferred to the lessor the transaction is a sale and leaseback transaction
that is accounted for applying paragraphs 98–103
B47 However if the lessee does not obtain control of the underlying asset before the
asset is transferred to the lessor the transaction is not a sale and leaseback
transaction For example this may be the case if a manufacturer a lessor and a
lessee negotiate a transaction for the purchase of an asset from the
manufacturer by the lessor which is in turn leased to the lessee The lessee may
obtain legal title to the underlying asset before legal title transfers to the lessor
In this case if the lessee obtains legal title to the underlying asset but does not
obtain control of the asset before it is transferred to the lessor the transaction is
not accounted for as a sale and leaseback transaction but as a lease
Lessee disclosures (paragraph 59)
B48 In determining whether additional information about leasing activities is
necessary to meet the disclosure objective in paragraph 51 a lessee shall
consider
IFRS 16
IFRS Foundation A769(a) whether that information is relevant to users of financial statements A
lessee shall provide additional information specified in paragraph 59
only if that information is expected to be relevant to users of financial
statements In this context this is likely to be the case if it helps those
users to understand
(i) the flexibility provided by leases Leases may provide flexibility
if for example a lessee can reduce its exposure by exercising
termination options or renewing leases with favourable terms
and conditions
(ii) restrictions imposed by leases Leases may impose restrictions
for example by requiring the lessee to maintain particular
financial ratios
(iii) sensitivity of reported information to key variables Reported
information may be sensitive to for example future variable
lease payments
(iv) exposure to other risks arising from leases
(v) deviations from industry practice Such deviations may include
for example unusual or unique lease terms and conditions that
affect a lessee’s lease portfolio
(b) whether that information is apparent from information either presented
in the primary financial statements or disclosed in the notes A lessee
need not duplicate information that is already presented elsewhere in
the financial statements
B49 Additional information relating to variable lease payments that depending on
the circumstances may be needed to satisfy the disclosure objective in
paragraph 51 could include information that helps users of financial statements
to assess for example
(a) the lessee’s reasons for using variable lease payments and the prevalence
of those payments
(b) the relative magnitude of variable lease payments to fixed payments
(c) key variables upon which variable lease payments depend and how
payments are expected to vary in response to changes in those key
variables and
(d) other operational and financial effects of variable lease payments
B50 Additional information relating to extension options or termination options
that depending on the circumstances may be needed to satisfy the disclosure
objective in paragraph 51 could include information that helps users of
financial statements to assess for example
(a) the lessee’s reasons for using extension options or termination options
and the prevalence of those options
(b) the relative magnitude of optional lease payments to lease payments
(c) the prevalence of the exercise of options that were not included in the
measurement of lease liabilities and
IFRS 16
IFRS FoundationA770(d) other operational and financial effects of those options
B51 Additional information relating to residual value guarantees that depending on
the circumstances may be needed to satisfy the disclosure objective in
paragraph 51 could include information that helps users of financial statements
to assess for example
(a) the lessee’s reasons for providing residual value guarantees and the
prevalence of those guarantees
(b) the magnitude of a lessee’s exposure to residual value risk
(c) the nature of underlying assets for which those guarantees are provided
and
(d) other operational and financial effects of those guarantees
B52 Additional information relating to sale and leaseback transactions that
depending on the circumstances may be needed to satisfy the disclosure
objective in paragraph 51 could include information that helps users of
financial statements to assess for example
(a) the lessee’s reasons for sale and leaseback transactions and the
prevalence of those transactions
(b) key terms and conditions of individual sale and leaseback transactions
(c) payments not included in the measurement of lease liabilities and
(d) the cash flow effect of sale and leaseback transactions in the reporting
period
Lessor lease classification (paragraphs 61–66)
B53 The classification of leases for lessors in this Standard is based on the extent to
which the lease transfers the risks and rewards incidental to ownership of an
underlying asset Risks include the possibilities of losses from idle capacity or
technological obsolescence and of variations in return because of changing
economic conditions Rewards may be represented by the expectation of
profitable operation over the underlying asset’s economic life and of gain from
appreciation in value or realisation of a residual value
B54 A lease contract may include terms and conditions to adjust the lease payments
for particular changes that occur between the inception date and the
commencement date (such as a change in the lessor’s cost of the underlying
asset or a change in the lessor’s cost of financing the lease) In that case for the
purposes of classifying the lease the effect of any such changes shall be deemed
to have taken place at the inception date
B55 When a lease includes both land and buildings elements a lessor shall assess the
classification of each element as a finance lease or an operating lease separately
applying paragraphs 62–66 and B53–B54 In determining whether the land
element is an operating lease or a finance lease an important consideration is
that land normally has an indefinite economic life
B56 Whenever necessary in order to classify and account for a lease of land and
buildings a lessor shall allocate lease payments (including any lumpsum
IFRS 16
IFRS Foundation A771upfront payments) between the land and the buildings elements in proportion
to the relative fair values of the leasehold interests in the land element and
buildings element of the lease at the inception date If the lease payments
cannot be allocated reliably between these two elements the entire lease is
classified as a finance lease unless it is clear that both elements are operating
leases in which case the entire lease is classified as an operating lease
B57 For a lease of land and buildings in which the amount for the land element is
immaterial to the lease a lessor may treat the land and buildings as a single unit
for the purpose of lease classification and classify it as a finance lease or an
operating lease applying paragraphs 62–66 and B53–B54 In such a case a lessor
shall regard the economic life of the buildings as the economic life of the entire
underlying asset
Sublease classification
B58 In classifying a sublease an intermediate lessor shall classify the sublease as a
finance lease or an operating lease as follows
(a) if the head lease is a shortterm lease that the entity as a lessee has
accounted for applying paragraph 6 the sublease shall be classified as an
operating lease
(b) otherwise the sublease shall be classified by reference to the rightofuse
asset arising from the head lease rather than by reference to the
underlying asset (for example the item of property plant or equipment
that is the subject of the lease)
IFRS 16
IFRS FoundationA772Appendix C
Effective date and transition
This appendix is an integral part of the Standard and has the same authority as the other parts of
the Standard
Effective date
C1 An entity shall apply this Standard for annual reporting periods beginning on or
after 1 January 2019 Earlier application is permitted for entities that apply
IFRS 15 Revenue from Contracts with Customers at or before the date of initial
application of this Standard If an entity applies this Standard earlier it shall
disclose that fact
Transition
C2 For the purposes of the requirements in paragraphs C1–C19 the date of initial
application is the beginning of the annual reporting period in which an entity
first applies this Standard
Definition of a lease
C3 As a practical expedient an entity is not required to reassess whether a contract
is or contains a lease at the date of initial application Instead the entity is
permitted
(a) to apply this Standard to contracts that were previously identified as
leases applying IAS 17 Leases and IFRIC 4 Determining whether an
Arrangement contains a Lease The entity shall apply the transition
requirements in paragraphs C5–C18 to those leases
(b) not to apply this Standard to contracts that were not previously
identified as containing a lease applying IAS 17 and IFRIC 4
C4 If an entity chooses the practical expedient in paragraph C3 it shall disclose that
fact and apply the practical expedient to all of its contracts As a result the
entity shall apply the requirements in paragraphs 9–11 only to contracts entered
into (or changed) on or after the date of initial application
Lessees
C5 A lessee shall apply this Standard to its leases either
(a) retrospectively to each prior reporting period presented applying IAS 8
Accounting Policies Changes in Accounting Estimates and Errorsor
(b) retrospectively with the cumulative effect of initially applying the
Standard recognised at the date of initial application in accordance with
paragraphs C7–C13
C6 A lessee shall apply the election described in paragraph C5 consistently to all of
its leases in which it is a lessee
C7 If a lessee elects to apply this Standard in accordance with paragraph C5(b) the
lessee shall not restate comparative information Instead the lessee shall
IFRS 16
IFRS Foundation A773recognise the cumulative effect of initially applying this Standard as an
adjustment to the opening balance of retained earnings (or other component of
equity as appropriate) at the date of initial application
Leases previously classified as operating leases
C8 If a lessee elects to apply this Standard in accordance with paragraph C5(b) the
lessee shall
(a) recognise a lease liability at the date of initial application for leases
previously classified as an operating lease applying IAS 17 The lessee
shall measure that lease liability at the present value of the remaining
lease payments discounted using the lessee’s incremental borrowing
rate at the date of initial application
(b) recognise a rightofuse asset at the date of initial application for leases
previously classified as an operating lease applying IAS 17 The lessee
shall choose on a leasebylease basis to measure that rightofuse asset
at either
(i) its carrying amount as if the Standard had been applied since the
commencement date but discounted using the lessee’s
incremental borrowing rate at the date of initial application or
(ii) an amount equal to the lease liability adjusted by the amount of
any prepaid or accrued lease payments relating to that lease
recognised in the statement of financial position immediately
before the date of initial application
(c) apply IAS 36 Impairment of Assets to rightofuse assets at the date of initial
application unless the lessee applies the practical expedient in
paragraph C10(b)
C9 Notwithstanding the requirements in paragraph C8 for leases previously
classified as operating leases applying IAS 17 a lessee
(a) is not required to make any adjustments on transition for leases for
which the underlying asset is of low value (as described in paragraphs
B3–B8) that will be accounted for applying paragraph 6 The lessee shall
account for those leases applying this Standard from the date of initial
application
(b) is not required to make any adjustments on transition for leases
previously accounted for as investment property using the fair value
model in IAS 40 Investment Property The lessee shall account for the
rightofuse asset and the lease liability arising from those leases applying
IAS 40 and this Standard from the date of initial application
(c) shall measure the rightofuse asset at fair value at the date of initial
application for leases previously accounted for as operating leases
applying IAS 17 and that will be accounted for as investment property
using the fair value model in IAS 40 from the date of initial application
The lessee shall account for the rightofuse asset and the lease liability
arising from those leases applying IAS 40 and this Standard from the
date of initial application
IFRS 16
IFRS FoundationA774C10 A lessee may use one or more of the following practical expedients when
applying this Standard retrospectively in accordance with paragraph C5(b) to
leases previously classified as operating leases applying IAS 17 A lessee is
permitted to apply these practical expedients on a leasebylease basis
(a) a lessee may apply a single discount rate to a portfolio of leases with
reasonably similar characteristics (such as leases with a similar
remaining lease term for a similar class of underlying asset in a similar
economic environment)
(b) a lessee may rely on its assessment of whether leases are onerous
applying IAS 37 Provisions Contingent Liabilities and Contingent Assets
immediately before the date of initial application as an alternative to
performing an impairment review If a lessee chooses this practical
expedient the lessee shall adjust the rightofuse asset at the date of
initial application by the amount of any provision for onerous leases
recognised in the statement of financial position immediately before the
date of initial application
(c) a lessee may elect not to apply the requirements in paragraph C8 to
leases for which the lease term ends within 12 months of the date of
initial application In this case a lessee shall
(i) account for those leases in the same way as shortterm leases as
described in paragraph 6 and
(ii) include the cost associated with those leases within the
disclosure of shortterm lease expense in the annual reporting
period that includes the date of initial application
(d) a lessee may exclude initial direct costs from the measurement of the
rightofuse asset at the date of initial application
(e) a lessee may use hindsight such as in determining the lease term if the
contract contains options to extend or terminate the lease
Leases previously classified as finance leases
C11 If a lessee elects to apply this Standard in accordance with paragraph C5(b) for
leases that were classified as finance leases applying IAS 17 the carrying amount
of the rightofuse asset and the lease liability at the date of initial application
shall be the carrying amount of the lease asset and lease liability immediately
before that date measured applying IAS 17 For those leases a lessee shall
account for the rightofuse asset and the lease liability applying this Standard
from the date of initial application
Disclosure
C12 If a lessee elects to apply this Standard in accordance with paragraph C5(b) the
lessee shall disclose information about initial application required by
paragraph 28 of IAS 8 except for the information specified in paragraph 28(f) of
IAS 8 Instead of the information specified in paragraph 28(f) of IAS 8 the lessee
shall disclose
IFRS 16
IFRS Foundation A775(a) the weighted average lessee’s incremental borrowing rate applied to
lease liabilities recognised in the statement of financial position at the
date of initial application and
(b) an explanation of any difference between
(i) operating lease commitments disclosed applying IAS 17 at the
end of the annual reporting period immediately preceding the
date of initial application discounted using the incremental
borrowing rate at the date of initial application as described in
paragraph C8(a) and
(ii) lease liabilities recognised in the statement of financial position
at the date of initial application
C13 If a lessee uses one or more of the specified practical expedients in
paragraph C10 it shall disclose that fact
Lessors
C14 Except as described in paragraph C15 a lessor is not required to make any
adjustments on transition for leases in which it is a lessor and shall account for
those leases applying this Standard from the date of initial application
C15 An intermediate lessor shall
(a) reassess subleases that were classified as operating leases applying IAS 17
and are ongoing at the date of initial application to determine whether
each sublease should be classified as an operating lease or a finance lease
applying this Standard The intermediate lessor shall perform this
assessment at the date of initial application on the basis of the
remaining contractual terms and conditions of the head lease and
sublease at that date
(b) for subleases that were classified as operating leases applying IAS 17 but
finance leases applying this Standard account for the sublease as a new
finance lease entered into at the date of initial application
Sale and leaseback transactions before the date of initial
application
C16 An entity shall not reassess sale and leaseback transactions entered into before
the date of initial application to determine whether the transfer of the
underlying asset satisfies the requirements in IFRS 15 to be accounted for as a
sale
C17 If a sale and leaseback transaction was accounted for as a sale and a finance lease
applying IAS 17 the sellerlessee shall
(a) account for the leaseback in the same way as it accounts for any other
finance lease that exists at the date of initial application and
(b) continue to amortise any gain on sale over the lease term
C18 If a sale and leaseback transaction was accounted for as a sale and operating
lease applying IAS 17 the sellerlessee shall
IFRS 16
IFRS FoundationA776(a) account for the leaseback in the same way as it accounts for any other
operating lease that exists at the date of initial application and
(b) adjust the leaseback rightofuse asset for any deferred gains or losses
that relate to offmarket terms recognised in the statement of financial
position immediately before the date of initial application
Amounts previously recognised in respect of business
combinations
C19 If a lessee previously recognised an asset or a liability applying IFRS 3 Business
Combinations relating to favourable or unfavourable terms of an operating lease
acquired as part of a business combination the lessee shall derecognise that
asset or liability and adjust the carrying amount of the rightofuse asset by a
corresponding amount at the date of initial application
References to IFRS 9
C20 If an entity applies this Standard but does not yet apply IFRS 9 Financial
Instruments any reference in this Standard to IFRS 9 shall be read as a reference
to IAS 39 Financial Instruments Recognition and Measurement
Withdrawal of other Standards
C21 This Standard supersedes the following Standards and Interpretations
(a) IAS 17 Leases
(b) IFRIC 4 Determining whether an Arrangement contains a Lease
(c) SIC15 Operating Leases—Incentives and
(d) SIC27 Evaluating the Substance of Transactions Involving the Legal Form of a
Lease
IFRS 16
IFRS Foundation A777Appendix D
Amendments to other Standards
This appendix sets out the amendments to other Standards that are a consequence of the IASB issuing this
Standard An entity shall apply the amendments for annual periods beginning on or after 1 January
2019 If an entity applies this Standard for an earlier period it shall also apply these amendments for
that earlier period
An entity is not permitted to apply IFRS 16 before applying IFRS 15 Revenue from Contracts with
Customers (see paragraph C1)
Consequently for Standards that were effective on 1 January 2016 the amendments in this appendix are
presented based on the text of those Standards that was effective on 1 January 2016 as amended by
IFRS 15 The text of those Standards in this appendix does not include any other amendments that were
not effective at 1 January 2016
For Standards that were not effective on 1 January 2016 the amendments in this appendix are presented
based on the text of the initial publication of that Standard as amended by IFRS 15 The text of those
Standards in this appendix does not include any other amendments that were not effective at 1 January
2016
*****
The amendments contained in this appendix when this Standard was issued in 2016 have been
incorporated into the text of the relevant Standards included in this volume
IFRS 16
IFRS FoundationA778
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This Preface is issued to set out the objectives and due process of the International
Accounting Standards Board and to explain the scope authority and timing of
application of International Financial Reporting Standards The Preface was approved by
the IASB in April 2002 and superseded the Preface published in January 1975 (amended
November 1982) In 2007 the Preface was amended in January and October to reflect
changes in the IASC Foundation’s2 Constitution and in September as a consequence of
the changes made by IAS 1 Presentation of Financial Statements (as revised in 2007) In
January 2008 paragraph 9 was amended to update the reference to the body now known
as the IPSASB In 2010 the Preface was amended to reflect the Constitution as revised in
January 2009 and January 2010 and the publication of the Conceptual Framework in
September 2010
1 The International Accounting Standards Board (IASB) was established in 2001 as
part of the International Accounting Standards Committee (IASC) Foundation
In 2010 the IASC Foundation was renamed the IFRS Foundation The governance
of the IFRS Foundation rests with twentytwo Trustees The Trustees’
responsibilities include appointing the members of the IASB and associated
councils and committees as well as securing financing for the organisation The
IASB comprises fifteen fulltime members (the IFRS Foundation’s Constitution
provides for membership to rise to sixteen by 1 July 2012) Approval of
International Financial Reporting Standards (IFRSs) and related documents such
as the Conceptual Framework for Financial Reporting exposure drafts and other
discussion documents is the responsibility of the IASB
2 The IFRS Interpretations Committee3 comprises fourteen voting members and a
nonvoting Chairman all appointed by the Trustees The role of the Committee
is to prepare interpretations of IFRSs for approval by the IASB and in the context
of the Conceptual Framework to provide timely guidance on financial reporting
issues The Committee (then called the International Financial Reporting
Interpretations Committee) replaced the former Standing Interpretations
Committee (SIC) in 2002
3 The IFRS Advisory Council4 is appointed by the Trustees It provides a formal
vehicle for participation by organisations and individuals with an interest in
international financial reporting The participants have diverse geographical
and functional backgrounds The Council’s objective is to give advice to the IASB
on priorities agenda decisions and on major standardsetting projects
4 The IASB was preceded by the Board of IASC which came into existence on
29 June 1973 as a result of an agreement by professional accountancy bodies in
Australia Canada France Germany Japan Mexico the Netherlands the United
1 including IFRIC and SIC Interpretations
2 In July 2010 the IASC Foundation was renamed the IFRS Foundation
3 Before March 2010 the Interpretations Committee was called the International Financial Reporting
Interpretations Committee (IFRIC)
4 Before March 2010 the IFRS Advisory Council was called the Standards Advisory Council (SAC)
Preface to IFRSs
IFRS Foundation A13Kingdom and Ireland and the United States of America A revised Agreement
and Constitution were signed in November 1982 The Constitution was further
revised in October 1992 and May 2000 by the IASC Board Under the May 2000
Constitution the professional accountancy bodies adopted a mechanism
enabling the appointed Trustees to put the May 2000 Constitution into force
The Trustees activated the new Constitution in January 2001 and revised it in
March 20025
5 At its meeting on 20 April 2001 the IASB passed the following resolution
All Standards and Interpretations issued under previous Constitutions continue to
be applicable unless and until they are amended or withdrawn The International
Accounting Standards Board may amend or withdraw International Accounting
Standards and SIC Interpretations issued under previous Constitutions of IASC as
well as issue new Standards and Interpretations
When the term IFRSs is used in this Preface it includes standards and
Interpretations approved by the IASB and International Accounting Standards
(IASs) and SIC Interpretations issued under previous Constitutions
Objectives of the IASB
6 The objectives of the IASB are
(a) to develop in the public interest a single set of high quality
understandable enforceable and globally accepted financial reporting
standards based on clearly articulated principles These standards
should require high quality transparent and comparable information in
financial statements and other financial reporting to help investors
other participants in the various capital markets of the world and other
users of financial information make economic decisions
(b) to promote the use and rigorous application of those standards
(c) in fulfilling the objectives associated with (a) and (b) to take account of
as appropriate the needs of a range of sizes and types of entities in
diverse economic settings
(d) to promote and facilitate the adoption of IFRSs being the standards and
interpretations issued by the IASB through the convergence of national
accounting standards and IFRSs
Scope and authority of International Financial Reporting
Standards
7 The IASB achieves its objectives primarily by developing and publishing IFRSs
and promoting the use of those standards in general purpose financial
statements and other financial reporting Other financial reporting comprises
information provided outside financial statements that assists in the
interpretation of a complete set of financial statements or improves users’
ability to make efficient economic decisions In developing IFRSs the IASB
5 The Constitution was further revised in July 2002 June 2005 October 2007 January 2009 January
2010 and January 2013
Preface to IFRSs
IFRS FoundationA14works with national standardsetters to promote and facilitate adoption of IFRSs
through convergence of national accounting standards and IFRSs
8 IFRSs set out recognition measurement presentation and disclosure
requirements dealing with transactions and events that are important in
general purpose financial statements They may also set out such requirements
for transactions and events that arise mainly in specific industries IFRSs are
based on the Conceptual Framework which addresses the concepts underlying the
information presented in general purpose financial statements Although the
Conceptual Framework was not issued until September 2010 it was developed from
the previous Framework for the Preparation and Presentation of Financial Statements
which the IASB adopted in 2001 The objective of the Conceptual Framework is to
facilitate the consistent and logical formulation of IFRSs The Conceptual
Framework also provides a basis for the use of judgement in resolving accounting
issues
9 IFRSs are designed to apply to the general purpose financial statements and
other financial reporting of profitoriented entities Profitoriented entities
include those engaged in commercial industrial financial and similar activities
whether organised in corporate or in other forms They include organisations
such as mutual insurance companies and other mutual cooperative entities that
provide dividends or other economic benefits directly and proportionately to
their owners members or participants Although IFRSs are not designed to
apply to notforprofit activities in the private sector public sector or
government entities with such activities may find them appropriate The
International Public Sector Accounting Standards Board (IPSASB) prepares
accounting standards for governments and other public sector entities other
than government business entities based on IFRSs
10 IFRSs apply to all general purpose financial statements Such financial
statements are directed towards the common information needs of a wide range
of users for example shareholders creditors employees and the public at large
The objective of financial statements is to provide information about the
financial position performance and cash flows of an entity that is useful to
those users in making economic decisions
11 A complete set of financial statements includes a statement of financial position
a statement of comprehensive income a statement of changes in equity a
statement of cash flows and accounting policies and explanatory notes When a
separate income statement is presented in accordance with IAS 1 Presentation of
Financial Statements (as revised in 2007) it is part of that complete set In the
interest of timeliness and cost considerations and to avoid repeating
information previously reported an entity may provide less information in its
interim financial statements than in its annual financial statements IAS 34
Interim Financial Reporting prescribes the minimum content of complete or
condensed financial statements for an interim period The term financial
statements’ includes a complete set of financial statements prepared for an
interim or annual period and condensed financial statements for an interim
period
12 Some IFRSs permit different treatments for given transactions and events The
IASB’s objective is to require like transactions and events to be accounted for and
Preface to IFRSs
IFRS Foundation A15reported in a like way and unlike transactions and events to be accounted for
and reported differently both within an entity over time and among entities
Consequently the IASB intends not to permit choices in accounting treatment
Also the IASB has reconsidered and will continue to reconsider those
transactions and events for which IFRSs permit a choice of accounting
treatment with the objective of reducing the number of those choices
13 Standards approved by the IASB include paragraphs in bold type and plain type
which have equal authority Paragraphs in bold type indicate the main
principles An individual standard should be read in the context of the objective
stated in that standard and this Preface
14 Interpretations of IFRSs are prepared by the Interpretations Committee to give
authoritative guidance on issues that are likely to receive divergent or
unacceptable treatment in the absence of such guidance
15 IAS 1 (as revised in 2007) includes the following requirement
An entity whose financial statements comply with IFRSs shall make an explicit and
unreserved statement of such compliance in the notes An entity shall not
describe financial statements as complying with IFRSs unless they comply with all
the requirements of IFRSs
16 Any limitation of the scope of an IFRS is made clear in the standard
Due process
17 IFRSs are developed through an international due process that involves
accountants financial analysts and other users of financial statements the
business community stock exchanges regulatory and legal authorities
academics and other interested individuals and organisations from around the
world The IASB consults in public meetings the Advisory Council on major
projects agenda decisions and work priorities and discusses technical matters
in meetings that are open to public observation Due process for projects
normally but not necessarily involves the following steps (the steps that are
required under the terms of the IFRS Foundation’s Constitution are indicated by
an asterisk*)
(a) the staff are asked to identify and review all the issues associated with
the topic and to consider the application of the Conceptual Framework to
the issues
(b) study of national accounting requirements and practice and an
exchange of views about the issues with national standardsetters
(c) consulting the Trustees and the Advisory Council about the advisability
of adding the topic to the IASB’s agenda*6
(d) formation of an advisory group to give advice to the IASB on the project
(e) publishing for public comment a discussion document
(f) publishing for public comment an exposure draft (including any
dissenting opinions held by IASB members) approved by at least nine
6 Beginning no later than 30 June 2011 the IASB is required to carry out a public consultation on its
agenda every three years
Preface to IFRSs
IFRS FoundationA16votes of the IASB if there are fewer than sixteen members or by ten of its
members if there are sixteen members*
(g) normally publishing with an exposure draft a basis for conclusions and
the alternative views of any IASB member who opposes publication*
(h) consideration of all comments received within the comment period on
discussion documents and exposure drafts*
(i) consideration of the desirability of holding a public hearing and of the
desirability of conducting field tests and if considered desirable holding
such hearings and conducting such tests
(j) approval of a standard by at least nine votes of the IASB if there are fewer
than sixteen members or by ten of its members if there are sixteen
members* and
(k) publishing with a standard (i) a basis for conclusions explaining among
other things the steps in the IASB’s due process and how the IASB dealt
with public comments on the exposure draft and (ii) the dissenting
opinion of any IASB member*
18 Interpretations of IFRSs are developed through an international due process that
involves accountants financial analysts and other users of financial statements
the business community stock exchanges regulatory and legal authorities
academics and other interested individuals and organisations from around the
world The Interpretations Committee discusses technical matters in meetings
that are open to public observation The due process for each project normally
but not necessarily involves the following steps (the steps that are required
under the terms of the IFRS Foundation’s Constitution are indicated by an
asterisk*)
(a) the staff are asked to identify and review all the issues associated with
the topic and to consider the application of the Conceptual Framework to
the issues
(b) consideration of the implications for the issues of the hierarchy of IAS 8
Accounting Policies Changes in Accounting Estimates and Errors
(c) publication of a draft Interpretation for public comment if no more than
four Committee members have voted against the proposal*
(d) consideration of all comments received within the comment period on a
draft Interpretation*
(e) approval by the Interpretations Committee of an Interpretation if no
more than four Committee members have voted against the
Interpretation after considering public comments on the draft
Interpretation* and
(f) approval of the Interpretation by at least nine votes of the IASB if there
are fewer than sixteen members or by ten of its members if there are
sixteen members*
Preface to IFRSs
IFRS Foundation A17Timing of application of International Financial Reporting
Standards
19 IFRSs apply from a date specified in the document New or revised IFRSs set out
transitional provisions to be applied on their initial application
20 The IASB has no general policy of exempting transactions occurring before a
specific date from the requirements of new IFRSs When financial statements
are used to monitor compliance with contracts and agreements a new IFRS may
have consequences that were not foreseen when the contract or agreement was
finalised For example covenants contained in banking and loan agreements
may impose limits on measures shown in a borrower’s financial statements The
IASB believes the fact that financial reporting requirements evolve and change
over time is well understood and would be known to the parties when they
entered into the agreement It is up to the parties to determine whether the
agreement should be insulated from the effects of a future IFRS or if not the
manner in which it might be renegotiated to reflect changes in reporting rather
than changes in the underlying financial condition
21 Exposure drafts are issued for comment and their proposals are subject to
revision Until the effective date of an IFRS the requirements of any IFRS that
would be affected by proposals in an exposure draft remain in force
Language
22 The approved text of any discussion document exposure draft or IFRS is that
approved by the IASB in the English language The IASB may approve
translations in other languages provided that the translation is prepared in
accordance with a process that provides assurance of the quality of the
translation and the IASB may license other translations
Preface to IFRSs
IFRS FoundationA18The Conceptual Framework for Financial
Reporting
The Conceptual Framework was issued by the International Accounting Standards Board in
September 2010 It superseded the Framework for the Preparation and Presentation of Financial
Statements
IFRS Foundation A15CONTENTS
from paragraph
FOREWORD
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
INTRODUCTION
Purpose and status
Scope
CHAPTERS
1 The objective of general purpose financial reporting OB1
2 The reporting entity to be added
3 Qualitative characteristics of useful financial information QC1
4 The Framework (1989) the remaining text 41
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF THE CONCEPTUAL FRAMEWORK 2010
BASIS FOR CONCLUSIONS ON CHAPTERS 1 AND 3
TABLE OF CONCORDANCE
Conceptual Framework
IFRS FoundationA16Foreword
The International Accounting Standards Board is currently in the process of updating its
conceptual framework This conceptual framework project is conducted in phases
As a chapter is finalised the relevant paragraphs in the Framework for the Preparation and
Presentation of Financial Statements that was published in 1989 will be replaced When the
conceptual framework project is completed the Board will have a complete comprehensive
and single document called the Conceptual Framework for Financial Reporting
This version of the Conceptual Framework includes the first two chapters the Board published
as a result of its first phase of the conceptual framework project—Chapter 1 The objective of
general purpose financial reporting and Chapter 3 Qualitative characteristics of useful financial
information Chapter 2 will deal with the reporting entity concept The Board published an
exposure draft on this topic in March 2010 with a comment period that ended on 16 July
2010 Chapter 4 contains the remaining text of the Framework (1989) The table of
concordance at the end of this publication shows how the contents of the Framework (1989)
and the Conceptual Framework (2010) correspond
Conceptual Framework
IFRS Foundation A17The Introduction has been carried forward from the Framework (1989) This will be
updated when the IASB considers the purpose of the Conceptual Framework Until then the
purpose and the status of the Conceptual Framework are the same as before
Introduction
Financial statements are prepared and presented for external users by many entities around
the world Although such financial statements may appear similar from country to
country there are differences which have probably been caused by a variety of social
economic and legal circumstances and by different countries having in mind the needs of
different users of financial statements when setting national requirements
These different circumstances have led to the use of a variety of definitions of the elements
of financial statements for example assets liabilities equity income and expenses They
have also resulted in the use of different criteria for the recognition of items in the financial
statements and in a preference for different bases of measurement The scope of the
financial statements and the disclosures made in them have also been affected
The International Accounting Standards Board is committed to narrowing these differences
by seeking to harmonise regulations accounting standards and procedures relating to the
preparation and presentation of financial statements It believes that further
harmonisation can best be pursued by focusing on financial statements that are prepared
for the purpose of providing information that is useful in making economic decisions
The Board believes that financial statements prepared for this purpose meet the common
needs of most users This is because nearly all users are making economic decisions for
example
(a) to decide when to buy hold or sell an equity investment
(b) to assess the stewardship or accountability of management
(c) to assess the ability of the entity to pay and provide other benefits to its employees
(d) to assess the security for amounts lent to the entity
(e) to determine taxation policies
(f) to determine distributable profits and dividends
(g) to prepare and use national income statistics
(h) to regulate the activities of entities
The Board recognises however that governments in particular may specify different or
additional requirements for their own purposes These requirements should not however
affect financial statements published for the benefit of other users unless they also meet the
needs of those other users
Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financial capital maintenance
concept Other models and concepts may be more appropriate in order to meet the
objective of providing information that is useful for making economic decisions although
there is at present no consensus for change This Conceptual Framework has been developed
so that it is applicable to a range of accounting models and concepts of capital and capital
maintenance
Conceptual Framework
IFRS FoundationA18Purpose and status
This Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users The purpose of the Conceptual
Framework is
(a) to assist the Board in the development of future IFRSs and in its review of existing
IFRSs
(b) to assist the Board in promoting harmonisation of regulations accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRSs
(c) to assist national standardsetting bodies in developing national standards
(d) to assist preparers of financial statements in applying IFRSs and in dealing with
topics that have yet to form the subject of an IFRS
(e) to assist auditors in forming an opinion on whether financial statements comply
with IFRSs
(f) to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs and
(g) to provide those who are interested in the work of the IASB with information about
its approach to the formulation of IFRSs
This Conceptual Framework is not an IFRS and hence does not define standards for any
particular measurement or disclosure issue Nothing in this Conceptual Framework overrides
any specific IFRS
The Board recognises that in a limited number of cases there may be a conflict between the
Conceptual Framework and an IFRS In those cases where there is a conflict the requirements
of the IFRS prevail over those of the Conceptual Framework As however the Board will be
guided by the Conceptual Framework in the development of future IFRSs and in its review of
existing IFRSs the number of cases of conflict between the Conceptual Framework and IFRSs
will diminish through time
The Conceptual Framework will be revised from time to time on the basis of the Board’s
experience of working with it
Scope
The Conceptual Framework deals with
(a) the objective of financial reporting
(b) the qualitative characteristics of useful financial information
(c) the definition recognition and measurement of the elements from which financial
statements are constructed and
(d) concepts of capital and capital maintenance
Conceptual Framework
IFRS Foundation A19CONTENTS
from paragraph
CHAPTER 1 THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
INTRODUCTION OB1
OBJECTIVE USEFULNESS AND LIMITATIONS OF GENERAL PURPOSE
FINANCIAL REPORTING OB2
INFORMATION ABOUT A REPORTING ENTITY’S ECONOMIC RESOURCES
CLAIMS AGAINST THE ENTITY AND CHANGES IN RESOURCES AND CLAIMS OB12
Economic resources and claims OB13
Changes in economic resources and claims OB15
Financial performance reflected by accrual accounting OB17
Financial performance reflected by past cash flows OB20
Changes in economic resources and claims not resulting from financial
performance OB21
Conceptual Framework
IFRS FoundationA20Chapter 1 The objective of general purpose financial reporting
Introduction
OB1 The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework Other aspects of the Conceptual Framework—a reporting
entity concept the qualitative characteristics of and the constraint on useful
financial information elements of financial statements recognition
measurement presentation and disclosure—flow logically from the objective
Objective usefulness and limitations of general purpose
financial reporting
OB2 The objective of general purpose financial reporting1 is to provide financial
information about the reporting entity that is useful to existing and potential
investors lenders and other creditors in making decisions about providing
resources to the entity Those decisions involve buying selling or holding equity
and debt instruments and providing or settling loans and other forms of credit
OB3 Decisions by existing and potential investors about buying selling or holding
equity and debt instruments depend on the returns that they expect from an
investment in those instruments for example dividends principal and interest
payments or market price increases Similarly decisions by existing and
potential lenders and other creditors about providing or settling loans and other
forms of credit depend on the principal and interest payments or other returns
that they expect Investors’ lenders’ and other creditors’ expectations about
returns depend on their assessment of the amount timing and uncertainty of
(the prospects for) future net cash inflows to the entity Consequently existing
and potential investors lenders and other creditors need information to help
them assess the prospects for future net cash inflows to an entity
OB4 To assess an entity’s prospects for future net cash inflows existing and potential
investors lenders and other creditors need information about the resources of
the entity claims against the entity and how efficiently and effectively the
entity’s management and governing board2 have discharged their
responsibilities to use the entity’s resources Examples of such responsibilities
include protecting the entity’s resources from unfavourable effects of economic
factors such as price and technological changes and ensuring that the entity
complies with applicable laws regulations and contractual provisions
Information about management’s discharge of its responsibilities is also useful
for decisions by existing investors lenders and other creditors who have the
right to vote on or otherwise influence management’s actions
OB5 Many existing and potential investors lenders and other creditors cannot
require reporting entities to provide information directly to them and must rely
1 Throughout this Conceptual Framework the terms financial reports and financial reporting refer to general
purpose financial reports and general purpose financial reporting unless specifically indicated otherwise
2 Throughout this Conceptual Framework the term management refers to management and the governing
board of an entity unless specifically indicated otherwise
Conceptual Framework
IFRS Foundation A21on general purpose financial reports for much of the financial information they
need Consequently they are the primary users to whom general purpose
financial reports are directed
OB6 However general purpose financial reports do not and cannot provide all of the
information that existing and potential investors lenders and other creditors
need Those users need to consider pertinent information from other sources
for example general economic conditions and expectations political events and
political climate and industry and company outlooks
OB7 General purpose financial reports are not designed to show the value of a
reporting entity but they provide information to help existing and potential
investors lenders and other creditors to estimate the value of the reporting
entity
OB8 Individual primary users have different and possibly conflicting information
needs and desires The Board in developing financial reporting standards will
seek to provide the information set that will meet the needs of the maximum
number of primary users However focusing on common information needs
does not prevent the reporting entity from including additional information
that is most useful to a particular subset of primary users
OB9 The management of a reporting entity is also interested in financial information
about the entity However management need not rely on general purpose
financial reports because it is able to obtain the financial information it needs
internally
OB10 Other parties such as regulators and members of the public other than
investors lenders and other creditors may also find general purpose financial
reports useful However those reports are not primarily directed to these other
groups
OB11 To a large extent financial reports are based on estimates judgements and
models rather than exact depictions The Conceptual Framework establishes the
concepts that underlie those estimates judgements and models The concepts
are the goal towards which the Board and preparers of financial reports strive
As with most goals the Conceptual Framework’s vision of ideal financial reporting
is unlikely to be achieved in full at least not in the short term because it takes
time to understand accept and implement new ways of analysing transactions
and other events Nevertheless establishing a goal towards which to strive is
essential if financial reporting is to evolve so as to improve its usefulness
Information about a reporting entity’s economic
resources claims against the entity and changes in
resources and claims
OB12 General purpose financial reports provide information about the financial
position of a reporting entity which is information about the entity’s economic
resources and the claims against the reporting entity Financial reports also
provide information about the effects of transactions and other events that
Conceptual Framework
IFRS FoundationA22change a reporting entity’s economic resources and claims Both types of
information provide useful input for decisions about providing resources to an
entity
Economic resources and claims
OB13 Information about the nature and amounts of a reporting entity’s economic
resources and claims can help users to identify the reporting entity’s financial
strengths and weaknesses That information can help users to assess the
reporting entity’s liquidity and solvency its needs for additional financing and
how successful it is likely to be in obtaining that financing Information about
priorities and payment requirements of existing claims helps users to predict
how future cash flows will be distributed among those with a claim against the
reporting entity
OB14 Different types of economic resources affect a user’s assessment of the reporting
entity’s prospects for future cash flows differently Some future cash flows
result directly from existing economic resources such as accounts receivable
Other cash flows result from using several resources in combination to produce
and market goods or services to customers Although those cash flows cannot be
identified with individual economic resources (or claims) users of financial
reports need to know the nature and amount of the resources available for use
in a reporting entity’s operations
Changes in economic resources and claims
OB15 Changes in a reporting entity’s economic resources and claims result from that
entity’s financial performance (see paragraphs OB17–OB20) and from other
events or transactions such as issuing debt or equity instruments (see
paragraph OB21) To properly assess the prospects for future cash flows from the
reporting entity users need to be able to distinguish between both of these
changes
OB16 Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic resources
Information about the return the entity has produced provides an indication of
how well management has discharged its responsibilities to make efficient and
effective use of the reporting entity’s resources Information about the
variability and components of that return is also important especially in
assessing the uncertainty of future cash flows Information about a reporting
entity’s past financial performance and how its management discharged its
responsibilities is usually helpful in predicting the entity’s future returns on its
economic resources
Financial performance reflected by accrual accounting
OB17 Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the
periods in which those effects occur even if the resulting cash receipts and
payments occur in a different period This is important because information
about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for
Conceptual Framework
IFRS Foundation A23assessing the entity’s past and future performance than information solely
about cash receipts and payments during that period
OB18 Information about a reporting entity’s financial performance during a period
reflected by changes in its economic resources and claims other than by
obtaining additional resources directly from investors and creditors (see
paragraph OB21) is useful in assessing the entity’s past and future ability to
generate net cash inflows That information indicates the extent to which the
reporting entity has increased its available economic resources and thus its
capacity for generating net cash inflows through its operations rather than by
obtaining additional resources directly from investors and creditors
OB19 Information about a reporting entity’s financial performance during a period
may also indicate the extent to which events such as changes in market prices or
interest rates have increased or decreased the entity’s economic resources and
claims thereby affecting the entity’s ability to generate net cash inflows
Financial performance reflected by past cash flows
OB20 Information about a reporting entity’s cash flows during a period also helps
users to assess the entity’s ability to generate future net cash inflows It
indicates how the reporting entity obtains and spends cash including
information about its borrowing and repayment of debt cash dividends or other
cash distributions to investors and other factors that may affect the entity’s
liquidity or solvency Information about cash flows helps users understand a
reporting entity’s operations evaluate its financing and investing activities
assess its liquidity or solvency and interpret other information about financial
performance
Changes in economic resources and claims not resulting from
financial performance
OB21 A reporting entity’s economic resources and claims may also change for reasons
other than financial performance such as issuing additional ownership shares
Information about this type of change is necessary to give users a complete
understanding of why the reporting entity’s economic resources and claims
changed and the implications of those changes for its future financial
performance
Conceptual Framework
IFRS FoundationA24CHAPTER 2 THE REPORTING ENTITY
[to be added]
Conceptual Framework
IFRS Foundation A25CONTENTS
from paragraph
CHAPTER 3 QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
INTRODUCTION QC1
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION QC4
Fundamental qualitative characteristics QC5
Relevance QC6
Faithful representation QC12
Applying the fundamental qualitative characteristics QC17
Enhancing qualitative characteristics QC19
Comparability QC20
Verifiability QC26
Timeliness QC29
Understandability QC30
Applying the enhancing characteristics QC33
THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING QC35
Conceptual Framework
IFRS FoundationA26Chapter 3 Qualitative characteristics of useful financial
information
Introduction
QC1 The qualitative characteristics of useful financial information discussed in this
chapter identify the types of information that are likely to be most useful to the
existing and potential investors lenders and other creditors for making
decisions about the reporting entity on the basis of information in its financial
report (financial information)
QC2 Financial reports provide information about the reporting entity’s economic
resources claims against the reporting entity and the effects of transactions and
other events and conditions that change those resources and claims (This
information is referred to in the Conceptual Framework as information about the
economic phenomena) Some financial reports also include explanatory
material about management’s expectations and strategies for the reporting
entity and other types of forwardlooking information
QC3 The qualitative characteristics of useful financial information3 apply to financial
information provided in financial statements as well as to financial information
provided in other ways Cost which is a pervasive constraint on the reporting
entity’s ability to provide useful financial information applies similarly
However the considerations in applying the qualitative characteristics and the
cost constraint may be different for different types of information For example
applying them to forwardlooking information may be different from applying
them to information about existing economic resources and claims and to
changes in those resources and claims
Qualitative characteristics of useful financial information
QC4 If financial information is to be useful it must be relevant and faithfully
represent what it purports to represent The usefulness of financial information
is enhanced if it is comparable verifiable timely and understandable
Fundamental qualitative characteristics
QC5 The fundamental qualitative characteristics are relevance and faithful
representation
Relevance
QC6 Relevant financial information is capable of making a difference in the decisions
made by users Information may be capable of making a difference in a decision
even if some users choose not to take advantage of it or are already aware of it
from other sources
QC7 Financial information is capable of making a difference in decisions if it has
predictive value confirmatory value or both
3 Throughout this Conceptual Framework the terms qualitative characteristics and constraint refer to the
qualitative characteristics of and the constraint on useful financial information
Conceptual Framework
IFRS Foundation A27QC8 Financial information has predictive value if it can be used as an input to
processes employed by users to predict future outcomes Financial information
need not be a prediction or forecast to have predictive value Financial
information with predictive value is employed by users in making their own
predictions
QC9 Financial information has confirmatory value if it provides feedback about
(confirms or changes) previous evaluations
QC10 The predictive value and confirmatory value of financial information are
interrelated Information that has predictive value often also has confirmatory
value For example revenue information for the current year which can be
used as the basis for predicting revenues in future years can also be compared
with revenue predictions for the current year that were made in past years The
results of those comparisons can help a user to correct and improve the
processes that were used to make those previous predictions
Materiality
QC11 Information is material if omitting it or misstating it could influence decisions
that users make on the basis of financial information about a specific reporting
entity In other words materiality is an entityspecific aspect of relevance based
on the nature or magnitude or both of the items to which the information
relates in the context of an individual entity’s financial report Consequently
the Board cannot specify a uniform quantitative threshold for materiality or
predetermine what could be material in a particular situation
Faithful representation
QC12 Financial reports represent economic phenomena in words and numbers To be
useful financial information must not only represent relevant phenomena but
it must also faithfully represent the phenomena that it purports to represent
To be a perfectly faithful representation a depiction would have three
characteristics It would be complete neutral and free from error Of course
perfection is seldom if ever achievable The Board’s objective is to maximise
those qualities to the extent possible
QC13 A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted including all necessary
descriptions and explanations For example a complete depiction of a group of
assets would include at a minimum a description of the nature of the assets in
the group a numerical depiction of all of the assets in the group and a
description of what the numerical depiction represents (for example original
cost adjusted cost or fair value) For some items a complete depiction may also
entail explanations of significant facts about the quality and nature of the items
factors and circumstances that might affect their quality and nature and the
process used to determine the numerical depiction
QC14 A neutral depiction is without bias in the selection or presentation of financial
information A neutral depiction is not slanted weighted emphasised
deemphasised or otherwise manipulated to increase the probability that
financial information will be received favourably or unfavourably by users
Neutral information does not mean information with no purpose or no
Conceptual Framework
IFRS FoundationA28influence on behaviour On the contrary relevant financial information is by
definition capable of making a difference in users’ decisions
QC15 Faithful representation does not mean accurate in all respects Free from error
means there are no errors or omissions in the description of the phenomenon
and the process used to produce the reported information has been selected and
applied with no errors in the process In this context free from error does not
mean perfectly accurate in all respects For example an estimate of an
unobservable price or value cannot be determined to be accurate or inaccurate
However a representation of that estimate can be faithful if the amount is
described clearly and accurately as being an estimate the nature and limitations
of the estimating process are explained and no errors have been made in
selecting and applying an appropriate process for developing the estimate
QC16 A faithful representation by itself does not necessarily result in useful
information For example a reporting entity may receive property plant and
equipment through a government grant Obviously reporting that an entity
acquired an asset at no cost would faithfully represent its cost but that
information would probably not be very useful A slightly more subtle example
is an estimate of the amount by which an asset’s carrying amount should be
adjusted to reflect an impairment in the asset’s value That estimate can be a
faithful representation if the reporting entity has properly applied an
appropriate process properly described the estimate and explained any
uncertainties that significantly affect the estimate However if the level of
uncertainty in such an estimate is sufficiently large that estimate will not be
particularly useful In other words the relevance of the asset being faithfully
represented is questionable If there is no alternative representation that is
more faithful that estimate may provide the best available information
Applying the fundamental qualitative characteristics
QC17 Information must be both relevant and faithfully represented if it is to be useful
Neither a faithful representation of an irrelevant phenomenon nor an unfaithful
representation of a relevant phenomenon helps users make good decisions
QC18 The most efficient and effective process for applying the fundamental
qualitative characteristics would usually be as follows (subject to the effects of
enhancing characteristics and the cost constraint which are not considered in
this example) First identify an economic phenomenon that has the potential to
be useful to users of the reporting entity’s financial information Second
identify the type of information about that phenomenon that would be most
relevant if it is available and can be faithfully represented Third determine
whether that information is available and can be faithfully represented If so
the process of satisfying the fundamental qualitative characteristics ends at that
point If not the process is repeated with the next most relevant type of
information
Enhancing qualitative characteristics
QC19 Comparability verifiability timeliness and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and
faithfully represented The enhancing qualitative characteristics may also help
Conceptual Framework
IFRS Foundation A29determine which of two ways should be used to depict a phenomenon if both are
considered equally relevant and faithfully represented
Comparability
QC20 Users’ decisions involve choosing between alternatives for example selling or
holding an investment or investing in one reporting entity or another
Consequently information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar
information about the same entity for another period or another date
QC21 Comparability is the qualitative characteristic that enables users to identify and
understand similarities in and differences among items Unlike the other
qualitative characteristics comparability does not relate to a single item A
comparison requires at least two items
QC22 Consistency although related to comparability is not the same Consistency
refers to the use of the same methods for the same items either from period to
period within a reporting entity or in a single period across entities
Comparability is the goal consistency helps to achieve that goal
QC23 Comparability is not uniformity For information to be comparable like things
must look alike and different things must look different Comparability of
financial information is not enhanced by making unlike things look alike any
more than it is enhanced by making like things look different
QC24 Some degree of comparability is likely to be attained by satisfying the
fundamental qualitative characteristics A faithful representation of a relevant
economic phenomenon should naturally possess some degree of comparability
with a faithful representation of a similar relevant economic phenomenon by
another reporting entity
QC25 Although a single economic phenomenon can be faithfully represented in
multiple ways permitting alternative accounting methods for the same
economic phenomenon diminishes comparability
Verifiability
QC26 Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent Verifiability means that
different knowledgeable and independent observers could reach consensus
although not necessarily complete agreement that a particular depiction is a
faithful representation Quantified information need not be a single point
estimate to be verifiable A range of possible amounts and the related
probabilities can also be verified
QC27 Verification can be direct or indirect Direct verification means verifying an
amount or other representation through direct observation for example by
counting cash Indirect verification means checking the inputs to a model
formula or other technique and recalculating the outputs using the same
methodology An example is verifying the carrying amount of inventory by
checking the inputs (quantities and costs) and recalculating the ending
inventory using the same cost flow assumption (for example using the firstin
firstout method)
Conceptual Framework
IFRS FoundationA30QC28 It may not be possible to verify some explanations and forwardlooking financial
information until a future period if at all To help users decide whether they
want to use that information it would normally be necessary to disclose the
underlying assumptions the methods of compiling the information and other
factors and circumstances that support the information
Timeliness
QC29 Timeliness means having information available to decisionmakers in time to be
capable of influencing their decisions Generally the older the information is
the less useful it is However some information may continue to be timely long
after the end of a reporting period because for example some users may need to
identify and assess trends
Understandability
QC30 Classifying characterising and presenting information clearly and concisely
makes it understandable
QC31 Some phenomena are inherently complex and cannot be made easy to
understand Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to
understand However those reports would be incomplete and therefore
potentially misleading
QC32 Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyse the information
diligently At times even wellinformed and diligent users may need to seek the
aid of an adviser to understand information about complex economic
phenomena
Applying the enhancing qualitative characteristics
QC33 Enhancing qualitative characteristics should be maximised to the extent
possible However the enhancing qualitative characteristics either individually
or as a group cannot make information useful if that information is irrelevant
or not faithfully represented
QC34 Applying the enhancing qualitative characteristics is an iterative process that
does not follow a prescribed order Sometimes one enhancing qualitative
characteristic may have to be diminished to maximise another qualitative
characteristic For example a temporary reduction in comparability as a result
of prospectively applying a new financial reporting standard may be worthwhile
to improve relevance or faithful representation in the longer term Appropriate
disclosures may partially compensate for noncomparability
The cost constraint on useful financial reporting
QC35 Cost is a pervasive constraint on the information that can be provided by
financial reporting Reporting financial information imposes costs and it is
important that those costs are justified by the benefits of reporting that
information There are several types of costs and benefits to consider
Conceptual Framework
IFRS Foundation A31QC36 Providers of financial information expend most of the effort involved in
collecting processing verifying and disseminating financial information but
users ultimately bear those costs in the form of reduced returns Users of
financial information also incur costs of analysing and interpreting the
information provided If needed information is not provided users incur
additional costs to obtain that information elsewhere or to estimate it
QC37 Reporting financial information that is relevant and faithfully represents what
it purports to represent helps users to make decisions with more confidence
This results in more efficient functioning of capital markets and a lower cost of
capital for the economy as a whole An individual investor lender or other
creditor also receives benefits by making more informed decisions However it
is not possible for general purpose financial reports to provide all the
information that every user finds relevant
QC38 In applying the cost constraint the Board assesses whether the benefits of
reporting particular information are likely to justify the costs incurred to
provide and use that information When applying the cost constraint in
developing a proposed financial reporting standard the Board seeks
information from providers of financial information users auditors academics
and others about the expected nature and quantity of the benefits and costs of
that standard In most situations assessments are based on a combination of
quantitative and qualitative information
QC39 Because of the inherent subjectivity different individuals’ assessments of the
costs and benefits of reporting particular items of financial information will
vary Therefore the Board seeks to consider costs and benefits in relation to
financial reporting generally and not just in relation to individual reporting
entities That does not mean that assessments of costs and benefits always
justify the same reporting requirements for all entities Differences may be
appropriate because of different sizes of entities different ways of raising capital
(publicly or privately) different users’ needs or other factors
Conceptual Framework
IFRS FoundationA32CONTENTS
from paragraph
CHAPTER 4 THE FRAMEWORK (1989) THE REMAINING
TEXT
UNDERLYING ASSUMPTION 41
Going concern 41
THE ELEMENTS OF FINANCIAL STATEMENTS 42
Financial position 44
Assets 48
Liabilities 415
Equity 420
Performance 424
Income 429
Expenses 433
Capital maintenance adjustments 436
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS 437
The probability of future economic benefit 440
Reliability of measurement 441
Recognition of assets 444
Recognition of liabilities 446
Recognition of income 447
Recognition of expenses 449
MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS 454
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE 457
Concepts of capital 457
Concepts of capital maintenance and the determination of profit 459
Conceptual Framework
IFRS Foundation A33Chapter 4 The Framework (1989) the remaining text
The remaining text of the Framework for the Preparation and Presentation of Financial
Statements (1989) has not been amended to reflect changes made by IAS 1 Presentation of
Financial Statements (as revised in 2007)
The remaining text will also be updated when the Board has considered the elements of financial
statements and their measurement bases
Underlying assumption
Going concern
41 The financial statements are normally prepared on the assumption that an
entity is a going concern and will continue in operation for the foreseeable
future Hence it is assumed that the entity has neither the intention nor the
need to liquidate or curtail materially the scale of its operations if such an
intention or need exists the financial statements may have to be prepared on a
different basis and if so the basis used is disclosed
The elements of financial statements
42 Financial statements portray the financial effects of transactions and other
events by grouping them into broad classes according to their economic
characteristics These broad classes are termed the elements of financial
statements The elements directly related to the measurement of financial
position in the balance sheet are assets liabilities and equity The elements
directly related to the measurement of performance in the income statement are
income and expenses The statement of changes in financial position usually
reflects income statement elements and changes in balance sheet elements
accordingly this Conceptual Framework identifies no elements that are unique to
this statement
43 The presentation of these elements in the balance sheet and the income
statement involves a process of subclassification For example assets and
liabilities may be classified by their nature or function in the business of the
entity in order to display information in the manner most useful to users for
purposes of making economic decisions
Financial position
44 The elements directly related to the measurement of financial position are
assets liabilities and equity These are defined as follows
(a) An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity
(b) A liability is a present obligation of the entity arising from past events
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits
Conceptual Framework
IFRS FoundationA34(c) Equity is the residual interest in the assets of the entity after deducting
all its liabilities
45 The definitions of an asset and a liability identify their essential features but do
not attempt to specify the criteria that need to be met before they are recognised
in the balance sheet Thus the definitions embrace items that are not
recognised as assets or liabilities in the balance sheet because they do not satisfy
the criteria for recognition discussed in paragraphs 437–453 In particular the
expectation that future economic benefits will flow to or from an entity must be
sufficiently certain to meet the probability criterion in paragraph 438 before an
asset or liability is recognised
46 In assessing whether an item meets the definition of an asset liability or equity
attention needs to be given to its underlying substance and economic reality and
not merely its legal form Thus for example in the case of finance leases the
substance and economic reality are that the lessee acquires the economic
benefits of the use of the leased asset for the major part of its useful life in
return for entering into an obligation to pay for that right an amount
approximating to the fair value of the asset and the related finance charge
Hence the finance lease gives rise to items that satisfy the definition of an asset
and a liability and are recognised as such in the lessee’s balance sheet
47 Balance sheets drawn up in accordance with current IFRSs may include items
that do not satisfy the definitions of an asset or liability and are not shown as
part of equity The definitions set out in paragraph 44 will however underlie
future reviews of existing IFRSs and the formulation of further IFRSs
Assets
48 The future economic benefit embodied in an asset is the potential to contribute
directly or indirectly to the flow of cash and cash equivalents to the entity The
potential may be a productive one that is part of the operating activities of the
entity It may also take the form of convertibility into cash or cash equivalents
or a capability to reduce cash outflows such as when an alternative
manufacturing process lowers the costs of production
49 An entity usually employs its assets to produce goods or services capable of
satisfying the wants or needs of customers because these goods or services can
satisfy these wants or needs customers are prepared to pay for them and hence
contribute to the cash flow of the entity Cash itself renders a service to the
entity because of its command over other resources
410 The future economic benefits embodied in an asset may flow to the entity in a
number of ways For example an asset may be
(a) used singly or in combination with other assets in the production of
goods or services to be sold by the entity
(b) exchanged for other assets
(c) used to settle a liability or
(d) distributed to the owners of the entity
Conceptual Framework
IFRS Foundation A35411 Many assets for example property plant and equipment have a physical form
However physical form is not essential to the existence of an asset hence
patents and copyrights for example are assets if future economic benefits are
expected to flow from them to the entity and if they are controlled by the entity
412 Many assets for example receivables and property are associated with legal
rights including the right of ownership In determining the existence of an
asset the right of ownership is not essential thus for example property held on
a lease is an asset if the entity controls the benefits which are expected to flow
from the property Although the capacity of an entity to control benefits is
usually the result of legal rights an item may nonetheless satisfy the definition
of an asset even when there is no legal control For example knowhow
obtained from a development activity may meet the definition of an asset when
by keeping that knowhow secret an entity controls the benefits that are
expected to flow from it
413 The assets of an entity result from past transactions or other past events
Entities normally obtain assets by purchasing or producing them but other
transactions or events may generate assets examples include property received
by an entity from government as part of a programme to encourage economic
growth in an area and the discovery of mineral deposits Transactions or events
expected to occur in the future do not in themselves give rise to assets hence
for example an intention to purchase inventory does not of itself meet the
definition of an asset
414 There is a close association between incurring expenditure and generating assets
but the two do not necessarily coincide Hence when an entity incurs
expenditure this may provide evidence that future economic benefits were
sought but is not conclusive proof that an item satisfying the definition of an
asset has been obtained Similarly the absence of a related expenditure does not
preclude an item from satisfying the definition of an asset and thus becoming a
candidate for recognition in the balance sheet for example items that have
been donated to the entity may satisfy the definition of an asset
Liabilities
415 An essential characteristic of a liability is that the entity has a present
obligation An obligation is a duty or responsibility to act or perform in a
certain way Obligations may be legally enforceable as a consequence of a
binding contract or statutory requirement This is normally the case for
example with amounts payable for goods and services received Obligations
also arise however from normal business practice custom and a desire to
maintain good business relations or act in an equitable manner If for example
an entity decides as a matter of policy to rectify faults in its products even when
these become apparent after the warranty period has expired the amounts that
are expected to be expended in respect of goods already sold are liabilities
416 A distinction needs to be drawn between a present obligation and a future
commitment A decision by the management of an entity to acquire assets in
the future does not of itself give rise to a present obligation An obligation
normally arises only when the asset is delivered or the entity enters into an
irrevocable agreement to acquire the asset In the latter case the irrevocable
Conceptual Framework
IFRS FoundationA36nature of the agreement means that the economic consequences of failing to
honour the obligation for example because of the existence of a substantial
penalty leave the entity with little if any discretion to avoid the outflow of
resources to another party
417 The settlement of a present obligation usually involves the entity giving up
resources embodying economic benefits in order to satisfy the claim of the other
party Settlement of a present obligation may occur in a number of ways for
example by
(a) payment of cash
(b) transfer of other assets
(c) provision of services
(d) replacement of that obligation with another obligation or
(e) conversion of the obligation to equity
An obligation may also be extinguished by other means such as a creditor
waiving or forfeiting its rights
418 Liabilities result from past transactions or other past events Thus for example
the acquisition of goods and the use of services give rise to trade payables (unless
paid for in advance or on delivery) and the receipt of a bank loan results in an
obligation to repay the loan An entity may also recognise future rebates based
on annual purchases by customers as liabilities in this case the sale of the goods
in the past is the transaction that gives rise to the liability
419 Some liabilities can be measured only by using a substantial degree of
estimation Some entities describe these liabilities as provisions In some
countries such provisions are not regarded as liabilities because the concept of a
liability is defined narrowly so as to include only amounts that can be
established without the need to make estimates The definition of a liability in
paragraph 44 follows a broader approach Thus when a provision involves a
present obligation and satisfies the rest of the definition it is a liability even if
the amount has to be estimated Examples include provisions for payments to
be made under existing warranties and provisions to cover pension obligations
Equity
420 Although equity is defined in paragraph 44 as a residual it may be subclassified
in the balance sheet For example in a corporate entity funds contributed by
shareholders retained earnings reserves representing appropriations of
retained earnings and reserves representing capital maintenance adjustments
may be shown separately Such classifications can be relevant to the
decisionmaking needs of the users of financial statements when they indicate
legal or other restrictions on the ability of the entity to distribute or otherwise
apply its equity They may also reflect the fact that parties with ownership
interests in an entity have differing rights in relation to the receipt of dividends
or the repayment of contributed equity
421 The creation of reserves is sometimes required by statute or other law in order to
give the entity and its creditors an added measure of protection from the effects
of losses Other reserves may be established if national tax law grants
Conceptual Framework
IFRS Foundation A37exemptions from or reductions in taxation liabilities when transfers to such
reserves are made The existence and size of these legal statutory and tax
reserves is information that can be relevant to the decisionmaking needs of
users Transfers to such reserves are appropriations of retained earnings rather
than expenses
422 The amount at which equity is shown in the balance sheet is dependent on the
measurement of assets and liabilities Normally the aggregate amount of equity
only by coincidence corresponds with the aggregate market value of the shares
of the entity or the sum that could be raised by disposing of either the net assets
on a piecemeal basis or the entity as a whole on a going concern basis
423 Commercial industrial and business activities are often undertaken by means of
entities such as sole proprietorships partnerships and trusts and various types
of government business undertakings The legal and regulatory framework for
such entities is often different from that applying to corporate entities For
example there may be few if any restrictions on the distribution to owners or
other beneficiaries of amounts included in equity Nevertheless the definition
of equity and the other aspects of this Conceptual Framework that deal with equity
are appropriate for such entities
Performance
424 Profit is frequently used as a measure of performance or as the basis for other
measures such as return on investment or earnings per share The elements
directly related to the measurement of profit are income and expenses The
recognition and measurement of income and expenses and hence profit
depends in part on the concepts of capital and capital maintenance used by the
entity in preparing its financial statements These concepts are discussed in
paragraphs 457–465
425 The elements of income and expenses are defined as follows
(a) Income is increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity other than those relating to
contributions from equity participants
(b) Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity other than those relating to
distributions to equity participants
426 The definitions of income and expenses identify their essential features but do
not attempt to specify the criteria that would need to be met before they are
recognised in the income statement Criteria for the recognition of income and
expenses are discussed in paragraphs 437–453
427 Income and expenses may be presented in the income statement in different
ways so as to provide information that is relevant for economic decisionmaking
For example it is common practice to distinguish between those items of
income and expenses that arise in the course of the ordinary activities of the
entity and those that do not This distinction is made on the basis that the
source of an item is relevant in evaluating the ability of the entity to generate
Conceptual Framework
IFRS FoundationA38cash and cash equivalents in the future for example incidental activities such
as the disposal of a longterm investment are unlikely to recur on a regular basis
When distinguishing between items in this way consideration needs to be given
to the nature of the entity and its operations Items that arise from the ordinary
activities of one entity may be unusual in respect of another
428 Distinguishing between items of income and expense and combining them in
different ways also permits several measures of entity performance to be
displayed These have differing degrees of inclusiveness For example the
income statement could display gross margin profit or loss from ordinary
activities before taxation profit or loss from ordinary activities after taxation
and profit or loss
Income
429 The definition of income encompasses both revenue and gains Revenue arises
in the course of the ordinary activities of an entity and is referred to by a variety
of different names including sales fees interest dividends royalties and rent
430 Gains represent other items that meet the definition of income and may or may
not arise in the course of the ordinary activities of an entity Gains represent
increases in economic benefits and as such are no different in nature from
revenue Hence they are not regarded as constituting a separate element in this
Conceptual Framework
431 Gains include for example those arising on the disposal of noncurrent assets
The definition of income also includes unrealised gains for example those
arising on the revaluation of marketable securities and those resulting from
increases in the carrying amount of longterm assets When gains are recognised
in the income statement they are usually displayed separately because
knowledge of them is useful for the purpose of making economic decisions
Gains are often reported net of related expenses
432 Various kinds of assets may be received or enhanced by income examples
include cash receivables and goods and services received in exchange for goods
and services supplied Income may also result from the settlement of liabilities
For example an entity may provide goods and services to a lender in settlement
of an obligation to repay an outstanding loan
Expenses
433 The definition of expenses encompasses losses as well as those expenses that
arise in the course of the ordinary activities of the entity Expenses that arise in
the course of the ordinary activities of the entity include for example cost of
sales wages and depreciation They usually take the form of an outflow or
depletion of assets such as cash and cash equivalents inventory property plant
and equipment
434 Losses represent other items that meet the definition of expenses and may or
may not arise in the course of the ordinary activities of the entity Losses
represent decreases in economic benefits and as such they are no different in
nature from other expenses Hence they are not regarded as a separate element
in this Conceptual Framework
Conceptual Framework
IFRS Foundation A39435 Losses include for example those resulting from disasters such as fire and flood
as well as those arising on the disposal of noncurrent assets The definition of
expenses also includes unrealised losses for example those arising from the
effects of increases in the rate of exchange for a foreign currency in respect of
the borrowings of an entity in that currency When losses are recognised in the
income statement they are usually displayed separately because knowledge of
them is useful for the purpose of making economic decisions Losses are often
reported net of related income
Capital maintenance adjustments
436 The revaluation or restatement of assets and liabilities gives rise to increases or
decreases in equity While these increases or decreases meet the definition of
income and expenses they are not included in the income statement under
certain concepts of capital maintenance Instead these items are included in
equity as capital maintenance adjustments or revaluation reserves These
concepts of capital maintenance are discussed in paragraphs 457–465 of this
Conceptual Framework
Recognition of the elements of financial statements
437 Recognition is the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element and satisfies the
criteria for recognition set out in paragraph 438 It involves the depiction of the
item in words and by a monetary amount and the inclusion of that amount in
the balance sheet or income statement totals Items that satisfy the recognition
criteria should be recognised in the balance sheet or income statement The
failure to recognise such items is not rectified by disclosure of the accounting
policies used nor by notes or explanatory material
438 An item that meets the definition of an element should be recognised if
(a) it is probable that any future economic benefit associated with the item
will flow to or from the entity and
(b) the item has a cost or value that can be measured with reliability4
439 In assessing whether an item meets these criteria and therefore qualifies for
recognition in the financial statements regard needs to be given to the
materiality considerations discussed in Chapter 3 Qualitative characteristics of useful
financial information The interrelationship between the elements means that an
item that meets the definition and recognition criteria for a particular element
for example an asset automatically requires the recognition of another
element for example income or a liability
The probability of future economic benefit
440 The concept of probability is used in the recognition criteria to refer to the
degree of uncertainty that the future economic benefits associated with the item
will flow to or from the entity The concept is in keeping with the uncertainty
that characterises the environment in which an entity operates Assessments of
4 Information is reliable when it is complete neutral and free from error
Conceptual Framework
IFRS FoundationA40the degree of uncertainty attaching to the flow of future economic benefits are
made on the basis of the evidence available when the financial statements are
prepared For example when it is probable that a receivable owed to an entity
will be paid it is then justifiable in the absence of any evidence to the contrary
to recognise the receivable as an asset For a large population of receivables
however some degree of nonpayment is normally considered probable hence
an expense representing the expected reduction in economic benefits is
recognised
Reliability of measurement
441 The second criterion for the recognition of an item is that it possesses a cost or
value that can be measured with reliability In many cases cost or value must be
estimated the use of reasonable estimates is an essential part of the preparation
of financial statements and does not undermine their reliability When
however a reasonable estimate cannot be made the item is not recognised in the
balance sheet or income statement For example the expected proceeds from a
lawsuit may meet the definitions of both an asset and income as well as the
probability criterion for recognition however if it is not possible for the claim
to be measured reliably it should not be recognised as an asset or as income the
existence of the claim however would be disclosed in the notes explanatory
material or supplementary schedules
442 An item that at a particular point in time fails to meet the recognition criteria
in paragraph 438 may qualify for recognition at a later date as a result of
subsequent circumstances or events
443 An item that possesses the essential characteristics of an element but fails to
meet the criteria for recognition may nonetheless warrant disclosure in the
notes explanatory material or in supplementary schedules This is appropriate
when knowledge of the item is considered to be relevant to the evaluation of the
financial position performance and changes in financial position of an entity by
the users of financial statements
Recognition of assets
444 An asset is recognised in the balance sheet when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value that
can be measured reliably
445 An asset is not recognised in the balance sheet when expenditure has been
incurred for which it is considered improbable that economic benefits will flow
to the entity beyond the current accounting period Instead such a transaction
results in the recognition of an expense in the income statement This
treatment does not imply either that the intention of management in incurring
expenditure was other than to generate future economic benefits for the entity
or that management was misguided The only implication is that the degree of
certainty that economic benefits will flow to the entity beyond the current
accounting period is insufficient to warrant the recognition of an asset
Conceptual Framework
IFRS Foundation A41Recognition of liabilities
446 A liability is recognised in the balance sheet when it is probable that an outflow
of resources embodying economic benefits will result from the settlement of a
present obligation and the amount at which the settlement will take place can
be measured reliably In practice obligations under contracts that are equally
proportionately unperformed (for example liabilities for inventory ordered but
not yet received) are generally not recognised as liabilities in the financial
statements However such obligations may meet the definition of liabilities
and provided the recognition criteria are met in the particular circumstances
may qualify for recognition In such circumstances recognition of liabilities
entails recognition of related assets or expenses
Recognition of income
447 Income is recognised in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability
has arisen that can be measured reliably This means in effect that recognition
of income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example the net increase in assets arising on a sale of
goods or services or the decrease in liabilities arising from the waiver of a debt
payable)
448 The procedures normally adopted in practice for recognising income for
example the requirement that revenue should be earned are applications of the
recognition criteria in this Conceptual Framework Such procedures are generally
directed at restricting the recognition as income to those items that can be
measured reliably and have a sufficient degree of certainty
Recognition of expenses
449 Expenses are recognised in the income statement when a decrease in future
economic benefits related to a decrease in an asset or an increase of a liability
has arisen that can be measured reliably This means in effect that recognition
of expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets (for example the accrual of employee
entitlements or the depreciation of equipment)
450 Expenses are recognised in the income statement on the basis of a direct
association between the costs incurred and the earning of specific items of
income This process commonly referred to as the matching of costs with
revenues involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other
events for example the various components of expense making up the cost of
goods sold are recognised at the same time as the income derived from the sale
of the goods However the application of the matching concept under this
Conceptual Framework does not allow the recognition of items in the balance sheet
which do not meet the definition of assets or liabilities
451 When economic benefits are expected to arise over several accounting periods
and the association with income can only be broadly or indirectly determined
expenses are recognised in the income statement on the basis of systematic and
rational allocation procedures This is often necessary in recognising the
Conceptual Framework
IFRS FoundationA42expenses associated with the using up of assets such as property plant
equipment goodwill patents and trademarks in such cases the expense is
referred to as depreciation or amortisation These allocation procedures are
intended to recognise expenses in the accounting periods in which the
economic benefits associated with these items are consumed or expire
452 An expense is recognised immediately in the income statement when an
expenditure produces no future economic benefits or when and to the extent
that future economic benefits do not qualify or cease to qualify for recognition
in the balance sheet as an asset
453 An expense is also recognised in the income statement in those cases when a
liability is incurred without the recognition of an asset as when a liability under
a product warranty arises
Measurement of the elements of financial statements
454 Measurement is the process of determining the monetary amounts at which the
elements of the financial statements are to be recognised and carried in the
balance sheet and income statement This involves the selection of the
particular basis of measurement
455 A number of different measurement bases are employed to different degrees and
in varying combinations in financial statements They include the following
(a) Historical cost Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the consideration given to acquire
them at the time of their acquisition Liabilities are recorded at the
amount of proceeds received in exchange for the obligation or in some
circumstances (for example income taxes) at the amounts of cash or
cash equivalents expected to be paid to satisfy the liability in the normal
course of business
(b) Current cost Assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent asset was
acquired currently Liabilities are carried at the undiscounted amount of
cash or cash equivalents that would be required to settle the obligation
currently
(c) Realisable (settlement) value Assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the asset in
an orderly disposal Liabilities are carried at their settlement values that
is the undiscounted amounts of cash or cash equivalents expected to be
paid to satisfy the liabilities in the normal course of business
(d) Present value Assets are carried at the present discounted value of the
future net cash inflows that the item is expected to generate in the
normal course of business Liabilities are carried at the present
discounted value of the future net cash outflows that are expected to be
required to settle the liabilities in the normal course of business
456 The measurement basis most commonly adopted by entities in preparing their
financial statements is historical cost This is usually combined with other
measurement bases For example inventories are usually carried at the lower of
Conceptual Framework
IFRS Foundation A43cost and net realisable value marketable securities may be carried at market
value and pension liabilities are carried at their present value Furthermore
some entities use the current cost basis as a response to the inability of the
historical cost accounting model to deal with the effects of changing prices of
nonmonetary assets
Concepts of capital and capital maintenance
Concepts of capital
457 A financial concept of capital is adopted by most entities in preparing their
financial statements Under a financial concept of capital such as invested
money or invested purchasing power capital is synonymous with the net assets
or equity of the entity Under a physical concept of capital such as operating
capability capital is regarded as the productive capacity of the entity based on
for example units of output per day
458 The selection of the appropriate concept of capital by an entity should be based
on the needs of the users of its financial statements Thus a financial concept of
capital should be adopted if the users of financial statements are primarily
concerned with the maintenance of nominal invested capital or the purchasing
power of invested capital If however the main concern of users is with the
operating capability of the entity a physical concept of capital should be used
The concept chosen indicates the goal to be attained in determining profit even
though there may be some measurement difficulties in making the concept
operational
Concepts of capital maintenance and the determination
of profit
459 The concepts of capital in paragraph 457 give rise to the following concepts of
capital maintenance
(a) Financial capital maintenance Under this concept a profit is earned only if
the financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of net assets at the beginning of
the period after excluding any distributions to and contributions from
owners during the period Financial capital maintenance can be
measured in either nominal monetary units or units of constant
purchasing power
(b) Physical capital maintenance Under this concept a profit is earned only if
the physical productive capacity (or operating capability) of the entity (or
the resources or funds needed to achieve that capacity) at the end of the
period exceeds the physical productive capacity at the beginning of the
period after excluding any distributions to and contributions from
owners during the period
460 The concept of capital maintenance is concerned with how an entity defines the
capital that it seeks to maintain It provides the linkage between the concepts of
capital and the concepts of profit because it provides the point of reference by
which profit is measured it is a prerequisite for distinguishing between an
entity’s return on capital and its return of capital only inflows of assets in
Conceptual Framework
IFRS FoundationA44excess of amounts needed to maintain capital may be regarded as profit and
therefore as a return on capital Hence profit is the residual amount that
remains after expenses (including capital maintenance adjustments where
appropriate) have been deducted from income If expenses exceed income the
residual amount is a loss
461 The physical capital maintenance concept requires the adoption of the current
cost basis of measurement The financial capital maintenance concept however
does not require the use of a particular basis of measurement Selection of the
basis under this concept is dependent on the type of financial capital that the
entity is seeking to maintain
462 The principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the
entity In general terms an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the period Any
amount over and above that required to maintain the capital at the beginning of
the period is profit
463 Under the concept of financial capital maintenance where capital is defined in
terms of nominal monetary units profit represents the increase in nominal
money capital over the period Thus increases in the prices of assets held over
the period conventionally referred to as holding gains are conceptually
profits They may not be recognised as such however until the assets are
disposed of in an exchange transaction When the concept of financial capital
maintenance is defined in terms of constant purchasing power units profit
represents the increase in invested purchasing power over the period Thus
only that part of the increase in the prices of assets that exceeds the increase in
the general level of prices is regarded as profit The rest of the increase is treated
as a capital maintenance adjustment and hence as part of equity
464 Under the concept of physical capital maintenance when capital is defined in
terms of the physical productive capacity profit represents the increase in that
capital over the period All price changes affecting the assets and liabilities of
the entity are viewed as changes in the measurement of the physical productive
capacity of the entity hence they are treated as capital maintenance
adjustments that are part of equity and not as profit
465 The selection of the measurement bases and concept of capital maintenance will
determine the accounting model used in the preparation of the financial
statements Different accounting models exhibit different degrees of relevance
and reliability and as in other areas management must seek a balance between
relevance and reliability This Conceptual Framework is applicable to a range of
accounting models and provides guidance on preparing and presenting the
financial statements constructed under the chosen model At the present time
it is not the intention of the Board to prescribe a particular model other than in
exceptional circumstances such as for those entities reporting in the currency
of a hyperinflationary economy This intention will however be reviewed in
the light of world developments
Conceptual Framework
IFRS Foundation A45IFRS Standard 1
Firsttime Adoption of International
Financial Reporting Standards
In April 2001 the International Accounting Standards Board (the Board) adopted SIC8
Firsttime Application of IASs as the Primary Basis of Accounting which had been issued by the
Standing Interpretations Committee of the International Accounting Standards Committee
in July 1998
In June 2003 the Board issued IFRS 1 Firsttime Adoption of International Financial Reporting
Standards to replace SIC8 IAS 1 Presentation of Financial Statements (as revised in 2007)
amended the terminology used throughout IFRS including IFRS 1
The Board restructured IFRS 1 in November 2008 In December 2010 the Board amended
IFRS 1 to reflect that a firsttime adopter would restate past transactions from the date of
transition to IFRS instead of at 1 January 2004
Since it was issued in 2003 IFRS 1 was amended to accommodate firsttime adoption
requirements resulting from new or amended Standards IFRS 1 was amended by
Government Loans (issued March 2012) which added an exception to the retrospective
application of IFRS to require that first time adopters apply the requirements in IFRS 9
Financial Instruments and IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance prospectively to government loans existing at the date of transition to IFRS
Other Standards have made minor consequential amendments to IFRS 1 They include
Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime Adopters (Amendments to
IFRS 1) (issued January 2010) Improvements to IFRSs (issued May 2010) Disclosures—Transfers of
Financial Assets (Amendments to IFRS 7) (issued October 2010) Severe Hyperinflation and Removal
of Fixed Dates for Firsttime Adopters (Amendments to IFRS 1) (issued December 2010) IFRS 10
Consolidated Financial Statements (issued May 2011) IFRS 11 Joint Arrangements (issued
May 2011) IFRS 13 Fair Value Measurement (issued May 2011) IAS 19 Employee Benefits (issued
June 2011) Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (issued
June 2011) IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (issued October
2011) Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012) Consolidated Financial
Statements Joint Arrangements and Disclosure of Interests in Other Entities Transition Guidance
(Amendments to IFRS 10 IFRS 11 and IFRS 12) (issued June 2012) Investment Entities
(Amendments to IFRS 10 IFRS 12 and IAS 27) (issued October 2012) IFRS 9 Financial
Instruments (Hedge Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued
November 2013) IFRS 14 Regulatory Deferral Accounts (issued January 2014) Accounting for
Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) (issued May 2014) IFRS 15
Revenue from Contracts with Customers (issued May 2014) IFRS 9 Financial Instruments (issued July
2014) Method in Separate Financial Statements (Amendments to IAS 27) (issued August 2014)
Annual Improvements to IFRSs 2012–2014 Cycle (issued September 2014) and IFRS 16 Leases (issued
January 2016)
IFRS 1
IFRS Foundation A47CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 1
FIRSTTIME ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS
OBJECTIVE 1
SCOPE 2
RECOGNITION AND MEASUREMENT 6
Opening IFRS statement of financial position 6
Accounting policies 7
Exceptions to the retrospective application of other IFRSs 13
Exemptions from other IFRSs 18
PRESENTATION AND DISCLOSURE 20
Comparative information 21
Explanation of transition to IFRSs 23
EFFECTIVE DATE 34
WITHDRAWAL OF IFRS 1 (ISSUED 2003) 40
APPENDICES
A Defined terms
B Exceptions to the retrospective application of other IFRSs
C Exemptions for business combinations
D Exemptions from other IFRSs
E Shortterm exemptions from IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 1 ISSUED IN NOVEMBER 2008
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 1
Additional Exemptions For Firsttime Adopters issued in July 2009
Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime
Adopters issued in January 2010
Severe Hyperinflation and Removal of Fixed Dates for Firsttime Adopters
issued in December 2010
Government Loans issued in March 2012
BASIS FOR CONCLUSIONS
APPENDIX
Amendments to Basis for Conclusions on other IFRSs IMPLEMENTATION
GUIDANCE
TABLE OF CONCORDANCE
IFRS 1
IFRS FoundationA48International Financial Reporting Standard 1 Firsttime Adoption of International Financial
Reporting Standards (IFRS 1) is set out in paragraphs 1–40 and Appendices A–E All the
paragraphs have equal authority Paragraphs in bold type state the main principles
Terms defined in Appendix A are in italics the first time they appear in the IFRS
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards IFRS 1 should be read in the context of its objective and the Basis for
Conclusions the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance
IFRS 1
IFRS Foundation A49Introduction
Reasons for issuing the IFRS
IN1 The International Accounting Standards Board issued IFRS 1 in June 2003
IFRS 1 replaced SIC8 Firsttime Application of IASs as the Primary Basis of Accounting
The Board developed the IFRS to address concerns about the full retrospective
application of IFRSs required by SIC8
IN2 Subsequently IFRS 1 was amended many times to accommodate firsttime
adoption requirements resulting from new or amended IFRSs As a result the
IFRS became more complex and less clear In 2007 therefore the Board
proposed as part of its annual improvements project to change IFRS 1 to make
it easier for the reader to understand and to design it to better accommodate
future changes The version of IFRS 1 issued in 2008 retains the substance of the
previous version but within a changed structure It replaces the previous
version and is effective for entities applying IFRSs for the first time for annual
periods beginning on or after 1 July 2009 Earlier application is permitted
Main features of the IFRS
IN3 The IFRS applies when an entity adopts IFRSs for the first time by an explicit and
unreserved statement of compliance with IFRSs
IN4 In general the IFRS requires an entity to comply with each IFRS effective at the
end of its first IFRS reporting period In particular the IFRS requires an entity to
do the following in the opening IFRS statement of financial position that it
prepares as a starting point for its accounting under IFRSs
(a) recognise all assets and liabilities whose recognition is required by IFRSs
(b) not recognise items as assets or liabilities if IFRSs do not permit such
recognition
(c) reclassify items that it recognised under previous GAAP as one type of
asset liability or component of equity but are a different type of asset
liability or component of equity under IFRSs and
(d) apply IFRSs in measuring all recognised assets and liabilities
IN5 The IFRS grants limited exemptions from these requirements in specified areas
where the cost of complying with them would be likely to exceed the benefits to
users of financial statements The IFRS also prohibits retrospective application
of IFRSs in some areas particularly where retrospective application would
require judgements by management about past conditions after the outcome of
a particular transaction is already known
IN6 The IFRS requires disclosures that explain how the transition from previous
GAAP to IFRSs affected the entity’s reported financial position financial
performance and cash flows
IN7 An entity is required to apply the IFRS if its first IFRS financial statements are for
a period beginning on or after 1 July 2009 Earlier application is encouraged
IFRS 1
IFRS FoundationA50IN8 Paragraphs B10 and B11 (introduced by Government Loans in March 2012) refer to
IFRS 9 If an entity applies this IFRS but does not yet apply IFRS 9 the references
in paragraphs B10 and B11 to IFRS 9 shall be read as references to IAS 39 Financial
Instruments Recognition and Measurement
IFRS 1
IFRS Foundation A51International Financial Reporting Standard 1
Firsttime Adoption of International Financial Reporting
Standards
Objective
1 The objective of this 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
International Financial Reporting Standards (IFRSs) and
(c) can be generated at a cost that does not exceed the benefits
Scope
2 An entity shall apply this IFRS in
(a) its first IFRS financial statements and
(b) each interim financial report if any that it presents in accordance with
IAS 34 Interim Financial Reporting for part of the period covered by its first
IFRS financial statements
3 An entity’s first IFRS financial statements are the first annual financial
statements in which the entity adopts IFRSs by an explicit and unreserved
statement in those financial statements of compliance with IFRSs Financial
statements in accordance with IFRSs are an entity’s first IFRS financial
statements if for example the entity
(a) presented its most recent previous financial statements
(i) in accordance with national requirements that are not consistent
with IFRSs in all respects
(ii) in conformity with IFRSs in all respects except that the financial
statements did not contain an explicit and unreserved statement
that they complied with IFRSs
(iii) containing an explicit statement of compliance with some but
not all IFRSs
(iv) in accordance with national requirements inconsistent with
IFRSs using some individual IFRSs to account for items for which
national requirements did not exist or
(v) in accordance with national requirements with a reconciliation
of some amounts to the amounts determined in accordance with
IFRSs
IFRS 1
IFRS FoundationA52(b) prepared financial statements in accordance with IFRSs for internal use
only without making them available to the entity’s owners or any other
external users
(c) prepared a reporting package in accordance with IFRSs for consolidation
purposes without preparing a complete set of financial statements as
defined in IAS 1 Presentation of Financial Statements (as revised in 2007) or
(d) did not present financial statements for previous periods
4 This IFRS applies when an entity first adopts IFRSs It does not apply when for
example an entity
(a) stops presenting financial statements in accordance with national
requirements having previously presented them as well as another set of
financial statements that contained an explicit and unreserved
statement of compliance with IFRSs
(b) presented financial statements in the previous year in accordance with
national requirements and those financial statements contained an
explicit and unreserved statement of compliance with IFRSs or
(c) presented financial statements in the previous year that contained an
explicit and unreserved statement of compliance with IFRSs even if the
auditors qualified their audit report on those financial statements
4A Notwithstanding the requirements in paragraphs 2 and 3 an entity that has
applied IFRSs in a previous reporting period but whose most recent previous
annual financial statements did not contain an explicit and unreserved
statement of compliance with IFRSs must either apply this IFRS or else apply
IFRSs retrospectively in accordance with IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors as if the entity had never stopped applying IFRSs
4B When an entity does not elect to apply this IFRS in accordance with
paragraph 4A the entity shall nevertheless apply the disclosure requirements in
paragraphs 23A–23B of IFRS 1 in addition to the disclosure requirements in
IAS 8
5 This IFRS does not apply to changes in accounting policies made by an entity
that already applies IFRSs Such changes are the subject of
(a) requirements on changes in accounting policies in IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors and
(b) specific transitional requirements in other IFRSs
Recognition and measurement
Opening IFRS statement of financial position
6 An entity shall prepare and present an opening IFRS statement of financial position at
the date of transition to IFRSs This is the starting point for its accounting in
accordance with IFRSs
IFRS 1
IFRS Foundation A53Accounting policies
7 An entity shall use the same accounting policies in its opening IFRS
statement of financial position and throughout all periods presented in
its first IFRS financial statements Those accounting policies shall
comply with each IFRS effective at the end of its first IFRS reporting
period except as specified in paragraphs 13–19 and Appendices B–E
8 An entity shall not apply different versions of IFRSs that were effective at earlier
dates An entity may apply a new IFRS that is not yet mandatory if that IFRS
permits early application
Example Consistent application of latest version of IFRSs
Background
The end of entity A’s first IFRS reporting period is 31 December 20X5
Entity A decides to present comparative information in those financial
statements for one year only (see paragraph 21) Therefore its date of
transition to IFRSs is the beginning of business on 1 January 20X4 (or
equivalently close of business on 31 December 20X3) Entity A presented
financial statements in accordance with its previous GAAP annually to
31 December each year up to and including 31 December 20X4
Application of requirements
Entity A is required to apply the IFRSs effective for periods ending on
31 December 20X5 in
(a) preparing and presenting its opening IFRS statement of financial
position at 1 January 20X4 and
(b) preparing and presenting its statement of financial position for
31 December 20X5 (including comparative amounts for 20X4)
statement of comprehensive income statement of changes in equity
and statement of cash flows for the year to 31 December 20X5
(including comparative amounts for 20X4) and disclosures (including
comparative information for 20X4)
If a new IFRS is not yet mandatory but permits early application entity A is
permitted but not required to apply that IFRS in its first IFRS financial
statements
9 The transitional provisions in other IFRSs apply to changes in accounting
policies made by an entity that already uses IFRSs they do not apply to a firsttime
adopter’s transition to IFRSs except as specified in Appendices B–E
10 Except as described in paragraphs 13–19 and Appendices B–E an entity shall in
its opening IFRS statement of financial position
(a) recognise all assets and liabilities whose recognition is required by IFRSs
(b) not recognise items as assets or liabilities if IFRSs do not permit such
recognition
IFRS 1
IFRS FoundationA54(c) reclassify items that it recognised in accordance with previous GAAP as
one type of asset liability or component of equity but are a different
type of asset liability or component of equity in accordance with IFRSs
and
(d) apply IFRSs in measuring all recognised assets and liabilities
11 The accounting policies that an entity uses in its opening IFRS statement of
financial position may differ from those that it used for the same date using its
previous GAAP The resulting adjustments arise from events and transactions
before the date of transition to IFRSs Therefore an entity shall recognise those
adjustments directly in retained earnings (or if appropriate another category of
equity) at the date of transition to IFRSs
12 This IFRS establishes two categories of exceptions to the principle that an
entity’s opening IFRS statement of financial position shall comply with each
IFRS
(a) paragraphs 14–17 and Appendix B prohibit retrospective application of
some aspects of other IFRSs
(b) Appendices C–E grant exemptions from some requirements of other
IFRSs
Exceptions to the retrospective application of other
IFRSs
13 This IFRS prohibits retrospective application of some aspects of other IFRSs
These exceptions are set out in paragraphs 14–17 and Appendix B
Estimates
14 An entity’s estimates in accordance with IFRSs at the date of transition to
IFRSs shall be consistent with estimates made for the same date in
accordance with previous GAAP (after adjustments to reflect any
difference in accounting policies) unless there is objective evidence that
those estimates were in error
15 An entity may receive information after the date of transition to IFRSs about
estimates that it had made under previous GAAP In accordance with
paragraph 14 an entity shall treat the receipt of that information in the same
way as nonadjusting events after the reporting period in accordance with IAS 10
Events after the Reporting Period For example assume that an entity’s date of
transition to IFRSs is 1 January 20X4 and new information on 15 July 20X4
requires the revision of an estimate made in accordance with previous GAAP at
31 December 20X3 The entity shall not reflect that new information in its
opening IFRS statement of financial position (unless the estimates need
adjustment for any differences in accounting policies or there is objective
evidence that the estimates were in error) Instead the entity shall reflect that
new information in profit or loss (or if appropriate other comprehensive
income) for the year ended 31 December 20X4
16 An entity may need to make estimates in accordance with IFRSs at the date of
transition to IFRSs that were not required at that date under previous GAAP To
achieve consistency with IAS 10 those estimates in accordance with IFRSs shall
IFRS 1
IFRS Foundation A55reflect conditions that existed at the date of transition to IFRSs In particular
estimates at the date of transition to IFRSs of market prices interest rates or
foreign exchange rates shall reflect market conditions at that date
17 Paragraphs 14–16 apply to the opening IFRS statement of financial position
They also apply to a comparative period presented in an entity’s first IFRS
financial statements in which case the references to the date of transition to
IFRSs are replaced by references to the end of that comparative period
Exemptions from other IFRSs
18 An entity may elect to use one or more of the exemptions contained in
Appendices C–E An entity shall not apply these exemptions by analogy to other
items
19 [Deleted]
Presentation and disclosure
20 This IFRS does not provide exemptions from the presentation and disclosure
requirements in other IFRSs
Comparative information
21 An entity’s first IFRS financial statements shall include at least three statements
of financial position two statements of profit or loss and other comprehensive
income two separate statements of profit or loss (if presented) two statements
of cash flows and two statements of changes in equity and related notes
including comparative information for all statements presented
NonIFRS comparative information and historical summaries
22 Some entities present historical summaries of selected data for periods before
the first period for which they present full comparative information in
accordance with IFRSs This IFRS does not require such summaries to comply
with the recognition and measurement requirements of IFRSs Furthermore
some entities present comparative information in accordance with previous
GAAP as well as the comparative information required by IAS 1 In any financial
statements containing historical summaries or comparative information in
accordance with previous GAAP an entity shall
(a) label the previous GAAP information prominently as not being prepared
in accordance with IFRSs and
(b) disclose the nature of the main adjustments that would make it comply
with IFRSs An entity need not quantify those adjustments
Explanation of transition to IFRSs
23 An entity shall explain how the transition from previous GAAP to IFRSs
affected its reported financial position financial performance and cash
flows
23A An entity that has applied IFRSs in a previous period as described in
paragraph 4A shall disclose
IFRS 1
IFRS FoundationA56(a) the reason it stopped applying IFRSs and
(b) the reason it is resuming the application of IFRSs
23B When an entity in accordance with paragraph 4A does not elect to apply IFRS 1
the entity shall explain the reasons for electing to apply IFRSs as if it had never
stopped applying IFRSs
Reconciliations
24 To comply with paragraph 23 an entity’s first IFRS financial statements shall
include
(a) reconciliations of its equity reported in accordance with previous GAAP
to its equity in accordance with IFRSs for both of the following dates
(i) the date of transition to IFRSs and
(ii) the end of the latest period presented in the entity’s most recent
annual 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 The starting point for that reconciliation shall be total
comprehensive income in accordance with previous GAAP for the same
period or if an entity did not report such a total profit or loss under
previous GAAP
(c) if the entity recognised or reversed 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 recognised those impairment losses or reversals in the period
beginning with the date of transition to IFRSs
25 The reconciliations required by paragraph 24(a) and (b) shall give sufficient
detail to enable users to understand the material adjustments to the statement
of financial position and statement of comprehensive income If an entity
presented a statement of cash flows under its previous GAAP it shall also
explain the material adjustments to the statement of cash flows
26 If an entity becomes aware of errors made under previous GAAP the
reconciliations required by paragraph 24(a) and (b) shall distinguish the
correction of those errors from changes in accounting policies
27 IAS 8 does not apply to the changes in accounting policies an entity makes when
it adopts IFRSs or to changes in those policies until after it presents its first IFRS
financial statements Therefore IAS 8’s requirements about changes in
accounting policies do not apply in an entity’s first IFRS financial statements
27A If during the period covered by its first IFRS financial statements an entity
changes its accounting policies or its use of the exemptions contained in this
IFRS it shall explain the changes between its first IFRS interim financial report
and its first IFRS financial statements in accordance with paragraph 23 and it
shall update the reconciliations required by paragraph 24(a) and (b)
28 If an entity did not present financial statements for previous periods its first
IFRS financial statements shall disclose that fact
IFRS 1
IFRS Foundation A57Designation of financial assets or financial liabilities
29 An entity is permitted to designate a previously recognised financial asset as a
financial asset measured at fair value through profit or loss in accordance with
paragraph D19A The entity shall disclose the fair value of financial assets so
designated at the date of designation and their classification and carrying
amount in the previous financial statements
29A An entity is permitted to designate a previously recognised financial liability as a
financial liability at fair value through profit or loss in accordance with
paragraph D19 The entity shall disclose the fair value of financial liabilities so
designated at the date of designation and their classification and carrying
amount in the previous financial statements
Use of fair value as deemed cost
30 If an entity uses fair value in its opening IFRS statement of financial position as
deemed cost for an item of property plant and equipment an investment
property an intangible asset or a rightofuse asset (see paragraphs D5 and D7)
the entity’s first IFRS financial statements shall disclose for each line item in the
opening IFRS statement of financial position
(a) the aggregate of those fair values and
(b) the aggregate adjustment to the carrying amounts reported under
previous GAAP
Use of deemed cost for investments in subsidiaries joint ventures
and associates
31 Similarly if an entity uses a deemed cost in its opening IFRS statement of
financial position for an investment in a subsidiary joint venture or associate in
its separate financial statements (see paragraph D15) the entity’s first IFRS
separate financial statements shall disclose
(a) the aggregate deemed cost of those investments for which deemed cost is
their previous GAAP carrying amount
(b) the aggregate deemed cost of those investments for which deemed cost is
fair value and
(c) the aggregate adjustment to the carrying amounts reported under
previous GAAP
Use of deemed cost for oil and gas assets
31A If an entity uses the exemption in paragraph D8A(b) for oil and gas assets it shall
disclose that fact and the basis on which carrying amounts determined under
previous GAAP were allocated
Use of deemed cost for operations subject to rate regulation
31B If an entity uses the exemption in paragraph D8B for operations subject to rate
regulation it shall disclose that fact and the basis on which carrying amounts
were determined under previous GAAP
IFRS 1
IFRS FoundationA58Use of deemed cost after severe hyperinflation
31C If an entity elects to measure assets and liabilities at fair value and to use that
fair value as the deemed cost in its opening IFRS statement of financial position
because of severe hyperinflation (see paragraphs D26–D30) the entity’s first IFRS
financial statements shall disclose an explanation of how and why the entity
had and then ceased to have a functional currency that has both of the
following characteristics
(a) a reliable general price index is not available to all entities with
transactions and balances in the currency
(b) exchangeability between the currency and a relatively stable foreign
currency does not exist
Interim financial reports
32 To comply with paragraph 23 if an entity presents an interim financial report in
accordance with IAS 34 for part of the period covered by its first IFRS financial
statements the entity shall satisfy the following requirements in addition to the
requirements of IAS 34
(a) Each such interim financial report shall if the entity presented an
interim financial report for the comparable interim period of the
immediately preceding financial year include
(i) a reconciliation of its equity in accordance with previous GAAP at
the end of that comparable interim period to its equity under
IFRSs at that date and
(ii) a reconciliation to its total comprehensive income in accordance
with IFRSs for that comparable interim period (current and year
to date) The starting point for that reconciliation shall be total
comprehensive income in accordance with previous GAAP for
that period or if an entity did not report such a total profit or
loss in accordance with previous GAAP
(b) In addition to the reconciliations required by (a) an entity’s first interim
financial report in accordance with IAS 34 for part of the period covered
by its first IFRS financial statements shall include the reconciliations
described in paragraph 24(a) and (b) (supplemented by the details
required by paragraphs 25 and 26) or a crossreference to another
published document that includes these reconciliations
(c) If an entity changes its accounting policies or its use of the exemptions
contained in this IFRS it shall explain the changes in each such interim
financial report in accordance with paragraph 23 and update the
reconciliations required by (a) and (b)
33 IAS 34 requires minimum disclosures which are based on the assumption that
users of the interim financial report also have access to the most recent annual
financial statements However IAS 34 also requires an entity to disclose any
events or transactions that are material to an understanding of the current
interim period’ Therefore if a firsttime adopter did not in its most recent
annual financial statements in accordance with previous GAAP disclose
IFRS 1
IFRS Foundation A59information material to an understanding of the current interim period its
interim financial report shall disclose that information or include a
crossreference to another published document that includes it
Effective date
34 An entity shall apply this IFRS if its first IFRS financial statements are for a
period beginning on or after 1 July 2009 Earlier application is permitted
35 An entity shall apply the amendments in paragraphs D1(n) and D23 for annual
periods beginning on or after 1 July 2009 If an entity applies IAS 23 Borrowing
Costs (as revised in 2007) for an earlier period those amendments shall be
applied for that earlier period
36 IFRS 3 Business Combinations (as revised in 2008) amended paragraphs 19 C1 and
C4(f) and (g) If an entity applies IFRS 3 (revised 2008) for an earlier period the
amendments shall also be applied for that earlier period
37 IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) amended
paragraphs B1 and B7 If an entity applies IAS 27 (amended 2008) for an earlier
period the amendments shall be applied for that earlier period
38 Cost of an Investment in a Subsidiary Jointly Controlled Entity or Associate (Amendments
to IFRS 1 and IAS 27) issued in May 2008 added paragraphs 31 D1(g) D14 and
D15 An entity shall apply those paragraphs for annual periods beginning on or
after 1 July 2009 Earlier application is permitted If an entity applies the
paragraphs for an earlier period it shall disclose that fact
39 Paragraph B7 was amended by Improvements to IFRSs issued in May 2008 An
entity shall apply those amendments for annual periods beginning on or after
1 July 2009 If an entity applies IAS 27 (amended 2008) for an earlier period the
amendments shall be applied for that earlier period
39A Additional Exemptions for Firsttime Adopters (Amendments to IFRS 1) issued in July
2009 added paragraphs 31A D8A D9A and D21A and amended paragraph D1(c)
(d) and (l) An entity shall apply those amendments for annual periods
beginning on or after 1 January 2010 Earlier application is permitted If an
entity applies the amendments for an earlier period it shall disclose that fact
39B [Deleted]
39C IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments added
paragraph D25 An entity shall apply that amendment when it applies IFRIC 19
39D Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime Adopters
(Amendment to IFRS 1) issued in January 2010 added paragraph E3 An entity
shall apply that amendment for annual periods beginning on or after 1 July
2010 Earlier application is permitted If an entity applies the amendment for
an earlier period it shall disclose that fact
39E Improvements to IFRSs issued in May 2010 added paragraphs 27A 31B and D8B and
amended paragraphs 27 32 D1(c) and D8 An entity shall apply those
amendments for annual periods beginning on or after 1 January 2011 Earlier
application is permitted If an entity applies the amendments for an earlier
IFRS 1
IFRS FoundationA60period it shall disclose that fact Entities that adopted IFRSs in periods before
the effective date of IFRS 1 or applied IFRS 1 in a previous period are permitted
to apply the amendment to paragraph D8 retrospectively in the first annual
period after the amendment is effective An entity applying paragraph D8
retrospectively shall disclose that fact
39F Disclosures—Transfers of Financial Assets (Amendments to IFRS 7) issued in October
2010 added paragraph E4 An entity shall apply that amendment for annual
periods beginning on or after 1 July 2011 Earlier application is permitted If an
entity applies the amendment for an earlier period it shall disclose that fact
39G [Deleted]
39H Severe Hyperinflation and Removal of Fixed Dates for Firsttime Adopters (Amendments to
IFRS 1) issued in December 2010 amended paragraphs B2 D1 and D20 and
added paragraphs 31C and D26–D30 An entity shall apply those amendments
for annual periods beginning on or after 1 July 2011 Earlier application is
permitted
39I IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements issued in
May 2011 amended paragraphs 31 B7 C1 D1 D14 and D15 and added
paragraph D31 An entity shall apply those amendments when it applies IFRS 10
and IFRS 11
39J IFRS 13 Fair Value Measurement issued in May 2011 deleted paragraph 19
amended the definition of fair value in Appendix A and amended
paragraphs D15 and D20 An entity shall apply those amendments when it
applies IFRS 13
39K Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) issued in
June 2011 amended paragraph 21 An entity shall apply that amendment when
it applies IAS 1 as amended in June 2011
39L IAS 19 Employee Benefits (as amended in June 2011) amended paragraph D1
deleted paragraphs D10 and D11 and added paragraph E5 An entity shall apply
those amendments when it applies IAS 19 (as amended in June 2011)
39M IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine added
paragraph D32 and amended paragraph D1 An entity shall apply that
amendment when it applies IFRIC 20
39N Government Loans (Amendments to IFRS 1) issued in March 2012 added
paragraphs B1(f) and B10–B12 An entity shall apply those paragraphs for
annual periods beginning on or after 1 January 2013 Earlier application is
permitted
39O Paragraphs B10 and B11 refer to IFRS 9 If an entity applies this IFRS but does
not yet apply IFRS 9 the references in paragraphs B10 and B11 to IFRS 9 shall be
read as references to IAS 39 Financial Instruments Recognition and Measurement
39P Annual Improvements 2009–2011 Cycle issued in May 2012 added paragraphs 4A–4B
and 23A–23B An entity shall apply that amendment retrospectively in
accordance with IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
IFRS 1
IFRS Foundation A61for annual periods beginning on or after 1 January 2013 Earlier application is
permitted If an entity applies that amendment for an earlier period it shall
disclose that fact
39Q Annual Improvements 2009–2011 Cycle issued in May 2012 amended
paragraph D23 An entity shall apply that amendment retrospectively in
accordance with IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
for annual periods beginning on or after 1 January 2013 Earlier application is
permitted If an entity applies that amendment for an earlier period it shall
disclose that fact
39R Annual Improvements 2009–2011 Cycle issued in May 2012 amended paragraph 21
An entity shall apply that amendment retrospectively in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors for annual periods
beginning on or after 1 January 2013 Earlier application is permitted If an
entity applies that amendment for an earlier period it shall disclose that fact
39S Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 amended paragraph D31 An entity shall apply that amendment
when it applies IFRS 11 (as amended in June 2012)
39T Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraphs D16 D17 and Appendix C and added a heading and
paragraphs E6–E7 An entity shall apply those amendments for annual periods
beginning on or after 1 January 2014 Earlier application of Investment Entities is
permitted If an entity applies those amendments earlier it shall also apply all
amendments included in Investment Entities at the same time
39U [Deleted]
39V IFRS 14 Regulatory Deferral Accounts issued in January 2014 amended
paragraph D8B An entity shall apply that amendment for annual periods
beginning on or after 1 January 2016 Earlier application is permitted If an
entity applies IFRS 14 for an earlier period the amendment shall be applied for
that earlier period
39W Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
issued in May 2014 amended paragraph C5 An entity shall apply that
amendment in annual periods beginning on or after 1 January 2016 If an entity
applies related amendments to IFRS 11 from Accounting for Acquisitions of Interests
in Joint Operations (Amendments to IFRS 11) in an earlier period the amendment
to paragraph C5 shall be applied in that earlier period
39X IFRS 15 Revenue from Contracts with Customers issued in May 2014 deleted
paragraph D24 and its related heading and added paragraphs D34–D35 and
their related heading An entity shall apply those amendments when it applies
IFRS 15
39Y IFRS 9 Financial Instruments as issued in July 2014 amended paragraphs 29
B1–B6 D1 D14 D15 D19 and D20 deleted paragraphs 39B 39G and 39U and
added paragraphs 29A B8–B8G B9 D19A–D19C D33 E1 and E2 An entity shall
apply those amendments when it applies IFRS 9
IFRS 1
IFRS FoundationA6239Z Equity Method in Separate Financial Statements (Amendments to IAS 27) issued in
August 2014 amended paragraph D14 and added paragraph D15A An entity
shall apply those amendments for annual periods beginning on or after
1 January 2016 Earlier application is permitted If an entity applies those
amendments for an earlier period it shall disclose that fact
39AA Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014 added
paragraph E4A An entity shall apply that amendment for annual periods
beginning on or after 1 January 2016 Earlier application is permitted If an
entity applies that amendment for an earlier period it shall disclose that fact
39AB IFRS 16 Leases issued in January 2016 amended paragraphs 30 C4 D1 D7 D8B
and D9 deleted paragraph D9A and added paragraphs D9B–D9E An entity shall
apply those amendments when it applies IFRS 16
Withdrawal of IFRS 1 (issued 2003)
40 This IFRS supersedes IFRS 1 (issued in 2003 and amended at May 2008)
IFRS 1
IFRS Foundation A63Appendix A
Defined terms
This appendix is an integral part of the IFRS
date of
transition to
IFRSs
The beginning of the earliest period for which an entity presents full
comparative information under IFRSs in its first IFRS financial
statements
deemed cost An amount used as a surrogate for cost or depreciated cost at a given
date Subsequent depreciation or amortisation assumes that the entity
had initially recognised the asset or liability at the given date and that
its cost was equal to the deemed cost
fair value Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date (See IFRS 13)
first IFRS
financial
statements
The first annual financial statements in which an entity adopts
International Financial Reporting Standards (IFRSs) by an explicit
and unreserved statement of compliance with IFRSs
first IFRS
reporting
period
The latest reporting period covered by an entity’s first IFRS financial
statements
firsttime
adopter
An entity that presents its first IFRS financial statements
International
Financial
Reporting
Standards
(IFRSs)
Standards and Interpretations issued by the International Accounting
Standards Board (IASB) They comprise
(a) International Financial Reporting Standards
(b) International Accounting Standards
(c) IFRIC Interpretations and
(d) SIC Interpretations(a)
opening IFRS
statement of
financial
position
An entity’s statement of financial position at the date of transition to
IFRSs
previous GAAP The basis of accounting that a firsttime adopter used immediately
before adopting IFRSs
(a) Definition of IFRSs amended after the name changes introduced by the revised Constitution of the
IFRS Foundation in 2010
IFRS 1
IFRS FoundationA64Appendix B
Exceptions to the retrospective application of other IFRSs
This appendix is an integral part of the IFRS
B1 An entity shall apply the following exceptions
(a) derecognition of financial assets and financial liabilities (paragraphs B2
and B3)
(b) hedge accounting (paragraphs B4–B6)
(c) noncontrolling interests (paragraph B7)
(d) classification and measurement of financial assets (paragraph B8–B8C)
(e) impairment of financial assets (paragraphs B8D–B8G)
(f) embedded derivatives (paragraph B9) and
(g) government loans (paragraphs B10–B12)
Derecognition of financial assets and financial liabilities
B2 Except as permitted by paragraph B3 a firsttime adopter shall apply the
derecognition requirements in IFRS 9 prospectively for transactions occurring
on or after the date of transition to IFRSs For example if a firsttime adopter
derecognised nonderivative financial assets or nonderivative financial
liabilities in accordance with its previous GAAP as a result of a transaction that
occurred before the date of transition to IFRSs it shall not recognise those assets
and liabilities in accordance with IFRSs (unless they qualify for recognition as a
result of a later transaction or event)
B3 Despite paragraph B2 an entity may apply the derecognition requirements in
IFRS 9 retrospectively from a date of the entity’s choosing provided that the
information needed to apply IFRS 9 to financial assets and financial liabilities
derecognised as a result of past transactions was obtained at the time of initially
accounting for those transactions
Hedge accounting
B4 As required by IFRS 9 at the date of transition to IFRSs an entity shall
(a) measure all derivatives at fair value and
(b) eliminate all deferred losses and gains arising on derivatives that were
reported in accordance with previous GAAP as if they were assets or
liabilities
B5 An entity shall not reflect in its opening IFRS statement of financial position a
hedging relationship of a type that does not qualify for hedge accounting in
accordance with IFRS 9 (for example many hedging relationships where the
hedging instrument is a standalone written option or a net written option or
where the hedged item is a net position in a cash flow hedge for another risk
than foreign currency risk) However if an entity designated a net position as a
hedged item in accordance with previous GAAP it may designate as a hedged
item in accordance with IFRSs an individual item within that net position or a
IFRS 1
IFRS Foundation A65net position if that meets the requirements in paragraph 661 of IFRS 9
provided that it does so no later than the date of transition to IFRSs
B6 If before the date of transition to IFRSs an entity had designated a transaction
as a hedge but the hedge does not meet the conditions for hedge accounting in
IFRS 9 the entity shall apply paragraphs 656 and 657 of IFRS 9 to discontinue
hedge accounting Transactions entered into before the date of transition to
IFRSs shall not be retrospectively designated as hedges
Noncontrolling interests
B7 A firsttime adopter shall apply the following requirements of IFRS 10
prospectively from the date of transition to IFRSs
(a) the requirement in paragraph B94 that total comprehensive income is
attributed to the owners of the parent and to the noncontrolling
interests even if this results in the noncontrolling interests having a
deficit balance
(b) the requirements in paragraphs 23 and B96 for accounting for changes
in the parent’s ownership interest in a subsidiary that do not result in a
loss of control and
(c) the requirements in paragraphs B97–B99 for accounting for a loss of
control over a subsidiary and the related requirements of paragraph 8A
of IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations
However if a firsttime adopter elects to apply IFRS 3 retrospectively to past
business combinations it shall also apply IFRS 10 in accordance with
paragraph C1 of this IFRS
Classification and measurement of financial assets
B8 An entity shall assess whether a financial asset meets the conditions in
paragraph 412 of IFRS 9 or the conditions in paragraph 412A of IFRS 9 on the
basis of the facts and circumstances that exist at the date of transition to IFRSs
B8A If it is impracticable to assess a modified time value of money element in
accordance with paragraphs B419B–B419D of IFRS 9 on the basis of the facts
and circumstances that exist at the date of transition to IFRSs an entity shall
assess the contractual cash flow characteristics of that financial asset on the
basis of the facts and circumstances that existed at the date of transition to IFRSs
without taking into account the requirements related to the modification of the
time value of money element in paragraphs B419B–B419D of IFRS 9 (In this
case the entity shall also apply paragraph 42R of IFRS 7 but references to
paragraph 724 of IFRS 9’ shall be read to mean this paragraph and references
to initial recognition of the financial asset’ shall be read to mean at the date of
transition to IFRSs’)
B8B If it is impracticable to assess whether the fair value of a prepayment feature is
insignificant in accordance with paragraph B4112(c) of IFRS 9 on the basis of
the facts and circumstances that exist at the date of transition to IFRSs an entity
shall assess the contractual cash flow characteristics of that financial asset on
the basis of the facts and circumstances that existed at the date of transition to
IFRSs without taking into account the exception for prepayment features in
IFRS 1
IFRS FoundationA66paragraph B4112 of IFRS 9 (In this case the entity shall also apply
paragraph 42S of IFRS 7 but references to paragraph 725 of IFRS 9’ shall be read
to mean this paragraph and references to initial recognition of the financial
asset’ shall be read to mean at the date of transition to IFRSs’)
B8C If it is impracticable (as defined in IAS 8) for an entity to apply retrospectively
the effective interest method in IFRS 9 the fair value of the financial asset or the
financial liability at the date of transition to IFRSs shall be the new gross
carrying amount of that financial asset or the new amortised cost of that
financial liability at the date of transition to IFRSs
Impairment of financial assets
B8D An entity shall apply the impairment requirements in Section 55 of IFRS 9
retrospectively subject to paragraphs 7215 and 7218–7220 of that IFRS
B8E At the date of transition to IFRSs an entity shall use reasonable and supportable
information that is available without undue cost or effort to determine the
credit risk at the date that financial instruments were initially recognised (or for
loan commitments and financial guarantee contracts the date that the entity
became a party to the irrevocable commitment in accordance with
paragraph 556 of IFRS 9) and compare that to the credit risk at the date of
transition to IFRSs (also see paragraphs B722–B723 of IFRS 9)
B8F When determining whether there has been a significant increase in credit risk
since initial recognition an entity may apply
(a) the requirements in paragraph 5510 and B5522–B5524 of IFRS 9 and
(b) the rebuttable presumption in paragraph 5511 of IFRS 9 for contractual
payments that are more than 30 days past due if an entity will apply the
impairment requirements by identifying significant increases in credit
risk since initial recognition for those financial instruments on the basis
of past due information
B8G If at the date of transition to IFRSs determining whether there has been a
significant increase in credit risk since the initial recognition of a financial
instrument would require undue cost or effort an entity shall recognise a loss
allowance at an amount equal to lifetime expected credit losses at each
reporting date until that financial instrument is derecognised (unless that
financial instrument is low credit risk at a reporting date in which case
paragraph B8F(a) applies)
Embedded derivatives
B9 A firsttime adopter shall assess whether an embedded derivative is required to
be separated from the host contract and accounted for as a derivative on the
basis of the conditions that existed at the later of the date it first became a party
to the contract and the date a reassessment is required by paragraph B4311 of
IFRS 9
Government loans
B10 A firsttime adopter shall classify all government loans received as a financial
liability or an equity instrument in accordance with IAS 32 Financial Instruments
IFRS 1
IFRS Foundation A67Presentation Except as permitted by paragraph B11 a firsttime adopter shall
apply the requirements in IFRS 9 Financial Instruments and IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance prospectively to
government loans existing at the date of transition to IFRSs and shall not
recognise the corresponding benefit of the government loan at a belowmarket
rate of interest as a government grant Consequently if a firsttime adopter did
not under its previous GAAP recognise and measure a government loan at a
belowmarket rate of interest on a basis consistent with IFRS requirements it
shall use its previous GAAP carrying amount of the loan at the date of transition
to IFRSs as the carrying amount of the loan in the opening IFRS statement of
financial position An entity shall apply IFRS 9 to the measurement of such
loans after the date of transition to IFRSs
B11 Despite paragraph B10 an entity may apply the requirements in IFRS 9 and
IAS 20 retrospectively to any government loan originated before the date of
transition to IFRSs provided that the information needed to do so had been
obtained at the time of initially accounting for that loan
B12 The requirements and guidance in paragraphs B10 and B11 do not preclude an
entity from being able to use the exemptions described in paragraphs D19–D19D
relating to the designation of previously recognised financial instruments at fair
value through profit or loss
IFRS 1
IFRS FoundationA68Appendix C
Exemptions for business combinations
This appendix is an integral part of the IFRS An entity shall apply the following requirements to
business combinations that the entity recognised before the date of transition to IFRSs This Appendix
should only be applied to business combinations within the scope of IFRS 3 Business Combinations
C1 A firsttime adopter may elect not to apply IFRS 3 retrospectively to past business
combinations (business combinations that occurred before the date of transition
to IFRSs) However if a firsttime adopter restates any business combination to
comply with IFRS 3 it shall restate all later business combinations and shall also
apply IFRS 10 from that same date For example if a firsttime adopter elects to
restate a business combination that occurred on 30 June 20X6 it shall restate all
business combinations that occurred between 30 June 20X6 and the date of
transition to IFRSs and it shall also apply IFRS 10 from 30 June 20X6
C2 An entity need not apply IAS 21 The Effects of Changes in Foreign Exchange Rates
retrospectively to fair value adjustments and goodwill arising in business
combinations that occurred before the date of transition to IFRSs If the entity
does not apply IAS 21 retrospectively to those fair value adjustments and
goodwill it shall treat them as assets and liabilities of the entity rather than as
assets and liabilities of the acquiree Therefore those goodwill and fair value
adjustments either are already expressed in the entity’s functional currency or
are nonmonetary foreign currency items which are reported using the
exchange rate applied in accordance with previous GAAP
C3 An entity may apply IAS 21 retrospectively to fair value adjustments and
goodwill arising in either
(a) all business combinations that occurred before the date of transition to
IFRSs or
(b) all business combinations that the entity elects to restate to comply with
IFRS 3 as permitted by paragraph C1 above
C4 If a firsttime adopter does not apply IFRS 3 retrospectively to a past business
combination this has the following consequences for that business
combination
(a) The firsttime adopter shall keep the same classification (as an
acquisition by the legal acquirer a reverse acquisition by the legal
acquiree or a uniting of interests) as in its previous GAAP financial
statements
(b) The firsttime adopter shall recognise all its assets and liabilities at the
date of transition to IFRSs that were acquired or assumed in a past
business combination other than
(i) some financial assets and financial liabilities derecognised in
accordance with previous GAAP (see paragraph B2) and
(ii) assets including goodwill and liabilities that were not
recognised in the acquirer’s consolidated statement of financial
position in accordance with previous GAAP and also would not
IFRS 1
IFRS Foundation A69qualify for recognition in accordance with IFRSs in the separate
statement of financial position of the acquiree (see (f)–(i) below)
The firsttime adopter shall recognise any resulting change by adjusting
retained earnings (or if appropriate another category of equity) unless
the change results from the recognition of an intangible asset that was
previously subsumed within goodwill (see (g)(i) below)
(c) The firsttime adopter shall exclude from its opening IFRS statement of
financial position any item recognised in accordance with previous
GAAP that does not qualify for recognition as an asset or liability under
IFRSs The firsttime adopter shall account for the resulting change as
follows
(i) the firsttime adopter may have classified a past business
combination as an acquisition and recognised as an intangible
asset an item that does not qualify for recognition as an asset in
accordance with IAS 38 Intangible Assets It shall reclassify that
item (and if any the related deferred tax and noncontrolling
interests) as part of goodwill (unless it deducted goodwill directly
from equity in accordance with previous GAAP see (g)(i) and (i)
below)
(ii) the firsttime adopter shall recognise all other resulting changes
in retained earnings1
(d) IFRSs require subsequent measurement of some assets and liabilities on a
basis that is not based on original cost such as fair value The firsttime
adopter shall measure these assets and liabilities on that basis in its
opening IFRS statement of financial position even if they were acquired
or assumed in a past business combination It shall recognise any
resulting change in the carrying amount by adjusting retained earnings
(or if appropriate another category of equity) rather than goodwill
(e) Immediately after the business combination the carrying amount in
accordance with previous GAAP of assets acquired and liabilities
assumed in that business combination shall be their deemed cost in
accordance with IFRSs at that date If IFRSs require a costbased
measurement of those assets and liabilities at a later date that deemed
cost shall be the basis for costbased depreciation or amortisation from
the date of the business combination
(f) If an asset acquired or liability assumed in a past business combination
was not recognised in accordance with previous GAAP it does not have a
deemed cost of zero in the opening IFRS statement of financial position
Instead the acquirer shall recognise and measure it in its consolidated
statement of financial position on the basis that IFRSs would require in
the statement of financial position of the acquiree To illustrate if the
acquirer had not in accordance with its previous GAAP capitalised
1 Such changes include reclassifications from or to intangible assets if goodwill was not recognised in
accordance with previous GAAP as an asset This arises if in accordance with previous GAAP the
entity (a) deducted goodwill directly from equity or (b) did not treat the business combination as an
acquisition
IFRS 1
IFRS FoundationA70leases acquired in a past business combination in which the acquiree was
a lessee it shall capitalise those leases in its consolidated financial
statements as IFRS 16 Leases would require the acquiree to do in its IFRS
statement of financial position Similarly if the acquirer had not in
accordance with its previous GAAP recognised a contingent liability that
still exists at the date of transition to IFRSs the acquirer shall recognise
that contingent liability at that date unless IAS 37 Provisions Contingent
Liabilities and Contingent Assets would prohibit its recognition in the
financial statements of the acquiree Conversely if an asset or liability
was subsumed in goodwill in accordance with previous GAAP but would
have been recognised separately under IFRS 3 that asset or liability
remains in goodwill unless IFRSs would require its recognition in the
financial statements of the acquiree
(g) The carrying amount of goodwill in the opening IFRS statement of
financial position shall be its carrying amount in accordance with
previous GAAP at the date of transition to IFRSs after the following two
adjustments
(i) If required by (c)(i) above the firsttime adopter shall increase the
carrying amount of goodwill when it reclassifies an item that it
recognised as an intangible asset in accordance with previous
GAAP Similarly if (f) above requires the firsttime adopter to
recognise an intangible asset that was subsumed in recognised
goodwill in accordance with previous GAAP the firsttime
adopter shall decrease the carrying amount of goodwill
accordingly (and if applicable adjust deferred tax and
noncontrolling interests)
(ii) Regardless of whether there is any indication that the goodwill
may be impaired the firsttime adopter shall apply IAS 36 in
testing the goodwill for impairment at the date of transition to
IFRSs and in recognising any resulting impairment loss in
retained earnings (or if so required by IAS 36 in revaluation
surplus) The impairment test shall be based on conditions at the
date of transition to IFRSs
(h) No other adjustments shall be made to the carrying amount of goodwill
at the date of transition to IFRSs For example the firsttime adopter
shall not restate the carrying amount of goodwill
(i) to exclude inprocess research and development acquired in that
business combination (unless the related intangible asset would
qualify for recognition in accordance with IAS 38 in the
statement of financial position of the acquiree)
(ii) to adjust previous amortisation of goodwill
(iii) to reverse adjustments to goodwill that IFRS 3 would not permit
but were made in accordance with previous GAAP because of
adjustments to assets and liabilities between the date of the
business combination and the date of transition to IFRSs
IFRS 1
IFRS Foundation A71(i) If the firsttime adopter recognised goodwill in accordance with previous
GAAP as a deduction from equity
(i) it shall not recognise that goodwill in its opening IFRS statement
of financial position Furthermore it shall not reclassify that
goodwill to profit or loss if it disposes of the subsidiary or if the
investment in the subsidiary becomes impaired
(ii) adjustments resulting from the subsequent resolution of a
contingency affecting the purchase consideration shall be
recognised in retained earnings
(j) In accordance with its previous GAAP the firsttime adopter may not
have consolidated a subsidiary acquired in a past business combination
(for example because the parent did not regard it as a subsidiary in
accordance with previous GAAP or did not prepare consolidated
financial statements) The firsttime adopter shall adjust the carrying
amounts of the subsidiary’s assets and liabilities to the amounts that
IFRSs would require in the subsidiary’s statement of financial position
The deemed cost of goodwill equals the difference at the date of
transition to IFRSs between
(i) the parent’s interest in those adjusted carrying amounts and
(ii) the cost in the parent’s separate financial statements of its
investment in the subsidiary
(k) The measurement of noncontrolling interests and deferred tax follows
from the measurement of other assets and liabilities Therefore the
above adjustments to recognised assets and liabilities affect
noncontrolling interests and deferred tax
C5 The exemption for past business combinations also applies to past acquisitions
of investments in associates interests in joint ventures and interests in joint
operations in which the activity of the joint operation constitutes a business as
defined in IFRS 3 Furthermore the date selected for paragraph C1 applies
equally for all such acquisitions
IFRS 1
IFRS FoundationA72Appendix D
Exemptions from other IFRSs
This appendix is an integral part of the IFRS
D1 An entity may elect to use one or more of the following exemptions
(a) sharebased payment transactions (paragraphs D2 and D3)
(b) insurance contracts (paragraph D4)
(c) deemed cost (paragraphs D5–D8B)
(d) leases (paragraphs D9 and D9B–D9E)
(e) [deleted]
(f) cumulative translation differences (paragraphs D12 and D13)
(g) investments in subsidiaries joint ventures and associates
(paragraphs D14–D15A)
(h) assets and liabilities of subsidiaries associates and joint ventures
(paragraphs D16 and D17)
(i) compound financial instruments (paragraph D18)
(j) designation of previously recognised financial instruments (paragraphs
D19–D19C)
(k) fair value measurement of financial assets or financial liabilities at
initial recognition (paragraph D20)
(l) decommissioning liabilities included in the cost of property plant and
equipment (paragraphs D21 and D21A)
(m) financial assets or intangible assets accounted for in accordance with
IFRIC 12 Service Concession Arrangements (paragraph D22)
(n) borrowing costs (paragraph D23)
(o) transfers of assets from customers (paragraph D24)
(p) extinguishing financial liabilities with equity instruments
(paragraph D25)
(q) severe hyperinflation (paragraphs D26–D30)
(r) joint arrangements (paragraph D31)
(s) stripping costs in the production phase of a surface mine
(paragraph D32) and
(t) designation of contracts to buy or sell a nonfinancial item
(paragraph D33)
An entity shall not apply these exemptions by analogy to other items
Sharebased payment transactions
D2 A firsttime adopter is encouraged but not required to apply IFRS 2 Sharebased
Payment to equity instruments that were granted on or before 7 November 2002
IFRS 1
IFRS Foundation A73A firsttime adopter is also encouraged but not required to apply IFRS 2 to
equity instruments that were granted after 7 November 2002 and vested before
the later of (a) the date of transition to IFRSs and (b) 1 January 2005 However if
a firsttime adopter elects to apply IFRS 2 to such equity instruments it may do
so only if the entity has disclosed publicly the fair value of those equity
instruments determined at the measurement date as defined in IFRS 2 For all
grants of equity instruments to which IFRS 2 has not been applied (eg equity
instruments granted on or before 7 November 2002) a firsttime adopter shall
nevertheless disclose the information required by paragraphs 44 and 45 of
IFRS 2 If a firsttime adopter modifies the terms or conditions of a grant of
equity instruments to which IFRS 2 has not been applied the entity is not
required to apply paragraphs 26–29 of IFRS 2 if the modification occurred before
the date of transition to IFRSs
D3 A firsttime adopter is encouraged but not required to apply IFRS 2 to liabilities
arising from sharebased payment transactions that were settled before the date
of transition to IFRSs A firsttime adopter is also encouraged but not required
to apply IFRS 2 to liabilities that were settled before 1 January 2005 For
liabilities to which IFRS 2 is applied a firsttime adopter is not required to
restate comparative information to the extent that the information relates to a
period or date that is earlier than 7 November 2002
Insurance contracts
D4 A firsttime adopter may apply the transitional provisions in IFRS 4 Insurance
Contracts IFRS 4 restricts changes in accounting policies for insurance contracts
including changes made by a firsttime adopter
Deemed cost
D5 An entity may elect to measure an item of property plant and equipment at the
date of transition to IFRSs at its fair value and use that fair value as its deemed
cost at that date
D6 A firsttime adopter may elect to use a previous GAAP revaluation of an item of
property plant and equipment at or before the date of transition to IFRSs as
deemed cost at the date of the revaluation if the revaluation was at the date of
the revaluation broadly comparable to
(a) fair value or
(b) cost or depreciated cost in accordance with IFRSs adjusted to reflect for
example changes in a general or specific price index
D7 The elections in paragraphs D5 and D6 are also available for
(a) investment property if an entity elects to use the cost model in IAS 40
Investment Property
(aa) rightofuse assets (IFRS 16 Leases) and
(b) intangible assets that meet
(i) the recognition criteria in IAS 38 (including reliable
measurement of original cost) and
IFRS 1
IFRS FoundationA74(ii) the criteria in IAS 38 for revaluation (including the existence of
an active market)
An entity shall not use these elections for other assets or for liabilities
D8 A firsttime adopter may have established a deemed cost in accordance with
previous GAAP for some or all of its assets and liabilities by measuring them at
their fair value at one particular date because of an event such as a privatisation
or initial public offering
(a) If the measurement date is at or before the date of transition to IFRSs the
entity may use such eventdriven fair value measurements as deemed
cost for IFRSs at the date of that measurement
(b) If the measurement date is after the date of transition to IFRSs but
during the period covered by the first IFRS financial statements the
eventdriven fair value measurements may be used as deemed cost when
the event occurs An entity shall recognise the resulting adjustments
directly in retained earnings (or if appropriate another category of
equity) at the measurement date At the date of transition to IFRSs the
entity shall either establish the deemed cost by applying the criteria in
paragraphs D5–D7 or measure assets and liabilities in accordance with
the other requirements in this IFRS
D8A Under some national accounting requirements exploration and development
costs for oil and gas properties in the development or production phases are
accounted for in cost centres that include all properties in a large geographical
area A firsttime adopter using such accounting under previous GAAP may elect
to measure oil and gas assets at the date of transition to IFRSs on the following
basis
(a) exploration and evaluation assets at the amount determined under the
entity’s previous GAAP and
(b) assets in the development or production phases at the amount
determined for the cost centre under the entity’s previous GAAP The
entity shall allocate this amount to the cost centre’s underlying assets
pro rata using reserve volumes or reserve values as of that date
The entity shall test exploration and evaluation assets and assets in the
development and production phases for impairment at the date of transition to
IFRSs in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources or
IAS 36 respectively and if necessary reduce the amount determined in
accordance with (a) or (b) above For the purposes of this paragraph oil and gas
assets comprise only those assets used in the exploration evaluation
development or production of oil and gas
D8B Some entities hold items of property plant and equipment rightofuse assets or
intangible assets that are used or were previously used in operations subject to
rate regulation The carrying amount of such items might include amounts that
were determined under previous GAAP but do not qualify for capitalisation in
accordance with IFRSs If this is the case a firsttime adopter may elect to use
the previous GAAP carrying amount of such an item at the date of transition to
IFRSs as deemed cost If an entity applies this exemption to an item it need not
IFRS 1
IFRS Foundation A75apply it to all items At the date of transition to IFRSs an entity shall test for
impairment in accordance with IAS 36 each item for which this exemption is
used For the purposes of this paragraph operations are subject to rate
regulation if they are governed by a framework for establishing the prices that
can be charged to customers for goods or services and that framework is subject
to oversight andor approval by a rate regulator (as defined in IFRS 14 Regulatory
Deferral Accounts)
Leases
D9 A firsttime adopter may assess whether a contract existing at the date of
transition to IFRSs contains a lease by applying paragraphs 9–11 of IFRS 16 to
those contracts on the basis of facts and circumstances existing at that date
D9A [Deleted]
D9B When a firsttime adopter that is a lessee recognises lease liabilities and
rightofuse assets it may apply the following approach to all of its leases (subject
to the practical expedients described in paragraph D9D)
(a) measure a lease liability at the date of transition to IFRSs A lessee
following this approach shall measure that lease liability at the present
value of the remaining lease payments (see paragraph D9E) discounted
using the lessee’s incremental borrowing rate (see paragraph D9E) at the
date of transition to IFRSs
(b) measure a rightofuse asset at the date of transition to IFRSs The lessee
shall choose on a leasebylease basis to measure that rightofuse asset
at either
(i) its carrying amount as if IFRS 16 had been applied since the
commencement date of the lease (see paragraph D9E) but
discounted using the lessee’s incremental borrowing rate at the
date of transition to IFRSs or
(ii) an amount equal to the lease liability adjusted by the amount of
any prepaid or accrued lease payments relating to that lease
recognised in the statement of financial position immediately
before the date of transition to IFRSs
(c) apply IAS 36 to rightofuse assets at the date of transition to IFRSs
D9C Notwithstanding the requirements in paragraph D9B a firsttime adopter that is
a lessee shall measure the rightofuse asset at fair value at the date of transition
to IFRSs for leases that meet the definition of investment property in IAS 40 and
are measured using the fair value model in IAS 40 from the date of transition to
IFRSs
D9D A firsttime adopter that is a lessee may do one or more of the following at the
date of transition to IFRSs applied on a leasebylease basis
(a) apply a single discount rate to a portfolio of leases with reasonably
similar characteristics (for example a similar remaining lease term for a
similar class of underlying asset in a similar economic environment)
IFRS 1
IFRS FoundationA76(b) elect not to apply the requirements in paragraph D9B to leases for which
the lease term (see paragraph D9E) ends within 12 months of the date of
transition to IFRSs Instead the entity shall account for (including
disclosure of information about) these leases as if they were shortterm
leases accounted for in accordance with paragraph 6 of IFRS 16
(c) elect not to apply the requirements in paragraph D9B to leases for which
the underlying asset is of low value (as described in paragraphs B3–B8 of
IFRS 16) Instead the entity shall account for (including disclosure of
information about) these leases in accordance with paragraph 6 of
IFRS 16
(d) exclude initial direct costs (see paragraph D9E) from the measurement of
the rightofuse asset at the date of transition to IFRSs
(e) use hindsight such as in determining the lease term if the contract
contains options to extend or terminate the lease
D9E Lease payments lessee lessee’s incremental borrowing rate commencement
date of the lease initial direct costs and lease term are defined terms in IFRS 16
and are used in this Standard with the same meaning
D10–
D11
[Deleted]
Cumulative translation differences
D12 IAS 21 requires an entity
(a) to recognise some translation differences in other comprehensive
income and accumulate these in a separate component of equity and
(b) on disposal of a foreign operation to reclassify the cumulative
translation difference for that foreign operation (including if applicable
gains and losses on related hedges) from equity to profit or loss as part of
the gain or loss on disposal
D13 However a firsttime adopter need not comply with these requirements for
cumulative translation differences that existed at the date of transition to IFRSs
If a firsttime adopter uses this exemption
(a) the cumulative translation differences for all foreign operations are
deemed to be zero at the date of transition to IFRSs and
(b) the gain or loss on a subsequent disposal of any foreign operation shall
exclude translation differences that arose before the date of transition to
IFRSs and shall include later translation differences
Investments in subsidiaries joint ventures and
associates
D14 When an entity prepares separate financial statements IAS 27 requires it to
account for its investments in subsidiaries joint ventures and associates either
(a) at cost
(b) in accordance with IFRS 9 or
(c) using the equity method as described in IAS 28
IFRS 1
IFRS Foundation A77D15 If a firsttime adopter measures such an investment at cost in accordance with
IAS 27 it shall measure that investment at one of the following amounts in its
separate opening IFRS statement of financial position
(a) cost determined in accordance with IAS 27 or
(b) deemed cost The deemed cost of such an investment shall be its
(i) fair value at the entity’s date of transition to IFRSs in its separate
financial statements or
(ii) previous GAAP carrying amount at that date
A firsttime adopter may choose either (i) or (ii) above to measure its
investment in each subsidiary joint venture or associate that it elects to
measure using a deemed cost
D15A If a firsttime adopter accounts for such an investment using the equity method
procedures as described in IAS 28
(a) the firsttime adopter applies the exemption for past business
combinations (Appendix C) to the acquisition of the investment
(b) if the entity becomes a firsttime adopter for its separate financial
statements earlier than for its consolidated financial statements and
(i) later than its parent the entity shall apply paragraph D16 in its
separate financial statements
(ii) later than its subsidiary the entity shall apply paragraph D17 in
its separate financial statements
Assets and liabilities of subsidiaries associates and
joint ventures
D16 If a subsidiary becomes a firsttime adopter later than its parent the subsidiary
shall in its financial statements measure its assets and liabilities at either
(a) the carrying amounts that would be included in the parent’s
consolidated financial statements based on the parent’s date of
transition to IFRSs if no adjustments were made for consolidation
procedures and for the effects of the business combination in which the
parent acquired the subsidiary (this election is not available to a
subsidiary of an investment entity as defined in IFRS 10 that is required
to be measured at fair value through profit or loss) or
(b) the carrying amounts required by the rest of this IFRS based on the
subsidiary’s date of transition to IFRSs These carrying amounts could
differ from those described in (a)
(i) when the exemptions in this IFRS result in measurements that
depend on the date of transition to IFRSs
(ii) when the accounting policies used in the subsidiary’s financial
statements differ from those in the consolidated financial
statements For example the subsidiary may use as its
accounting policy the cost model in IAS 16 Property Plant and
Equipment whereas the group may use the revaluation model
IFRS 1
IFRS FoundationA78A similar election is available to an associate or joint venture that
becomes a firsttime adopter later than an entity that has significant
influence or joint control over it
D17 However if an entity becomes a firsttime adopter later than its subsidiary (or
associate or joint venture) the entity shall in its consolidated financial
statements measure the assets and liabilities of the subsidiary (or associate or
joint venture) at the same carrying amounts as in the financial statements of the
subsidiary (or associate or joint venture) after adjusting for consolidation and
equity accounting adjustments and for the effects of the business combination
in which the entity acquired the subsidiary Notwithstanding this requirement
a noninvestment entity parent shall not apply the exception to consolidation
that is used by any investment entity subsidiaries Similarly if a parent becomes
a firsttime adopter for its separate financial statements earlier or later than for
its consolidated financial statements it shall measure its assets and liabilities at
the same amounts in both financial statements except for consolidation
adjustments
Compound financial instruments
D18 IAS 32 Financial Instruments Presentation requires an entity to split a compound
financial instrument at inception into separate liability and equity components
If the liability component is no longer outstanding retrospective application of
IAS 32 involves separating two portions of equity The first portion is in retained
earnings and represents the cumulative interest accreted on the liability
component The other portion represents the original equity component
However in accordance with this IFRS a firsttime adopter need not separate
these two portions if the liability component is no longer outstanding at the
date of transition to IFRSs
Designation of previously recognised financial
instruments
D19 IFRS 9 permits a financial liability (provided it meets certain criteria) to be
designated as a financial liability at fair value through profit or loss Despite
this requirement an entity is permitted to designate at the date of transition to
IFRSs any financial liability as at fair value through profit or loss provided the
liability meets the criteria in paragraph 422 of IFRS 9 at that date
D19A An entity may designate a financial asset as measured at fair value through
profit or loss in accordance with paragraph 415 of IFRS 9 on the basis of the
facts and circumstances that exist at the date of transition to IFRSs
D19B An entity may designate an investment in an equity instrument as at fair value
through other comprehensive income in accordance with paragraph 575 of
IFRS 9 on the basis of the facts and circumstances that exist at the date of
transition to IFRSs
D19C For a financial liability that is designated as a financial liability at fair value
through profit or loss an entity shall determine whether the treatment in
paragraph 577 of IFRS 9 would create an accounting mismatch in profit or loss
on the basis of the facts and circumstances that exist at the date of transition to
IFRSs
IFRS 1
IFRS Foundation A79Fair value measurement of financial assets or financial
liabilities at initial recognition
D20 Despite the requirements of paragraphs 7 and 9 an entity may apply the
requirements in paragraph B512A(b) of IFRS 9 prospectively to transactions
entered into on or after the date of transition to IFRSs
Decommissioning liabilities included in the cost of
property plant and equipment
D21 IFRIC 1 Changes in Existing Decommissioning Restoration and Similar Liabilities requires
specified changes in a decommissioning restoration or similar liability to be
added to or deducted from the cost of the asset to which it relates the adjusted
depreciable amount of the asset is then depreciated prospectively over its
remaining useful life A firsttime adopter need not comply with these
requirements for changes in such liabilities that occurred before the date of
transition to IFRSs If a firsttime adopter uses this exemption it shall
(a) measure the liability as at the date of transition to IFRSs in accordance
with IAS 37
(b) to the extent that the liability is within the scope of IFRIC 1 estimate the
amount that would have been included in the cost of the related asset
when the liability first arose by discounting the liability to that date
using its best estimate of the historical riskadjusted discount rate(s) that
would have applied for that liability over the intervening period and
(c) calculate the accumulated depreciation on that amount as at the date of
transition to IFRSs on the basis of the current estimate of the useful life
of the asset using the depreciation policy adopted by the entity in
accordance with IFRSs
D21A An entity that uses the exemption in paragraph D8A(b) (for oil and gas assets in
the development or production phases accounted for in cost centres that include
all properties in a large geographical area under previous GAAP) shall instead of
applying paragraph D21 or IFRIC 1
(a) measure decommissioning restoration and similar liabilities as at the
date of transition to IFRSs in accordance with IAS 37 and
(b) recognise directly in retained earnings any difference between that
amount and the carrying amount of those liabilities at the date of
transition to IFRSs determined under the entity’s previous GAAP
Financial assets or intangible assets accounted for in
accordance with IFRIC 12
D22 A firsttime adopter may apply the transitional provisions in IFRIC 12
Borrowing costs
D23 A firsttime adopter can elect to apply the requirements of IAS 23 from the date
of transition or from an earlier date as permitted by paragraph 28 of IAS 23
From the date on which an entity that applies this exemption begins to apply
IAS 23 the entity
IFRS 1
IFRS FoundationA80(a) shall not restate the borrowing cost component that was capitalised
under previous GAAP and that was included in the carrying amount of
assets at that date and
(b) shall account for borrowing costs incurred on or after that date in
accordance with IAS 23 including those borrowing costs incurred on or
after that date on qualifying assets already under construction
D24 [Deleted]
Extinguishing financial liabilities with equity instruments
D25 A firsttime adopter may apply the transitional provisions in IFRIC 19
Extinguishing Financial Liabilities with Equity Instruments
Severe hyperinflation
D26 If an entity has a functional currency that was or is the currency of a
hyperinflationary economy it shall determine whether it was subject to severe
hyperinflation before the date of transition to IFRSs This applies to entities that
are adopting IFRSs for the first time as well as entities that have previously
applied IFRSs
D27 The currency of a hyperinflationary economy is subject to severe hyperinflation
if it has both of the following characteristics
(a) a reliable general price index is not available to all entities with
transactions and balances in the currency
(b) exchangeability between the currency and a relatively stable foreign
currency does not exist
D28 The functional currency of an entity ceases to be subject to severe hyperinflation
on the functional currency normalisation date That is the date when the
functional currency no longer has either or both of the characteristics in
paragraph D27 or when there is a change in the entity’s functional currency to
a currency that is not subject to severe hyperinflation
D29 When an entity’s date of transition to IFRSs is on or after the functional
currency normalisation date the entity may elect to measure all assets and
liabilities held before the functional currency normalisation date at fair value on
the date of transition to IFRSs The entity may use that fair value as the deemed
cost of those assets and liabilities in the opening IFRS statement of financial
position
D30 When the functional currency normalisation date falls within a 12month
comparative period the comparative period may be less than 12 months
provided that a complete set of financial statements (as required by
paragraph 10 of IAS 1) is provided for that shorter period
Joint arrangements
D31 A firsttime adopter may apply the transition provisions in IFRS 11 with the
following exceptions
(a) When applying the transition provisions in IFRS 11 a firsttime adopter
shall apply these provisions at the date of transition to IFRS
IFRS 1
IFRS Foundation A81(b) When changing from proportionate consolidation to the equity method
a firsttime adopter shall test for impairment the investment in
accordance with IAS 36 as at the date of transition to IFRS regardless of
whether there is any indication that the investment may be impaired
Any resulting impairment shall be recognised as an adjustment to
retained earnings at the date of transition to IFRS
Stripping costs in the production phase of a surface
mine
D32 A firsttime adopter may apply the transitional provisions set out in
paragraphs A1 to A4 of IFRIC 20 Stripping Costs in the Production Phase of a Surface
Mine In that paragraph reference to the effective date shall be interpreted as
1 January 2013 or the beginning of the first IFRS reporting period whichever is
later
Designation of contracts to buy or sell a nonfinancial
item
D33 IFRS 9 permits some contracts to buy or sell a nonfinancial item to be
designated at inception as measured at fair value through profit or loss
(see paragraph 25 of IFRS 9) Despite this requirement an entity is permitted to
designate at the date of transition to IFRSs contracts that already exist on that
date as measured at fair value through profit or loss but only if they meet the
requirements of paragraph 25 of IFRS 9 at that date and the entity designates all
similar contracts
Revenue
D34 A firsttime adopter may apply the transition provisions in paragraph C5 of
IFRS 15 In those paragraphs references to the date of initial application’ shall
be interpreted as the beginning of the first IFRS reporting period If a firsttime
adopter decides to apply those transition provisions it shall also apply
paragraph C6 of IFRS 15
D35 A firsttime adopter is not required to restate contracts that were completed
before the earliest period presented A completed contract is a contract for
which the entity has transferred all of the goods or services identified in
accordance with previous GAAP
IFRS 1
IFRS FoundationA82Appendix E
Shortterm exemptions from IFRSs
This appendix is an integral part of the IFRS
Exemption from the requirement to restate comparative
information for IFRS 9
E1 If an entity’s first IFRS reporting period begins before 1 January 2019 and the
entity applies the completed version of IFRS 9 (issued in 2014) the comparative
information in the entity’s first IFRS financial statements need not comply with
IFRS 7 Financial Instruments Disclosure or the completed version of IFRS 9 (issued in
2014) to the extent that the disclosures required by IFRS 7 relate to items within
the scope of IFRS 9 For such entities references to the date of transition to
IFRSs’ shall mean in the case of IFRS 7 and IFRS 9 (2014) only the beginning of
the first IFRS reporting period
E2 An entity that chooses to present comparative information that does not comply
with IFRS 7 and the completed version of IFRS 9 (issued in 2014) in its first year
of transition shall
(a) apply the requirements of its previous GAAP in place of the requirements
of IFRS 9 to comparative information about items within the scope of
IFRS 9
(b) disclose this fact together with the basis used to prepare this
information
(c) treat any adjustment between the statement of financial position at the
comparative period’s reporting date (ie the statement of financial
position that includes comparative information under previous GAAP)
and the statement of financial position at the start of the first IFRS
reporting period (ie the first period that includes information that
complies with IFRS 7 and the completed version of IFRS 9 (issued in
2014)) as arising from a change in accounting policy and give the
disclosures required by paragraph 28(a)–(e) and (f)(i) of IAS 8
Paragraph 28(f)(i) applies only to amounts presented in the statement of
financial position at the comparative period’s reporting date
(d) apply paragraph 17(c) of IAS 1 to provide additional disclosures when
compliance with the specific requirements in IFRSs is insufficient to
enable users to understand the impact of particular transactions other
events and conditions on the entity’s financial position and financial
performance
IFRS 1
IFRS Foundation A83Disclosures about financial instruments
E3 A firsttime adopter may apply the transition provisions in paragraph 44G of
IFRS 72
E4 A firsttime adopter may apply the transition provisions in paragraph 44M of
IFRS 73
E4A A firsttime adopter may apply the transition provisions in paragraph 44AA of
IFRS 7
Employee benefits
E5 A firsttime adopter may apply the transition provisions in paragraph 173(b) of
IAS 19
Investment entities
E6 A firsttime adopter that is a parent shall assess whether it is an investment
entity as defined in IFRS 10 on the basis of the facts and circumstances that
exist at the date of transition to IFRSs
E7 A firsttime adopter that is an investment entity as defined in IFRS 10 may
apply the transition provisions in paragraphs C3C–C3D of IFRS 10 and
paragraphs 18C–18G of IAS 27 if its first IFRS financial statements are for an
annual period ending on or before 31 December 2014 The references in those
paragraphs to the annual period that immediately precedes the date of initial
application shall be read as the earliest annual period presented Consequently
the references in those paragraphs shall be read as the date of transition to
IFRSs
2 Paragraph E3 was added as a consequence of Limited Exemption from Comparative IFRS 7 Disclosures for
Firsttime Adopters (Amendment to IFRS 1) issued in January 2010 To avoid the potential use of
hindsight and to ensure that firsttime adopters are not disadvantaged as compared with current
IFRS preparers the Board decided that firsttime adopters should be permitted to use the same
transition provisions permitted for existing preparers of financial statements prepared in
accordance with IFRSs that are included in Improving Disclosures about Financial Instruments
(Amendments to IFRS 7)
3 Paragraph E4 was added as a consequence of Disclosures—Transfers of Financial Assets (Amendments to
IFRS 7) issued in October 2010 To avoid the potential use of hindsight and to ensure that firsttime
adopters are not disadvantaged as compared with current IFRS preparers the Board decided that
firsttime adopters should be permitted to use the same transition provisions permitted for existing
preparers of financial statements prepared in accordance with IFRSs that are included in
Disclosures—Transfers of Financial Assets (Amendments to IFRS 7)
IFRS 1
IFRS FoundationA84IFRS Standard 2
Sharebased Payment
In February 2004 the International Accounting Standards Board (the Board) issued IFRS 2
Sharebased Payment The Board amended IFRS 2 to clarify its scope in January 2008 and to
incorporate the guidance contained in two related Interpretations (IFRIC 8 Scope of IFRS 2
and IFRIC 11 IFRS 2—Group and Treasury Share Transactions) in June 2009
Other Standards have made minor consequential amendments to IFRS 2 They include
IFRS 10 Consolidated Financial Statements (issued May 2011) IFRS 11 Joint Arrangements (issued
May 2011) IFRS 13 Fair Value Measurement (issued May 2011) Annual Improvements to IFRSs
2010–2012 Cycle (issued December 2013) and IFRS 9 Financial Instruments (issued July 2014)
IFRS 2
IFRS Foundation A85CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 2
SHAREBASED PAYMENT
OBJECTIVE 1
SCOPE 2
RECOGNITION 7
EQUITYSETTLED SHAREBASED PAYMENT TRANSACTIONS 10
Overview 10
Transactions in which services are received 14
Transactions measured by reference to the fair value of the equity
instruments granted 16
Modifications to the terms and conditions on which equity instruments were
granted including cancellations and settlements 26
CASHSETTLED SHAREBASED PAYMENT TRANSACTIONS 30
SHAREBASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES 34
Sharebased payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement 35
Sharebased payment transactions in which the terms of the arrangement
provide the entity with a choice of settlement 41
SHAREBASED PAYMENT TRANSACTIONS AMONG GROUP ENTITIES (2009
AMENDMENTS) 43A
DISCLOSURES 44
TRANSITIONAL PROVISIONS 53
EFFECTIVE DATE 60
WITHDRAWAL OF INTERPRETATIONS 64
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 2 ISSUED IN FEBRUARY 2004
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 2
Vesting Conditions and Cancellations issued in January 2008
Group Cashsettled Sharebased Payment Transactions issued in June 2009
BASIS FOR CONCLUSIONS
IMPLEMENTATION GUIDANCE
TABLE OF CONCORDANCE
IFRS 2
IFRS FoundationA86International Financial Reporting Standard 2 Sharebased Payment (IFRS 2) is set out in
paragraphs 1–64 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 2 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 2
IFRS Foundation A87Introduction
Reasons for issuing the IFRS
IN1 Entities often grant shares or share options to employees or other parties Share
plans and share option plans are a common feature of employee remuneration
for directors senior executives and many other employees Some entities issue
shares or share options to pay suppliers such as suppliers of professional
services
IN2 Until this IFRS was issued there was no IFRS covering the recognition and
measurement of these transactions Concerns were raised about this gap in
IFRSs given the increasing prevalence of sharebased payment transactions in
many countries
Reasons for amending IFRS 2 in June 2009
IN2A In June 2009 the International Accounting Standards Board amended IFRS 2 to
clarify its scope and the accounting for group cashsettled sharebased payment
transactions in the separate or individual financial statements of the entity
receiving the goods or services when that entity has no obligation to settle the
sharebased payment transaction The amendments also incorporate the
guidance contained in the following Interpretations
● IFRIC 8 Scope of IFRS 2
● IFRIC 11 IFRS 2—Group and Treasury Share Transactions
As a result the Board withdrew IFRIC 8 and IFRIC 11
Main features of the IFRS
IN3 The IFRS requires an entity to recognise sharebased payment transactions in its
financial statements including transactions with employees or other parties to
be settled in cash other assets or equity instruments of the entity There are no
exceptions to the IFRS other than for transactions to which other Standards
apply
IN4 The IFRS sets out measurement principles and specific requirements for three
types of sharebased payment transactions
(a) equitysettled sharebased payment transactions in which the entity
receives goods or services as consideration for equity instruments of the
entity (including shares or share options)
(b) cashsettled sharebased payment transactions in which the entity
acquires goods or services by incurring liabilities to the supplier of those
goods or services for amounts that are based on the price (or value) of the
entity’s shares or other equity instruments of the entity and
IFRS 2
IFRS FoundationA88(c) transactions in which the entity receives or acquires goods or services
and the terms of the arrangement provide either the entity or the
supplier of those goods or services with a choice of whether the entity
settles the transaction in cash or by issuing equity instruments
IN5 For equitysettled sharebased payment transactions the IFRS requires an entity
to measure the goods or services received and the corresponding increase in
equity directly at the fair value of the goods or services received unless that fair
value cannot be estimated reliably If the entity cannot estimate reliably the fair
value of the goods or services received the entity is required to measure their
value and the corresponding increase in equity indirectly by reference to the
fair value of the equity instruments granted Furthermore
(a) for transactions with employees and others providing similar services
the entity is required to measure the fair value of the equity instruments
granted because it is typically not possible to estimate reliably the fair
value of employee services received The fair value of the equity
instruments granted is measured at grant date
(b) for transactions with parties other than employees (and those providing
similar services) there is a rebuttable presumption that the fair value of
the goods or services received can be estimated reliably That fair value is
measured at the date the entity obtains the goods or the counterparty
renders service In rare cases if the presumption is rebutted the
transaction is measured by reference to the fair value of the equity
instruments granted measured at the date the entity obtains the goods
or the counterparty renders service
(c) for goods or services measured by reference to the fair value of the equity
instruments granted the IFRS specifies that all nonvesting conditions
are taken into account in the estimate of the fair value of the equity
instruments However vesting conditions that are not market
conditions are not taken into account when estimating the fair value of
the shares or options at the relevant measurement date (as specified
above) Instead vesting conditions are taken into account by adjusting
the number of equity instruments included in the measurement of the
transaction amount so that ultimately the amount recognised for goods
or services received as consideration for the equity instruments granted
is based on the number of equity instruments that eventually vest
Hence on a cumulative basis no amount is recognised for goods or
services received if the equity instruments granted do not vest because of
failure to satisfy a vesting condition (other than a market condition)
(d) the IFRS requires the fair value of equity instruments granted to be based
on market prices if available and to take into account the terms and
conditions upon which those equity instruments were granted In the
absence of market prices fair value is estimated using a valuation
technique to estimate what the price of those equity instruments would
have been on the measurement date in an arm’s length transaction
between knowledgeable willing parties
IFRS 2
IFRS Foundation A89(e) the IFRS also sets out requirements if the terms and conditions of an
option or share grant are modified (eg an option is repriced) or if a grant
is cancelled repurchased or replaced with another grant of equity
instruments For example irrespective of any modification cancellation
or settlement of a grant of equity instruments to employees the IFRS
generally requires the entity to recognise as a minimum the services
received measured at the grant date fair value of the equity instruments
granted
IN6 For cashsettled sharebased payment transactions the IFRS requires an entity to
measure the goods or services acquired and the liability incurred at the fair
value of the liability Until the liability is settled the entity is required to
remeasure the fair value of the liability at the end of each reporting period and
at the date of settlement with any changes in value recognised in profit or loss
for the period
IN7 For sharebased payment transactions in which the terms of the arrangement
provide either the entity or the supplier of goods or services with a choice of
whether the entity settles the transaction in cash or by issuing equity
instruments the entity is required to account for that transaction or the
components of that transaction as a cashsettled sharebased payment
transaction if and to the extent that the entity has incurred a liability to settle
in cash (or other assets) or as an equitysettled sharebased payment transaction
if and to the extent that no such liability has been incurred
IN8 The IFRS prescribes various disclosure requirements to enable users of financial
statements to understand
(a) the nature and extent of sharebased payment arrangements that existed
during the period
(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 effect of sharebased payment transactions on the entity’s profit or
loss for the period and on its financial position
IFRS 2
IFRS FoundationA90International Financial Reporting Standard 2
Sharebased Payment
Objective
1 The objective of this IFRS is to specify the financial reporting by an entity when
it undertakes a sharebased payment transaction In particular it requires an entity
to reflect in its profit or loss and financial position the effects of sharebased
payment transactions including expenses associated with transactions in which
share options are granted to employees
Scope
2 An entity shall apply this IFRS in accounting for all sharebased payment
transactions whether or not the entity can identify specifically some or all of
the goods or services received including
(a) equitysettled sharebased payment transactions
(b) cashsettled sharebased payment transactions and
(c) transactions in which the entity receives or acquires goods or services
and the terms of the arrangement provide either the entity or the
supplier of those goods or services with a choice of whether the entity
settles the transaction in cash (or other assets) or by issuing equity
instruments
except as noted in paragraphs 3A–6 In the absence of specifically identifiable
goods or services other circumstances may indicate that goods or services have
been (or will be) received in which case this IFRS applies
3 [Deleted]
3A A sharebased payment transaction may be settled by another group entity (or a
shareholder of any group entity) on behalf of the entity receiving or acquiring
the goods or services Paragraph 2 also applies to an entity that
(a) receives goods or services when another entity in the same group (or a
shareholder of any group entity) has the obligation to settle the
sharebased payment transaction or
(b) has an obligation to settle a sharebased payment transaction when
another entity in the same group receives the goods or services
unless the transaction is clearly for a purpose other than payment for goods or
services supplied to the entity receiving them
4 For the purposes of this IFRS a transaction with an employee (or other party) in
hisher capacity as a holder of equity instruments of the entity is not a
sharebased payment transaction For example if an entity grants all holders of
a particular class of its equity instruments the right to acquire additional equity
instruments of the entity at a price that is less than the fair value of those equity
instruments and an employee receives such a right because heshe is a holder of
IFRS 2
IFRS Foundation A91equity instruments of that particular class the granting or exercise of that right
is not subject to the requirements of this IFRS
5 As noted in paragraph 2 this IFRS applies to sharebased payment transactions
in which an entity acquires or receives goods or services Goods includes
inventories consumables property plant and equipment intangible assets and
other nonfinancial assets However an entity shall not apply this IFRS to
transactions in which the entity acquires goods as part of the net assets acquired
in a business combination as defined by IFRS 3 Business Combinations (as revised in
2008) in a combination of entities or businesses under common control as
described in paragraphs B1–B4 of IFRS 3 or the contribution of a business on the
formation of a joint venture as defined by IFRS 11 Joint Arrangements Hence
equity instruments issued in a business combination in exchange for control of
the acquiree are not within the scope of this IFRS However equity instruments
granted to employees of the acquiree in their capacity as employees (eg in return
for continued service) are within the scope of this IFRS Similarly the
cancellation replacement or other modification of sharebased payment
arrangements because of a business combination or other equity restructuring
shall be accounted for in accordance with this IFRS IFRS 3 provides guidance on
determining whether equity instruments issued in a business combination are
part of the consideration transferred in exchange for control of the acquiree
(and therefore within the scope of IFRS 3) or are in return for continued service
to be recognised in the postcombination period (and therefore within the scope
of this IFRS)
6 This IFRS does not apply to sharebased payment transactions in which the entity
receives or acquires goods or services under a contract within the scope of
paragraphs 8–10 of IAS 32 Financial Instruments Presentation (as revised in 2003)1 or
paragraphs 24–27 of IFRS 9 Financial Instruments
6A This IFRS uses the term fair value’ in a way that differs in some respects from
the definition of fair value in IFRS 13 Fair Value Measurement Therefore when
applying IFRS 2 an entity measures fair value in accordance with this IFRS not
IFRS 13
Recognition
7 An entity shall recognise the goods or services received or acquired in a
sharebased payment transaction when it obtains the goods or as the
services are received The entity shall recognise a corresponding increase
in equity if the goods or services were received in an equitysettled
sharebased payment transaction or a liability if the goods or services
were acquired in a cashsettled sharebased payment transaction
8 When the goods or services received or acquired in a sharebased payment
transaction do not qualify for recognition as assets they shall be
recognised as expenses
9 Typically an expense arises from the consumption of goods or services For
example services are typically consumed immediately in which case an expense
1 The title of IAS 32 was amended in 2005
IFRS 2
IFRS FoundationA92is recognised as the counterparty renders service Goods might be consumed
over a period of time or in the case of inventories sold at a later date in which
case an expense is recognised when the goods are consumed or sold However
sometimes it is necessary to recognise an expense before the goods or services
are consumed or sold because they do not qualify for recognition as assets For
example an entity might acquire goods as part of the research phase of a project
to develop a new product Although those goods have not been consumed they
might not qualify for recognition as assets under the applicable IFRS
Equitysettled sharebased payment transactions
Overview
10 For equitysettled sharebased payment transactions the entity shall
measure the goods or services received and the corresponding increase in
equity directly at the fair value of the goods or services received unless
that fair value cannot be estimated reliably If the entity cannot estimate
reliably the fair value of the goods or services received the entity shall
measure their value and the corresponding increase in equity indirectly
by reference to2 the fair value of the equity instruments granted
11 To apply the requirements of paragraph 10 to transactions with employees and
others providing similar services3 the entity shall measure the fair value of the
services received by reference to the fair value of the equity instruments granted
because typically it is not possible to estimate reliably the fair value of the
services received as explained in paragraph 12 The fair value of those equity
instruments shall be measured at grant date
12 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 components of the employee’s remuneration
package It might also not be possible to measure the fair value of the total
remuneration package independently without measuring directly the fair value
of the equity instruments granted Furthermore shares or share options are
sometimes granted as part of a bonus arrangement rather than as a part of basic
remuneration eg as an incentive to the employees to remain in the entity’s
employ or to reward them for their efforts in improving the entity’s
performance By granting shares or share options in addition to other
remuneration the entity is paying additional remuneration to obtain additional
benefits Estimating the fair value of those additional benefits is likely to be
difficult Because of the difficulty of measuring directly the fair value of the
services received the entity shall measure the fair value of the employee services
received by reference to the fair value of the equity instruments granted
2 This IFRS uses the phrase by reference to’ rather than at’ because the transaction is ultimately
measured by multiplying the fair value of the equity instruments granted measured at the date
specified in paragraph 11 or 13 (whichever is applicable) by the number of equity instruments that
vest as explained in paragraph 19
3 In the remainder of this IFRS all references to employees also include others providing similar
services
IFRS 2
IFRS Foundation A9313 To apply the requirements of paragraph 10 to transactions with parties other
than employees there shall be a rebuttable presumption that the fair value of
the goods or services received can be estimated reliably That fair value shall be
measured at the date the entity obtains the goods or the counterparty renders
service In rare cases if the entity rebuts this presumption because it cannot
estimate reliably the fair value of the goods or services received the entity shall
measure the goods or services received and the corresponding increase in
equity indirectly by reference to the fair value of the equity instruments
granted measured at the date the entity obtains the goods or the counterparty
renders service
13A In particular if the identifiable consideration received (if any) by the entity
appears to be less than the fair value of the equity instruments granted or
liability incurred typically this situation indicates that other consideration (ie
unidentifiable goods or services) has been (or will be) received by the entity The
entity shall measure the identifiable goods or services received in accordance
with this IFRS The entity shall measure the unidentifiable goods or services
received (or to be received) as the difference between the fair value of the
sharebased payment and the fair value of any identifiable goods or services
received (or to be received) The entity shall measure the unidentifiable goods or
services received at the grant date However for cashsettled transactions the
liability shall be remeasured at the end of each reporting period until it is
settled in accordance with paragraphs 30–33
Transactions in which services are received
14 If the equity instruments granted vest immediately the counterparty is not
required to complete a specified period of service before becoming
unconditionally entitled to those equity instruments In the absence of evidence
to the contrary the entity shall presume that services rendered by the
counterparty as consideration for the equity instruments have been received In
this case on grant date the entity shall recognise the services received in full
with a corresponding increase in equity
15 If the equity instruments granted do not vest until the counterparty completes a
specified period of service the entity shall presume that the services to be
rendered by the counterparty as consideration for those equity instruments will
be received in the future during the vesting period The entity shall account for
those services as they are rendered by the counterparty during the vesting
period with a corresponding increase in equity For example
(a) if an employee is granted share options conditional upon completing
three years’ service then the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
received in the future over that threeyear vesting period
(b) if an employee is granted share options conditional upon the
achievement of a performance condition and remaining in the entity’s
employ until that performance condition is satisfied and the length of
the vesting period varies depending on when that performance
condition is satisfied the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
IFRS 2
IFRS FoundationA94received in the future over the expected vesting period The entity shall
estimate the length of the expected vesting period at grant date based
on the most likely outcome of the performance condition If the
performance condition is a market condition the estimate of the length of
the expected vesting period shall be consistent with the assumptions
used in estimating the fair value of the options granted and shall not be
subsequently revised If the performance condition is not a market
condition the entity shall revise its estimate of the length of the vesting
period if necessary if subsequent information indicates that the length
of the vesting period differs from previous estimates
Transactions measured by reference to the fair value of
the equity instruments granted
Determining the fair value of equity instruments granted
16 For transactions measured by reference to the fair value of the equity
instruments granted an entity shall measure the fair value of equity
instruments granted at the measurement date based on market prices if available
taking into account the terms and conditions upon which those equity
instruments were granted (subject to the requirements of paragraphs 19–22)
17 If market prices are not available the entity shall estimate the fair value of the
equity instruments granted using a valuation technique to estimate what the
price of those equity instruments would have been on the measurement date in
an arm’s length transaction between knowledgeable willing parties The
valuation technique shall be consistent with generally accepted valuation
methodologies for pricing financial instruments and shall incorporate all
factors and assumptions that knowledgeable willing market participants would
consider in setting the price (subject to the requirements of paragraphs 19–22)
18 Appendix B contains further guidance on the measurement of the fair value of
shares and share options focusing on the specific terms and conditions that are
common features of a grant of shares or share options to employees
Treatment of vesting conditions
19 A grant of equity instruments might be conditional upon satisfying specified
vesting conditions For example a grant of shares or share options to an
employee is typically conditional on the employee remaining in the entity’s
employ for a specified period of time There might be performance conditions
that must be satisfied such as the entity achieving a specified growth in profit
or a specified increase in the entity’s share price Vesting conditions other than
market conditions shall not be taken into account when estimating the fair
value of the shares or share options at the measurement date Instead vesting
conditions shall be taken into account by adjusting the number of equity
instruments included in the measurement of the transaction amount so that
ultimately the amount recognised for goods or services received as
consideration for the equity instruments granted shall be based on the number
of equity instruments that eventually vest Hence on a cumulative basis no
amount is recognised for goods or services received if the equity instruments
granted do not vest because of failure to satisfy a vesting conditionegthe
IFRS 2
IFRS Foundation A95counterparty fails to complete a specified service period or a performance
condition is not satisfied subject to the requirements of paragraph 21
20 To apply the requirements of paragraph 19 the entity shall recognise an amount
for the goods or services received during the vesting period based on the best
available estimate of the number of equity instruments expected to vest and
shall revise that estimate if necessary if subsequent information indicates that
the number of equity instruments expected to vest differs from previous
estimates On vesting date the entity shall revise the estimate to equal the
number of equity instruments that ultimately vested subject to the
requirements of paragraph 21
21 Market conditions such as a target share price upon which vesting
(or exercisability) is conditioned shall be taken into account when estimating
the fair value of the equity instruments granted Therefore for grants of equity
instruments with market conditions the entity shall recognise the goods or
services received from a counterparty who satisfies all other vesting conditions
(eg services received from an employee who remains in service for the specified
period of service) irrespective of whether that market condition is satisfied
Treatment of nonvesting conditions
21A Similarly an entity shall take into account all nonvesting conditions when
estimating the fair value of the equity instruments granted Therefore for
grants of equity instruments with nonvesting conditions the entity shall
recognise the goods or services received from a counterparty that satisfies all
vesting conditions that are not market conditions (eg services received from an
employee who remains in service for the specified period of service) irrespective
of whether those nonvesting conditions are satisfied
Treatment of a reload feature
22 For options with a reload feature the reload feature shall not be taken into
account when estimating the fair value of options granted at the measurement
date Instead a reload option shall be accounted for as a new option grant if and
when a reload option is subsequently granted
After vesting date
23 Having recognised the goods or services received in accordance with
paragraphs 10–22 and a corresponding increase in equity the entity shall make
no subsequent adjustment to total equity after vesting date For example the
entity shall not subsequently reverse the amount recognised for services
received from an employee if the vested equity instruments are later forfeited or
in the case of share options the options are not exercised However this
requirement does not preclude the entity from recognising a transfer within
equity ie a transfer from one component of equity to another
If the fair value of the equity instruments cannot be estimated
reliably
24 The requirements in paragraphs 16–23 apply when the entity is required to
measure a sharebased payment transaction by reference to the fair value of the
equity instruments granted In rare cases the entity may be unable to estimate
IFRS 2
IFRS FoundationA96reliably the fair value of the equity instruments granted at the measurement
date in accordance with the requirements in paragraphs 16–22 In these rare
cases only the entity shall instead
(a) measure the equity instruments at their intrinsic value initially at the
date the entity obtains the goods or the counterparty renders service and
subsequently at the end of each reporting period and at the date of final
settlement with any change in intrinsic value recognised in profit or
loss For a grant of share options the sharebased payment arrangement
is finally settled when the options are exercised are forfeited (eg upon
cessation of employment) or lapse (eg at the end of the option’s life)
(b) recognise the goods or services received based on the number of equity
instruments that ultimately vest or (where applicable) are ultimately
exercised To apply this requirement to share options for example the
entity shall recognise the goods or services received during the vesting
period if any in accordance with paragraphs 14 and 15 except that the
requirements in paragraph 15(b) concerning a market condition do not
apply The amount recognised for goods or services received during the
vesting period shall be based on the number of share options expected to
vest The entity shall revise that estimate if necessary if subsequent
information indicates that the number of share options expected to vest
differs from previous estimates On vesting date the entity shall revise
the estimate to equal the number of equity instruments that ultimately
vested After vesting date the entity shall reverse the amount recognised
for goods or services received if the share options are later forfeited or
lapse at the end of the share option’s life
25 If an entity applies paragraph 24 it is not necessary to apply paragraphs 26–29
because any modifications to the terms and conditions on which the equity
instruments were granted will be taken into account when applying the
intrinsic value method set out in paragraph 24 However if an entity settles a
grant of equity instruments to which paragraph 24 has been applied
(a) if the settlement occurs during the vesting period the entity shall
account for the settlement as an acceleration of vesting and shall
therefore recognise immediately the amount that would otherwise have
been recognised for services received over the remainder of the vesting
period
(b) any payment made on settlement shall be accounted for as the
repurchase of equity instruments ie as a deduction from equity except
to the extent that the payment exceeds the intrinsic value of the equity
instruments measured at the repurchase date Any such excess shall be
recognised as an expense
Modifications to the terms and conditions on which
equity instruments were granted including cancellations
and settlements
26 An entity might modify the terms and conditions on which the equity
instruments were granted For example it might reduce the exercise price of
options granted to employees (ie reprice the options) which increases the fair
IFRS 2
IFRS Foundation A97value of those options The requirements in paragraphs 27–29 to account for the
effects of modifications are expressed in the context of sharebased payment
transactions with employees However the requirements shall also be applied
to sharebased payment transactions with parties other than employees that are
measured by reference to the fair value of the equity instruments granted In
the latter case any references in paragraphs 27–29 to grant date shall instead
refer to the date the entity obtains the goods or the counterparty renders service
27 The entity shall recognise as a minimum the services received measured at the
grant date fair value of the equity instruments granted unless those equity
instruments do not vest because of failure to satisfy a vesting condition (other
than a market condition) that was specified at grant date This applies
irrespective of any modifications to the terms and conditions on which the
equity instruments were granted or a cancellation or settlement of that grant of
equity instruments In addition the entity shall recognise the effects of
modifications that increase the total fair value of the sharebased payment
arrangement or are otherwise beneficial to the employee Guidance on applying
this requirement is given in Appendix B
28 If a grant of equity instruments is cancelled or settled during the vesting period
(other than a grant cancelled by forfeiture when the vesting conditions are not
satisfied)
(a) the entity shall account for the cancellation or settlement as an
acceleration of vesting and shall therefore recognise immediately the
amount that otherwise would have been recognised for services received
over the remainder of the vesting period
(b) any payment made to the employee on the cancellation or settlement of
the grant shall be accounted for as the repurchase of an equity interest
ie as a deduction from equity except to the extent that the payment
exceeds the fair value of the equity instruments granted measured at the
repurchase date Any such excess shall be recognised as an expense
However if the sharebased payment arrangement included liability
components the entity shall remeasure the fair value of the liability at
the date of cancellation or settlement Any payment made to settle the
liability component shall be accounted for as an extinguishment of the
liability
(c) if new equity instruments are granted to the employee and on the date
when those new equity instruments are granted the entity identifies the
new equity instruments granted as replacement equity instruments for
the cancelled equity instruments the entity shall account for the
granting of replacement equity instruments in the same way as a
modification of the original grant of equity instruments in accordance
with paragraph 27 and the guidance in Appendix B The incremental
fair value granted is the difference between the fair value of the
replacement equity instruments and the net fair value of the cancelled
equity instruments at the date the replacement equity instruments are
granted The net fair value of the cancelled equity instruments is their
fair value immediately before the cancellation less the amount of any
payment made to the employee on cancellation of the equity
IFRS 2
IFRS FoundationA98instruments that is accounted for as a deduction from equity in
accordance with (b) above If the entity does not identify new equity
instruments granted as replacement equity instruments for the
cancelled equity instruments the entity shall account for those new
equity instruments as a new grant of equity instruments
28A If an entity or counterparty can choose whether to meet a nonvesting condition
the entity shall treat the entity’s or counterparty’s failure to meet that
nonvesting condition during the vesting period as a cancellation
29 If an entity repurchases vested equity instruments the payment made to the
employee shall be accounted for as a deduction from equity except to the extent
that the payment exceeds the fair value of the equity instruments repurchased
measured at the repurchase date Any such excess shall be recognised as an
expense
Cashsettled sharebased payment transactions
30 For cashsettled sharebased payment transactions the entity shall
measure the goods or services acquired and the liability incurred at the
fair value of the liability Until the liability is settled the entity shall
remeasure the fair value of the liability at the end of each reporting
period and at the date of settlement with any changes in fair value
recognised in profit or loss for the period
31 For example an entity might grant share appreciation rights to employees as
part of their remuneration package whereby the employees will become
entitled to a future cash payment (rather than an equity instrument) based on
the increase in the entity’s share price from a specified level over a specified
period of time Or an entity might grant to its employees a right to receive a
future cash payment by granting to them a right to shares (including shares to
be issued upon the exercise of share options) that are redeemable either
mandatorily (eg upon cessation of employment) or at the employee’s option
32 The entity shall recognise the services received and a liability to pay for those
services as the employees render service For example some share appreciation
rights vest immediately and the employees are therefore not required to
complete a specified period of service to become entitled to the cash payment
In the absence of evidence to the contrary the entity shall presume that the
services rendered by the employees in exchange for the share appreciation rights
have been received Thus the entity shall recognise immediately the services
received and a liability to pay for them If the share appreciation rights do not
vest until the employees have completed a specified period of service the entity
shall recognise the services received and a liability to pay for them as the
employees render service during that period
33 The liability shall be measured initially and at the end of each reporting period
until settled at the fair value of the share appreciation rights by applying an
option pricing model taking into account the terms and conditions on which
the share appreciation rights were granted and the extent to which the
employees have rendered service to date
IFRS 2
IFRS Foundation A99Sharebased payment transactions with cash alternatives
34 For sharebased payment transactions in which the terms of the
arrangement provide either the entity or the counterparty with the
choice of whether the entity settles the transaction in cash (or other
assets) or by issuing equity instruments the entity shall account for that
transaction or the components of that transaction as a cashsettled
sharebased payment transaction if and to the extent that the entity has
incurred a liability to settle in cash or other assets or as an equitysettled
sharebased payment transaction if and to the extent that no such
liability has been incurred
Sharebased payment transactions in which the terms of
the arrangement provide the counterparty with a choice
of settlement
35 If an entity has granted the counterparty the right to choose whether a
sharebased payment transaction is settled in cash4 or by issuing equity
instruments the entity has granted a compound financial instrument which
includes a debt component (ie the counterparty’s right to demand payment in
cash) and an equity component (ie the counterparty’s right to demand
settlement in equity instruments rather than in cash) For transactions with
parties other than employees in which the fair value of the goods or services
received is measured directly the entity shall measure the equity component of
the compound financial instrument as the difference between the fair value of
the goods or services received and the fair value of the debt component at the
date when the goods or services are received
36 For other transactions including transactions with employees the entity shall
measure the fair value of the compound financial instrument at the
measurement date taking into account the terms and conditions on which the
rights to cash or equity instruments were granted
37 To apply paragraph 36 the entity shall first measure the fair value of the debt
component and then measure the fair value of the equity component—taking
into account that the counterparty must forfeit the right to receive cash in order
to receive the equity instrument The fair value of the compound financial
instrument is the sum of the fair values of the two components However
sharebased payment transactions in which the counterparty has the choice of
settlement are often structured so that the fair value of one settlement
alternative is the same as the other For example the counterparty might have
the choice of receiving share options or cashsettled share appreciation rights
In such cases the fair value of the equity component is zero and hence the fair
value of the compound financial instrument is the same as the fair value of the
debt component Conversely if the fair values of the settlement alternatives
differ the fair value of the equity component usually will be greater than zero
in which case the fair value of the compound financial instrument will be
greater than the fair value of the debt component
4 In paragraphs 35–43 all references to cash also include other assets of the entity
IFRS 2
IFRS FoundationA10038 The entity shall account separately for the goods or services received or acquired
in respect of each component of the compound financial instrument For the
debt component the entity shall recognise the goods or services acquired and a
liability to pay for those goods or services as the counterparty supplies goods or
renders service in accordance with the requirements applying to cashsettled
sharebased payment transactions (paragraphs 30–33) For the equity
component (if any) the entity shall recognise the goods or services received and
an increase in equity as the counterparty supplies goods or renders service in
accordance with the requirements applying to equitysettled sharebased
payment transactions (paragraphs 10–29)
39 At the date of settlement the entity shall remeasure the liability to its fair value
If the entity issues equity instruments on settlement rather than paying cash
the liability shall be transferred direct to equity as the consideration for the
equity instruments issued
40 If the entity pays in cash on settlement rather than issuing equity instruments
that payment shall be applied to settle the liability in full Any equity
component previously recognised shall remain within equity By electing to
receive cash on settlement the counterparty forfeited the right to receive equity
instruments However this requirement does not preclude the entity from
recognising a transfer within equity ie a transfer from one component of equity
to another
Sharebased payment transactions in which the terms of
the arrangement provide the entity with a choice of
settlement
41 For a sharebased payment transaction in which the terms of the arrangement
provide an entity with the choice of whether to settle in cash or by issuing
equity instruments the entity shall determine whether it has a present
obligation to settle in cash and account for the sharebased payment transaction
accordingly The entity has a present obligation to settle in cash if the choice of
settlement in equity instruments has no commercial substance (eg because the
entity is legally prohibited from issuing shares) or the entity has a past practice
or a stated policy of settling in cash or generally settles in cash whenever the
counterparty asks for cash settlement
42 If the entity has a present obligation to settle in cash it shall account for the
transaction in accordance with the requirements applying to cashsettled
sharebased payment transactions in paragraphs 30–33
43 If no such obligation exists the entity shall account for the transaction in
accordance with the requirements applying to equitysettled sharebased
payment transactions in paragraphs 10–29 Upon settlement
(a) if the entity elects to settle in cash the cash payment shall be accounted
for as the repurchase of an equity interest ie as a deduction from equity
except as noted in (c) below
(b) if the entity elects to settle by issuing equity instruments no further
accounting is required (other than a transfer from one component of
equity to another if necessary) except as noted in (c) below
IFRS 2
IFRS Foundation A101(c) if the entity elects the settlement alternative with the higher fair value
as at the date of settlement the entity shall recognise an additional
expense for the excess value given ie the difference between the cash
paid and the fair value of the equity instruments that would otherwise
have been issued or the difference between the fair value of the equity
instruments issued and the amount of cash that would otherwise have
been paid whichever is applicable
Sharebased payment transactions among group entities
(2009 amendments)
43A For sharebased payment transactions among group entities in its separate or
individual financial statements the entity receiving the goods or services shall
measure the goods or services received as either an equitysettled or a
cashsettled sharebased payment transaction by assessing
(a) the nature of the awards granted and
(b) its own rights and obligations
The amount recognised by the entity receiving the goods or services may differ
from the amount recognised by the consolidated group or by another group
entity settling the sharebased payment transaction
43B The entity receiving the goods or services shall measure the goods or services
received as an equitysettled sharebased payment transaction when
(a) the awards granted are its own equity instruments or
(b) the entity has no obligation to settle the sharebased payment
transaction
The entity shall subsequently remeasure such an equitysettled sharebased
payment transaction only for changes in nonmarket vesting conditions in
accordance with paragraphs 19–21 In all other circumstances the entity
receiving the goods or services shall measure the goods or services received as a
cashsettled sharebased payment transaction
43C The entity settling a sharebased payment transaction when another entity in
the group receives the goods or services shall recognise the transaction as an
equitysettled sharebased payment transaction only if it is settled in the entity’s
own equity instruments Otherwise the transaction shall be recognised as a
cashsettled sharebased payment transaction
43D Some group transactions involve repayment arrangements that require one
group entity to pay another group entity for the provision of the sharebased
payments to the suppliers of goods or services In such cases the entity that
receives the goods or services shall account for the sharebased payment
transaction in accordance with paragraph 43B regardless of intragroup
repayment arrangements
IFRS 2
IFRS FoundationA102Disclosures
44 An entity shall disclose information that enables users of the financial
statements to understand the nature and extent of sharebased payment
arrangements that existed during the period
45 To give effect to the principle in paragraph 44 the entity shall disclose at least
the following
(a) a description of each type of sharebased payment arrangement that
existed at any time during the period including the general terms and
conditions of each arrangement such as vesting requirements the
maximum term of options granted and the method of settlement
(eg whether in cash or equity) An entity with substantially similar types
of sharebased payment arrangements may aggregate this information
unless separate disclosure of each arrangement is necessary to satisfy the
principle in paragraph 44
(b) the number and weighted average exercise prices of share options for
each of the following groups of options
(i) outstanding at the beginning of the period
(ii) granted during the period
(iii) forfeited during the period
(iv) exercised during the period
(v) expired during the period
(vi) outstanding at the end of the period and
(vii) exercisable at the end of the period
(c) for share options exercised during the period the weighted average
share price at the date of exercise If options were exercised on a regular
basis throughout the period the entity may instead disclose the
weighted average share price during the period
(d) for share options outstanding at the end of the period the range of
exercise prices and weighted average remaining contractual life If the
range of exercise prices is wide the outstanding options shall be divided
into ranges that are meaningful for assessing the number and timing of
additional shares that may be issued and the cash that may be received
upon exercise of those options
46 An entity shall disclose information that enables users of the financial
statements to understand how the fair value of the goods or services
received or the fair value of the equity instruments granted during the
period was determined
47 If the entity has measured the fair value of goods or services received as
consideration for equity instruments of the entity indirectly by reference to the
fair value of the equity instruments granted to give effect to the principle in
paragraph 46 the entity shall disclose at least the following
IFRS 2
IFRS Foundation A103(a) for share options granted during the period the weighted average fair
value of those options at the measurement date and information on how
that fair value was measured including
(i) the option pricing model used and the inputs to that model
including the weighted average share price exercise price
expected volatility option life expected dividends the riskfree
interest rate and any other inputs to the model including the
method used and the assumptions made to incorporate the
effects of expected early exercise
(ii) how expected volatility was determined including an
explanation of the extent to which expected volatility was based
on historical volatility and
(iii) whether and how any other features of the option grant were
incorporated into the measurement of fair value such as a
market condition
(b) for other equity instruments granted during the period (ie other than
share options) the number and weighted average fair value of those
equity instruments at the measurement date and information on how
that fair value was measured including
(i) if fair value was not measured on the basis of an observable
market price how it was determined
(ii) whether and how expected dividends were incorporated into the
measurement of fair value and
(iii) whether and how any other features of the equity instruments
granted were incorporated into the measurement of fair value
(c) for sharebased payment arrangements that were modified during the
period
(i) an explanation of those modifications
(ii) the incremental fair value granted (as a result of those
modifications) and
(iii) information on how the incremental fair value granted was
measured consistently with the requirements set out in (a) and
(b) above where applicable
48 If the entity has measured directly the fair value of goods or services received
during the period the entity shall disclose how that fair value was determined
eg whether fair value was measured at a market price for those goods or services
49 If the entity has rebutted the presumption in paragraph 13 it shall disclose that
fact and give an explanation of why the presumption was rebutted
50 An entity shall disclose information that enables users of the financial
statements to understand the effect of sharebased payment transactions
on the entity’s profit or loss for the period and on its financial position
51 To give effect to the principle in paragraph 50 the entity shall disclose at least
the following
IFRS 2
IFRS FoundationA104(a) the total expense recognised for the period arising from sharebased
payment transactions in which the goods or services received did not
qualify for recognition as assets and hence were recognised immediately
as an expense including separate disclosure of that portion of the total
expense that arises from transactions accounted for as equitysettled
sharebased payment transactions
(b) for liabilities arising from sharebased payment transactions
(i) the total carrying amount at the end of the period and
(ii) the total intrinsic value at the end of the period of liabilities for
which the counterparty’s right to cash or other assets had vested
by the end of the period (eg vested share appreciation rights)
52 If the information required to be disclosed by this IFRS does not satisfy the
principles in paragraphs 44 46 and 50 the entity shall disclose such additional
information as is necessary to satisfy them
Transitional provisions
53 For equitysettled sharebased payment transactions the entity shall apply this
IFRS to grants of shares share options or other equity instruments that were
granted after 7 November 2002 and had not yet vested at the effective date of
this IFRS
54 The entity is encouraged but not required to apply this IFRS to other grants of
equity instruments if the entity has disclosed publicly the fair value of those
equity instruments determined at the measurement date
55 For all grants of equity instruments to which this IFRS is applied the entity shall
restate comparative information and where applicable adjust the opening
balance of retained earnings for the earliest period presented
56 For all grants of equity instruments to which this IFRS has not been applied
(eg equity instruments granted on or before 7 November 2002) the entity shall
nevertheless disclose the information required by paragraphs 44 and 45
57 If after the IFRS becomes effective an entity modifies the terms or conditions of
a grant of equity instruments to which this IFRS has not been applied the entity
shall nevertheless apply paragraphs 26–29 to account for any such
modifications
58 For liabilities arising from sharebased payment transactions existing at the
effective date of this IFRS the entity shall apply the IFRS retrospectively For
these liabilities the entity shall restate comparative information including
adjusting the opening balance of retained earnings in the earliest period
presented for which comparative information has been restated except that the
entity is not required to restate comparative information to the extent that the
information relates to a period or date that is earlier than 7 November 2002
IFRS 2
IFRS Foundation A10559 The entity is encouraged but not required to apply retrospectively the IFRS to
other liabilities arising from sharebased payment transactions for example to
liabilities that were settled during a period for which comparative information
is presented
Effective date
60 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005 Earlier application is encouraged If an entity applies the IFRS
for a period beginning before 1 January 2005 it shall disclose that fact
61 IFRS 3 (as revised in 2008) and Improvements to IFRSs issued in April 2009 amended
paragraph 5 An entity shall apply those amendments for annual periods
beginning on or after 1 July 2009 Earlier application is permitted If an entity
applies IFRS 3 (revised 2008) for an earlier period the amendments shall also be
applied for that earlier period
62 An entity shall apply the following amendments retrospectively in annual
periods beginning on or after 1 January 2009
(a) the requirements in paragraph 21A in respect of the treatment of
nonvesting conditions
(b) the revised definitions of vest’ and vesting conditions’ in Appendix A
(c) the amendments in paragraphs 28 and 28A in respect of cancellations
Earlier application is permitted If an entity applies these amendments for a
period beginning before 1 January 2009 it shall disclose that fact
63 An entity shall apply the following amendments made by Group Cashsettled
Sharebased Payment Transactions issued in June 2009 retrospectively subject to the
transitional provisions in paragraphs 53–59 in accordance with IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors for annual periods beginning on
or after 1 January 2010
(a) the amendment of paragraph 2 the deletion of paragraph 3 and the
addition of paragraphs 3A and 43A–43D and of paragraphs B45 B47
B50 B54 B56–B58 and B60 in Appendix B in respect of the accounting
for transactions among group entities
(b) the revised definitions in Appendix A of the following terms
● cashsettled sharebased payment transaction
● equitysettled sharebased payment transaction
● sharebased payment arrangement and
● sharebased payment transaction
If the information necessary for retrospective application is not available an
entity shall reflect in its separate or individual financial statements the amounts
previously recognised in the group’s consolidated financial statements Earlier
application is permitted If an entity applies the amendments for a period
beginning before 1 January 2010 it shall disclose that fact
IFRS 2
IFRS FoundationA10663A IFRS 10 Consolidated Financial Statements and IFRS 11 issued in May 2011 amended
paragraph 5 and Appendix A An entity shall apply those amendments when it
applies IFRS 10 and IFRS 11
63B Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 15 and 19 In Appendix A the definitions of vesting conditions’ and
market condition’ were amended and the definitions of performance
condition’ and service condition’ were added An entity shall prospectively apply
that amendment to sharebased payment transactions for which the grant date
is on or after 1 July 2014 Earlier application is permitted If an entity applies
that amendment for an earlier period it shall disclose that fact
63C IFRS 9 as issued in July 2014 amended paragraph 6 An entity shall apply that
amendment when it applies IFRS 9
Withdrawal of Interpretations
64 Group Cashsettled Sharebased Payment Transactions issued in June 2009 supersedes
IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions
The amendments made by that document incorporated the previous
requirements set out in IFRIC 8 and IFRIC 11 as follows
(a) amended paragraph 2 and added paragraph 13A in respect of the
accounting for transactions in which the entity cannot identify
specifically some or all of the goods or services received Those
requirements were effective for annual periods beginning on or after
1 May 2006
(b) added paragraphs B46 B48 B49 B51–B53 B55 B59 and B61 in
Appendix B in respect of the accounting for transactions among group
entities Those requirements were effective for annual periods beginning
on or after 1 March 2007
Those requirements were applied retrospectively in accordance with the
requirements of IAS 8 subject to the transitional provisions of IFRS 2
IFRS 2
IFRS Foundation A107Appendix A
Defined terms
This appendix is an integral part of the IFRS
cashsettled
sharebased payment
transaction
A sharebased payment transaction in which the entity
acquires goods or services by incurring a liability to transfer cash
or other assets to the supplier of those goods or services for
amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or
another group entity
employees and others
providing similar
services
Individuals who render personal services to the entity and either
(a) the individuals are regarded as employees for legal or tax
purposes (b) the individuals work for the entity under its
direction in the same way as individuals who are regarded as
employees for legal or tax purposes or (c) the services rendered
are similar to those rendered by employees For example the
term encompasses all management personnel ie those persons
having authority and responsibility for planning directing and
controlling the activities of the entity including nonexecutive
directors
equity instrument A contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities5
equity instrument
granted
The right (conditional or unconditional) to an equity
instrument of the entity conferred by the entity on another
party under a sharebased payment arrangement
equitysettled
sharebased payment
transaction
A sharebased payment transaction in which the entity
(a) receives goods or services as consideration for its own
equity instruments (including shares or share
options) or
(b) receives goods or services but has no obligation to settle
the transaction with the supplier
fair value The amount for which an asset could be exchanged a liability
settled or an equity instrument granted could be exchanged
between knowledgeable willing parties in an arm’s length
transaction
5 The Conceptual Framework for Financial Reporting defines a liability as a present obligation of the entity
arising from past events the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits (ie an outflow of cash or other assets of the entity)
IFRS 2
IFRS FoundationA108grant date The date at which the entity and another party (including an
employee) agree to a sharebased payment arrangement
being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement
At grant date the entity confers on the counterparty the right to
cash other assets or equity instruments of the entity provided
the specified vesting conditions if any are met If that
agreement is subject to an approval process (for example by
shareholders) grant date is the date when that approval is
obtained
intrinsic value The difference between the fair value of the shares to which the
counterparty has the (conditional or unconditional) right to
subscribe or which it has the right to receive and the price (if
any) the counterparty is (or will be) required to pay for those
shares For example a share option with an exercise price of
CU156 on a share with a fair value of CU20 has an intrinsic value
of CU5
market condition A performance condition upon which the exercise price
vesting or exercisability of an equity instrument depends that is
related to the market price (or value) of the entity’s equity
instruments (or the equity instruments of another entity in the
same group) such as
(a) attaining a specified share price or a specified amount of
intrinsic value of a share optionor
(b) achieving a specified target that is based on the market
price (or value) of the entity’s equity instruments (or the
equity instruments of another entity in the same group)
relative to an index of market prices of equity
instruments of other entities
A market condition requires the counterparty to complete a
specified period of service (ie a service condition) the service
requirement can be explicit or implicit
measurement date The date at which the fair value of the equity instruments
granted is measured for the purposes of this IFRS For
transactions with employees and others providing similar
services the measurement date is grant date For transactions
with parties other than employees (and those providing similar
services) the measurement date is the date the entity obtains the
goods or the counterparty renders service
6 In this appendix monetary amounts are denominated in currency units (CU)’
IFRS 2
IFRS Foundation A109performance condition A vesting condition that requires
(a) the counterparty to complete a specified period of service
(ie a service condition) the service requirement can be
explicit or implicit and
(b) specified performance target(s) to be met while the
counterparty is rendering the service required in (a)
The period of achieving the performance target(s)
(a) shall not extend beyond the end of the service period and
(b) may start before the service period on the condition that
the commencement date of the performance target is not
substantially before the commencement of the service
period
A performance target is defined by reference to
(a) the entity’s own operations (or activities) or the
operations or activities of another entity in the same
group (ie a nonmarket condition) or
(b) the price (or value) of the entity’s equity instruments or
the equity instruments of another entity in the same
group (including shares and share options) (ie a market
condition)
A performance target might relate either to the performance of
the entity as a whole or to some part of the entity (or part of the
group) such as a division or an individual employee
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
service condition A vesting condition that requires the counterparty to complete
a specified period of service during which services are provided to
the entity If the counterparty regardless of the reason ceases to
provide service during the vesting period it has failed to satisfy
the condition A service condition does not require a
performance target to be met
IFRS 2
IFRS FoundationA110sharebased payment
arrangement
An agreement between the entity (or another group7 entity or
any shareholder of any group entity) and another party
(including an employee) that entitles the other party to receive
(a) cash or other assets of the entity for amounts that are
based on the price (or value) of equity instruments
(including shares or share options) of the entity or
another group entity or
(b) equity instruments (including shares or share options)
of the entity or another group entity
provided the specified vesting conditions if any are met
sharebased payment
transaction
A transaction in which the entity
(a) receives goods or services from the supplier of those
goods or services (including an employee) in a
sharebased payment arrangementor
(b) incurs an obligation to settle the transaction with the
supplier in a sharebased payment arrangement when
another group entity receives those goods or services
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 sharebased 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 conditions
vesting condition A condition that determines whether the entity receives the
services that entitle the counterparty to receive cash other assets
or equity instruments of the entity under a sharebased
payment arrangement A vesting condition is either a service
condition or a performance condition
vesting period The period during which all the specified vesting conditions of
a sharebased payment arrangement are to be satisfied
7 A group’ is defined in Appendix A of IFRS 10 Consolidated Financial Statements as a parent and its
subsidiaries’ from the perspective of the reporting entity’s ultimate parent
IFRS 2
IFRS Foundation A111Appendix B
Application guidance
This appendix is an integral part of the IFRS
Estimating the fair value of equity instruments granted
B1 Paragraphs B2–B41 of this appendix discuss measurement of the fair value of
shares and share options granted focusing on the specific terms and conditions
that are common features of a grant of shares or share options to employees
Therefore it is not exhaustive Furthermore because the valuation issues
discussed below focus on shares and share options granted to employees it is
assumed that the fair value of the shares or share options is measured at grant
date However many of the valuation issues discussed below (eg determining
expected volatility) also apply in the context of estimating the fair value of
shares or share options granted to parties other than employees at the date the
entity obtains the goods or the counterparty renders service
Shares
B2 For shares granted to employees the fair value of the shares shall be measured at
the market price of the entity’s shares (or an estimated market price if the
entity’s shares are not publicly traded) adjusted to take into account the terms
and conditions upon which the shares were granted (except for vesting
conditions that are excluded from the measurement of fair value in accordance
with paragraphs 19–21)
B3 For example if the employee is not entitled to receive dividends during the
vesting period this factor shall be taken into account when estimating the fair
value of the shares granted Similarly if the shares are subject to restrictions on
transfer after vesting date that factor shall be taken into account but only to
the extent that the postvesting restrictions affect the price that a
knowledgeable willing market participant would pay for that share For
example if the shares are actively traded in a deep and liquid market
postvesting transfer restrictions may have little if any effect on the price that a
knowledgeable willing market participant would pay for those shares
Restrictions on transfer or other restrictions that exist during the vesting period
shall not be taken into account when estimating the grant date fair value of the
shares granted because those restrictions stem from the existence of vesting
conditions which are accounted for in accordance with paragraphs 19–21
Share options
B4 For share options granted to employees in many cases market prices are not
available because the options granted are subject to terms and conditions that
do not apply to traded options If traded options with similar terms and
conditions do not exist the fair value of the options granted shall be estimated
by applying an option pricing model
B5 The entity shall consider factors that knowledgeable willing market
participants would consider in selecting the option pricing model to apply For
example many employee options have long lives are usually exercisable during
the period between vesting date and the end of the options’ life and are often
IFRS 2
IFRS FoundationA112exercised early These factors should be considered when estimating the grant
date fair value of the options For many entities this might preclude the use of
the BlackScholesMerton formula which does not allow for the possibility of
exercise before the end of the option’s life and may not adequately reflect the
effects of expected early exercise It also does not allow for the possibility that
expected volatility and other model inputs might vary over the option’s life
However for share options with relatively short contractual lives or that must
be exercised within a short period of time after vesting date the factors
identified above may not apply In these instances the BlackScholesMerton
formula may produce a value that is substantially the same as a more flexible
option pricing model
B6 All option pricing models take into account as a minimum the following
factors
(a) the exercise price of the option
(b) the life of the option
(c) the current price of the underlying shares
(d) the expected volatility of the share price
(e) the dividends expected on the shares (if appropriate) and
(f) the riskfree interest rate for the life of the option
B7 Other factors that knowledgeable willing market participants would consider in
setting the price shall also be taken into account (except for vesting conditions
and reload features that are excluded from the measurement of fair value in
accordance with paragraphs 19–22)
B8 For example a share option granted to an employee typically cannot be
exercised during specified periods (eg during the vesting period or during
periods specified by securities regulators) This factor shall be taken into
account if the option pricing model applied would otherwise assume that the
option could be exercised at any time during its life However if an entity uses
an option pricing model that values options that can be exercised only at the
end of the options’ life no adjustment is required for the inability to exercise
them during the vesting period (or other periods during the options’ life)
because the model assumes that the options cannot be exercised during those
periods
B9 Similarly another factor common to employee share options is the possibility of
early exercise of the option for example because the option is not freely
transferable or because the employee must exercise all vested options upon
cessation of employment The effects of expected early exercise shall be taken
into account as discussed in paragraphs B16–B21
B10 Factors that a knowledgeable willing market participant would not consider in
setting the price of a share option (or other equity instrument) shall not be taken
into account when estimating the fair value of share options (or other equity
instruments) granted For example for share options granted to employees
factors that affect the value of the option from the individual employee’s
IFRS 2
IFRS Foundation A113perspective only are not relevant to estimating the price that would be set by a
knowledgeable willing market participant
Inputs to option pricing models
B11 In estimating the expected volatility of and dividends on the underlying shares
the objective is to approximate the expectations that would be reflected in a
current market or negotiated exchange price for the option Similarly when
estimating the effects of early exercise of employee share options the objective
is to approximate the expectations that an outside party with access to detailed
information about employees’ exercise behaviour would develop based on
information available at the grant date
B12 Often there is likely to be a range of reasonable expectations about future
volatility dividends and exercise behaviour If so an expected value should be
calculated by weighting each amount within the range by its associated
probability of occurrence
B13 Expectations about the future are generally based on experience modified if the
future is reasonably expected to differ from the past In some circumstances
identifiable factors may indicate that unadjusted historical experience is a
relatively poor predictor of future experience For example if an entity with two
distinctly different lines of business disposes of the one that was significantly
less risky than the other historical volatility may not be the best information on
which to base reasonable expectations for the future
B14 In other circumstances historical information may not be available For
example a newly listed entity will have little if any historical data on the
volatility of its share price Unlisted and newly listed entities are discussed
further below
B15 In summary an entity should not simply base estimates of volatility exercise
behaviour and dividends on historical information without considering the
extent to which the past experience is expected to be reasonably predictive of
future experience
Expected early exercise
B16 Employees often exercise share options early for a variety of reasons For
example employee share options are typically nontransferable This often
causes employees to exercise their share options early because that is the only
way for the employees to liquidate their position Also employees who cease
employment are usually required to exercise any vested options within a short
period of time otherwise the share options are forfeited This factor also causes
the early exercise of employee share options Other factors causing early
exercise are risk aversion and lack of wealth diversification
B17 The means by which the effects of expected early exercise are taken into account
depends upon the type of option pricing model applied For example expected
early exercise could be taken into account by using an estimate of the option’s
expected life (which for an employee share option is the period of time from
grant date to the date on which the option is expected to be exercised) as an
input into an option pricing model (eg the BlackScholesMerton formula)
IFRS 2
IFRS FoundationA114Alternatively expected early exercise could be modelled in a binomial or similar
option pricing model that uses contractual life as an input
B18 Factors to consider in estimating early exercise include
(a) the length of the vesting period because the share option typically
cannot be exercised until the end of the vesting period Hence
determining the valuation implications of expected early exercise is
based on the assumption that the options will vest The implications of
vesting conditions are discussed in paragraphs 19–21
(b) the average length of time similar options have remained outstanding in
the past
(c) the price of the underlying shares Experience may indicate that the
employees tend to exercise options when the share price reaches a
specified level above the exercise price
(d) the employee’s level within the organisation For example experience
might indicate that higherlevel employees tend to exercise options later
than lowerlevel employees (discussed further in paragraph B21)
(e) expected volatility of the underlying shares On average employees
might tend to exercise options on highly volatile shares earlier than on
shares with low volatility
B19 As noted in paragraph B17 the effects of early exercise could be taken into
account by using an estimate of the option’s expected life as an input into an
option pricing model When estimating the expected life of share options
granted to a group of employees the entity could base that estimate on an
appropriately weighted average expected life for the entire employee group or
on appropriately weighted average lives for subgroups of employees within the
group based on more detailed data about employees’ exercise behaviour
(discussed further below)
B20 Separating an option grant into groups for employees with relatively
homogeneous exercise behaviour is likely to be important Option value is not a
linear function of option term value increases at a decreasing rate as the term
lengthens For example if all other assumptions are equal although a twoyear
option is worth more than a oneyear option it is not worth twice as much That
means that calculating estimated option value on the basis of a single weighted
average life that includes widely differing individual lives would overstate the
total fair value of the share options granted Separating options granted into
several groups each of which has a relatively narrow range of lives included in
its weighted average life reduces that overstatement
B21 Similar considerations apply when using a binomial or similar model For
example the experience of an entity that grants options broadly to all levels of
employees might indicate that toplevel executives tend to hold their options
longer than middlemanagement employees hold theirs and that lowerlevel
employees tend to exercise their options earlier than any other group In
addition employees who are encouraged or required to hold a minimum
amount of their employer’s equity instruments including options might on
average exercise options later than employees not subject to that provision In
IFRS 2
IFRS Foundation A115those situations separating options by groups of recipients with relatively
homogeneous exercise behaviour will result in a more accurate estimate of the
total fair value of the share options granted
Expected volatility
B22 Expected volatility is a measure of the amount by which a price is expected to
fluctuate during a period The measure of volatility used in option pricing
models is the annualised standard deviation of the continuously compounded
rates of return on the share over a period of time Volatility is typically
expressed in annualised terms that are comparable regardless of the time period
used in the calculation for example daily weekly or monthly price
observations
B23 The rate of return (which may be positive or negative) on a share for a period
measures how much a shareholder has benefited from dividends and
appreciation (or depreciation) of the share price
B24 The expected annualised volatility of a share is the range within which the
continuously compounded annual rate of return is expected to fall
approximately twothirds of the time For example to say that a share with an
expected continuously compounded rate of return of 12 per cent has a volatility
of 30 per cent means that the probability that the rate of return on the share for
one year will be between –18 per cent (12 – 30) and 42 per cent (12 + 30) is
approximately twothirds If the share price is CU100 at the beginning of the
year and no dividends are paid the yearend share price would be expected to be
between CU8353 (CU100 × e–018) and CU15220 (CU100 × e042) approximately
twothirds of the time
B25 Factors to consider in estimating expected volatility include
(a) implied volatility from traded share options on the entity’s shares or
other traded instruments of the entity that include option features (such
as convertible debt) if any
(b) the historical volatility of the share price over the most recent period
that is generally commensurate with the expected term of the option
(taking into account the remaining contractual life of the option and the
effects of expected early exercise)
(c) the length of time an entity’s shares have been publicly traded A newly
listed entity might have a high historical volatility compared with
similar entities that have been listed longer Further guidance for newly
listed entities is given below
(d) the tendency of volatility to revert to its mean ie its longterm average
level and other factors indicating that expected future volatility might
differ from past volatility For example if an entity’s share price was
extraordinarily volatile for some identifiable period of time because of a
failed takeover bid or a major restructuring that period could be
disregarded in computing historical average annual volatility
IFRS 2
IFRS FoundationA116(e) appropriate and regular intervals for price observations The price
observations should be consistent from period to period For example
an entity might use the closing price for each week or the highest price
for the week but it should not use the closing price for some weeks and
the highest price for other weeks Also the price observations should be
expressed in the same currency as the exercise price
Newly listed entities
B26 As noted in paragraph B25 an entity should consider historical volatility of the
share price over the most recent period that is generally commensurate with the
expected option term If a newly listed entity does not have sufficient
information on historical volatility it should nevertheless compute historical
volatility for the longest period for which trading activity is available It could
also consider the historical volatility of similar entities following a comparable
period in their lives For example an entity that has been listed for only one
year and grants options with an average expected life of five years might
consider the pattern and level of historical volatility of entities in the same
industry for the first six years in which the shares of those entities were publicly
traded
Unlisted entities
B27 An unlisted entity will not have historical information to consider when
estimating expected volatility Some factors to consider instead are set out
below
B28 In some cases an unlisted entity that regularly issues options or shares to
employees (or other parties) might have set up an internal market for its shares
The volatility of those share prices could be considered when estimating
expected volatility
B29 Alternatively the entity could consider the historical or implied volatility of
similar listed entities for which share price or option price information is
available to use when estimating expected volatility This would be appropriate
if the entity has based the value of its shares on the share prices of similar listed
entities
B30 If the entity has not based its estimate of the value of its shares on the share
prices of similar listed entities and has instead used another valuation
methodology to value its shares the entity could derive an estimate of expected
volatility consistent with that valuation methodology For example the entity
might value its shares on a net asset or earnings basis It could consider the
expected volatility of those net asset values or earnings
Expected dividends
B31 Whether expected dividends should be taken into account when measuring the
fair value of shares or options granted depends on whether the counterparty is
entitled to dividends or dividend equivalents
B32 For example if employees were granted options and are entitled to dividends on
the underlying shares or dividend equivalents (which might be paid in cash or
applied to reduce the exercise price) between grant date and exercise date the
IFRS 2
IFRS Foundation A117options granted should be valued as if no dividends will be paid on the
underlying shares ie the input for expected dividends should be zero
B33 Similarly when the grant date fair value of shares granted to employees is
estimated no adjustment is required for expected dividends if the employee is
entitled to receive dividends paid during the vesting period
B34 Conversely if the employees are not entitled to dividends or dividend
equivalents during the vesting period (or before exercise in the case of an
option) the grant date valuation of the rights to shares or options should take
expected dividends into account That is to say when the fair value of an option
grant is estimated expected dividends should be included in the application of
an option pricing model When the fair value of a share grant is estimated that
valuation should be reduced by the present value of dividends expected to be
paid during the vesting period
B35 Option pricing models generally call for expected dividend yield However the
models may be modified to use an expected dividend amount rather than a
yield An entity may use either its expected yield or its expected payments If
the entity uses the latter it should consider its historical pattern of increases in
dividends For example if an entity’s policy has generally been to increase
dividends by approximately 3 per cent per year its estimated option value
should not assume a fixed dividend amount throughout the option’s life unless
there is evidence that supports that assumption
B36 Generally the assumption about expected dividends should be based on publicly
available information An entity that does not pay dividends and has no plans to
do so should assume an expected dividend yield of zero However an emerging
entity with no history of paying dividends might expect to begin paying
dividends during the expected lives of its employee share options Those entities
could use an average of their past dividend yield (zero) and the mean dividend
yield of an appropriately comparable peer group
Riskfree interest rate
B37 Typically the riskfree interest rate is the implied yield currently available on
zerocoupon government issues of the country in whose currency the exercise
price is expressed with a remaining term equal to the expected term of the
option being valued (based on the option’s remaining contractual life and taking
into account the effects of expected early exercise) It may be necessary to use an
appropriate substitute if no such government issues exist or circumstances
indicate that the implied yield on zerocoupon government issues is not
representative of the riskfree interest rate (for example in high inflation
economies) Also an appropriate substitute should be used if market
participants would typically determine the riskfree interest rate by using that
substitute rather than the implied yield of zerocoupon government issues
when estimating the fair value of an option with a life equal to the expected
term of the option being valued
Capital structure effects
B38 Typically third parties not the entity write traded share options When these
share options are exercised the writer delivers shares to the option holder
IFRS 2
IFRS FoundationA118Those shares are acquired from existing shareholders Hence the exercise of
traded share options has no dilutive effect
B39 In contrast if share options are written by the entity new shares are issued
when those share options are exercised (either actually issued or issued in
substance if shares previously repurchased and held in treasury are used)
Given that the shares will be issued at the exercise price rather than the current
market price at the date of exercise this actual or potential dilution might
reduce the share price so that the option holder does not make as large a gain
on exercise as on exercising an otherwise similar traded option that does not
dilute the share price
B40 Whether this has a significant effect on the value of the share options granted
depends on various factors such as the number of new shares that will be issued
on exercise of the options compared with the number of shares already issued
Also if the market already expects that the option grant will take place the
market may have already factored the potential dilution into the share price at
the date of grant
B41 However the entity should consider whether the possible dilutive effect of the
future exercise of the share options granted might have an impact on their
estimated fair value at grant date Option pricing models can be adapted to take
into account this potential dilutive effect
Modifications to equitysettled sharebased payment
arrangements
B42 Paragraph 27 requires that irrespective of any modifications to the terms and
conditions on which the equity instruments were granted or a cancellation or
settlement of that grant of equity instruments the entity should recognise as a
minimum the services received measured at the grant date fair value of the
equity instruments granted unless those equity instruments do not vest because
of failure to satisfy a vesting condition (other than a market condition) that was
specified at grant date In addition the entity should recognise the effects of
modifications that increase the total fair value of the sharebased payment
arrangement or are otherwise beneficial to the employee
B43 To apply the requirements of paragraph 27
(a) if the modification increases the fair value of the equity instruments
granted (eg by reducing the exercise price) measured immediately
before and after the modification the entity shall include the
incremental fair value granted in the measurement of the amount
recognised for services received as consideration for the equity
instruments granted The incremental fair value granted is the
difference between the fair value of the modified equity instrument and
that of the original equity instrument both estimated as at the date of
the modification If the modification occurs during the vesting period
the incremental fair value granted is included in the measurement of the
amount recognised for services received over the period from the
modification date until the date when the modified equity instruments
vest in addition to the amount based on the grant date fair value of the
original equity instruments which is recognised over the remainder of
IFRS 2
IFRS Foundation A119the original vesting period If the modification occurs after vesting date
the incremental fair value granted is recognised immediately or over the
vesting period if the employee is required to complete an additional
period of service before becoming unconditionally entitled to those
modified equity instruments
(b) similarly if the modification increases the number of equity instruments
granted the entity shall include the fair value of the additional equity
instruments granted measured at the date of the modification in the
measurement of the amount recognised for services received as
consideration for the equity instruments granted consistently with the
requirements in (a) above For example if the modification occurs
during the vesting period the fair value of the additional equity
instruments granted is included in the measurement of the amount
recognised for services received over the period from the modification
date until the date when the additional equity instruments vest in
addition to the amount based on the grant date fair value of the equity
instruments originally granted which is recognised over the remainder
of the original vesting period
(c) if the entity modifies the vesting conditions in a manner that is
beneficial to the employee for example by reducing the vesting period
or by modifying or eliminating a performance condition (other than a
market condition changes to which are accounted for in accordance
with (a) above) the entity shall take the modified vesting conditions into
account when applying the requirements of paragraphs 19–21
B44 Furthermore if the entity modifies the terms or conditions of the equity
instruments granted in a manner that reduces the total fair value of the
sharebased payment arrangement or is not otherwise beneficial to the
employee the entity shall nevertheless continue to account for the services
received as consideration for the equity instruments granted as if that
modification had not occurred (other than a cancellation of some or all the
equity instruments granted which shall be accounted for in accordance with
paragraph 28) For example
(a) if the modification reduces the fair value of the equity instruments
granted measured immediately before and after the modification the
entity shall not take into account that decrease in fair value and shall
continue to measure the amount recognised for services received as
consideration for the equity instruments based on the grant date fair
value of the equity instruments granted
(b) if the modification reduces the number of equity instruments granted to
an employee that reduction shall be accounted for as a cancellation of
that portion of the grant in accordance with the requirements of
paragraph 28
(c) if the entity modifies the vesting conditions in a manner that is not
beneficial to the employee for example by increasing the vesting period
or by modifying or adding a performance condition (other than a market
condition changes to which are accounted for in accordance with (a)
IFRS 2
IFRS FoundationA120above) the entity shall not take the modified vesting conditions into
account when applying the requirements of paragraphs 19–21
Sharebased payment transactions among group entities
(2009 amendments)
B45 Paragraphs 43A–43C address the accounting for sharebased payment
transactions among group entities in each entity’s separate or individual
financial statements Paragraphs B46–B61 discuss how to apply the
requirements in paragraphs 43A–43C As noted in paragraph 43D sharebased
payment transactions among group entities may take place for a variety of
reasons depending on facts and circumstances Therefore this discussion is not
exhaustive and assumes that when the entity receiving the goods or services has
no obligation to settle the transaction the transaction is a parent’s equity
contribution to the subsidiary regardless of any intragroup repayment
arrangements
B46 Although the discussion below focuses on transactions with employees it also
applies to similar sharebased payment transactions with suppliers of goods or
services other than employees An arrangement between a parent and its
subsidiary may require the subsidiary to pay the parent for the provision of the
equity instruments to the employees The discussion below does not address
how to account for such an intragroup payment arrangement
B47 Four issues are commonly encountered in sharebased payment transactions
among group entities For convenience the examples below discuss the issues
in terms of a parent and its subsidiary
Sharebased payment arrangements involving an entity’s own
equity instruments
B48 The first issue is whether the following transactions involving an entity’s own
equity instruments should be accounted for as equitysettled or as cashsettled in
accordance with the requirements of this IFRS
(a) an entity grants to its employees rights to equity instruments of the
entity (eg share options) and either chooses or is required to buy equity
instruments (ie treasury shares) from another party to satisfy its
obligations to its employees and
(b) an entity’s employees are granted rights to equity instruments of the
entity (eg share options) either by the entity itself or by its shareholders
and the shareholders of the entity provide the equity instruments
needed
B49 The entity shall account for sharebased payment transactions in which it
receives services as consideration for its own equity instruments as
equitysettled This applies regardless of whether the entity chooses or is
required to buy those equity instruments from another party to satisfy its
obligations to its employees under the sharebased payment arrangement It
also applies regardless of whether
(a) the employee’s rights to the entity’s equity instruments were granted by
the entity itself or by its shareholder(s) or
IFRS 2
IFRS Foundation A121(b) the sharebased payment arrangement was settled by the entity itself or
by its shareholder(s)
B50 If the shareholder has an obligation to settle the transaction with its investee’s
employees it provides equity instruments of its investee rather than its own
Therefore if its investee is in the same group as the shareholder in accordance
with paragraph 43C the shareholder shall measure its obligation in accordance
with the requirements applicable to cashsettled sharebased payment
transactions in the shareholder’s separate financial statements and those
applicable to equitysettled sharebased payment transactions in the
shareholder’s consolidated financial statements
Sharebased payment arrangements involving equity instruments
of the parent
B51 The second issue concerns sharebased payment transactions between two or
more entities within the same group involving an equity instrument of another
group entity For example employees of a subsidiary are granted rights to
equity instruments of its parent as consideration for the services provided to the
subsidiary
B52 Therefore the second issue concerns the following sharebased payment
arrangements
(a) a parent grants rights to its equity instruments directly to the employees
of its subsidiary the parent (not the subsidiary) has the obligation to
provide the employees of the subsidiary with the equity instruments
and
(b) a subsidiary grants rights to equity instruments of its parent to its
employees the subsidiary has the obligation to provide its employees
with the equity instruments
A parent grants rights to its equity instruments to the employees of its
subsidiary (paragraph B52(a))
B53 The subsidiary does not have an obligation to provide its parent’s equity
instruments to the subsidiary’s employees Therefore in accordance with
paragraph 43B the subsidiary shall measure the services received from its
employees in accordance with the requirements applicable to equitysettled
sharebased payment transactions and recognise a corresponding increase in
equity as a contribution from the parent
B54 The parent has an obligation to settle the transaction with the subsidiary’s
employees by providing the parent’s own equity instruments Therefore in
accordance with paragraph 43C the parent shall measure its obligation in
accordance with the requirements applicable to equitysettled sharebased
payment transactions
A subsidiary grants rights to equity instruments of its parent to its
employees (paragraph B52(b))
B55 Because the subsidiary does not meet either of the conditions in paragraph 43B
it shall account for the transaction with its employees as cashsettled This
IFRS 2
IFRS FoundationA122requirement applies irrespective of how the subsidiary obtains the equity
instruments to satisfy its obligations to its employees
Sharebased payment arrangements involving cashsettled
payments to employees
B56 The third issue is how an entity that receives goods or services from its suppliers
(including employees) should account for sharebased arrangements that are
cashsettled when the entity itself does not have any obligation to make the
required payments to its suppliers For example consider the following
arrangements in which the parent (not the entity itself) has an obligation to
make the required cash payments to the employees of the entity
(a) the employees of the entity will receive cash payments that are linked to
the price of its equity instruments
(b) the employees of the entity will receive cash payments that are linked to
the price of its parent’s equity instruments
B57 The subsidiary does not have an obligation to settle the transaction with its
employees Therefore the subsidiary shall account for the transaction with its
employees as equitysettled and recognise a corresponding increase in equity as
a contribution from its parent The subsidiary shall remeasure the cost of the
transaction subsequently for any changes resulting from nonmarket vesting
conditions not being met in accordance with paragraphs 19–21 This differs
from the measurement of the transaction as cashsettled in the consolidated
financial statements of the group
B58 Because the parent has an obligation to settle the transaction with the
employees and the consideration is cash the parent (and the consolidated
group) shall measure its obligation in accordance with the requirements
applicable to cashsettled sharebased payment transactions in paragraph 43C
Transfer of employees between group entities
B59 The fourth issue relates to group sharebased payment arrangements that
involve employees of more than one group entity For example a parent might
grant rights to its equity instruments to the employees of its subsidiaries
conditional upon the completion of continuing service with the group for a
specified period An employee of one subsidiary might transfer employment to
another subsidiary during the specified vesting period without the employee’s
rights to equity instruments of the parent under the original sharebased
payment arrangement being affected If the subsidiaries have no obligation to
settle the sharebased payment transaction with their employees they account
for it as an equitysettled transaction Each subsidiary shall measure the services
received from the employee by reference to the fair value of the equity
instruments at the date the rights to those equity instruments were originally
granted by the parent as defined in Appendix A and the proportion of the
vesting period the employee served with each subsidiary
B60 If the subsidiary has an obligation to settle the transaction with its employees in
its parent’s equity instruments it accounts for the transaction as cashsettled
Each subsidiary shall measure the services received on the basis of grant date fair
value of the equity instruments for the proportion of the vesting period the
IFRS 2
IFRS Foundation A123employee served with each subsidiary In addition each subsidiary shall
recognise any change in the fair value of the equity instruments during the
employee’s service period with each subsidiary
B61 Such an employee after transferring between group entities may fail to satisfy a
vesting condition other than a market condition as defined in Appendix A
eg the employee leaves the group before completing the service period In this
case because the vesting condition is service to the group each subsidiary shall
adjust the amount previously recognised in respect of the services received from
the employee in accordance with the principles in paragraph 19 Hence if the
rights to the equity instruments granted by the parent do not vest because of an
employee’s failure to meet a vesting condition other than a market condition
no amount is recognised on a cumulative basis for the services received from
that employee in the financial statements of any group entity
IFRS 2
IFRS FoundationA124Appendix C
Amendments to other IFRSs
The amendments in this appendix become effective for annual financial statements covering periods
beginning on or after 1 January 2005 If an entity applies this Standard for an earlier period these
amendments become effective for that earlier period
*****
The amendments contained in this appendix when this Standard was issued in 2004 have been
incorporated into the relevant Standards published in this volume
IFRS 2
IFRS Foundation A125IFRS Standard 3
Business Combinations
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 22
Business Combinations which had originally been issued by the International Accounting
Standards Committee in October 1998 IAS 22 was itself a revised version of IAS 22 Business
Combinations that was issued in November 1983
In March 2004 the Board replaced IAS 22 and three related Interpretations (SIC9 Business
Combinations—Classification either as Acquisitions or Unitings of Interests SIC22 Business
Combinations—Subsequent Adjustment of Fair Values and Goodwill Initially Reported and SIC28
Business Combinations—Date of Exchange’ and Fair Value of Equity Instruments) when it issued
IFRS 3 Business Combinations
Minor amendments were made to IFRS 3 in March 2004 by IFRS 5 Noncurrent Assets Held for
Sale and Discontinued Operations and IAS 1 Presentation of Financial Statements (as revised in
September 2007) which amended the terminology used throughout the Standards
including IFRS 3
In January 2008 the Board issued a revised IFRS 3
Other Standards have made minor consequential amendments to IFRS 3 They include
Improvements to IFRSs (issued in May 2010) IFRS 10 Consolidated Financial Statements (issued
May 2011) IFRS 13 Fair Value Measurement (issued May 2011) Investment Entities (Amendments
to IFRS 10 IFRS 12 and IAS 27) (issued October 2012) IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued November 2013) Annual
Improvements to IFRSs 2010–2012 Cycle (issued December 2013) Annual Improvements to IFRSs
2011–2013 Cycle (issued December 2013) IFRS 15 Revenue from Contracts with Customers (issued
May 2014) IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases (issued January
2016)
IFRS 3
IFRS Foundation A127CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 3
BUSINESS COMBINATIONS
OBJECTIVE 1
SCOPE 2
IDENTIFYING A BUSINESS COMBINATION 3
THE ACQUISITION METHOD 4
Identifying the acquirer 6
Determining the acquisition date 8
Recognising and measuring the identifiable assets acquired the liabilities
assumed and any noncontrolling interest in the acquiree 10
Recognising and measuring goodwill or a gain from a bargain purchase 32
Additional guidance for applying the acquisition method to particular types
of business combinations 41
Measurement period 45
Determining what is part of the business combination transaction 51
SUBSEQUENT MEASUREMENT AND ACCOUNTING 54
Reacquired rights 55
Contingent liabilities 56
Indemnification assets 57
Contingent consideration 58
DISCLOSURES 59
EFFECTIVE DATE AND TRANSITION 64
Effective date 64
Transition 65
REFERENCE TO IFRS 9 67A
WITHDRAWAL OF IFRS 3 (2004) 68
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 3 ISSUED IN JANUARY
2008 BASIS FOR CONCLUSIONS
APPENDIX
Amendments to the Basis for Conclusions on other IFRSs
IFRS 3
IFRS FoundationA128DISSENTING OPINIONS
ILLUSTRATIVE EXAMPLES
APPENDIX
Amendments to guidance on other IFRSs
COMPARISON OF IFRS 3 (AS REVISED IN 2008) AND SFAS 141(R)
TABLE OF CONCORDANCE
IFRS 3
IFRS Foundation A129International Financial Reporting Standard 3 Business Combinations (IFRS 3) is set out in
paragraphs 1–68 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the IFRS Definitions of other terms are given in the
Glossary for International Financial Reporting Standards IFRS 3 should be read in the
context of its objective and the Basis for Conclusions the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance
IFRS 3
IFRS FoundationA130Introduction
Reasons for issuing the IFRS
IN1 The revised International Financial Reporting Standard 3 Business Combinations
(IFRS 3) is part of a joint effort by the International Accounting Standards Board
(IASB) and the US Financial Accounting Standards Board (FASB) to improve
financial reporting while promoting the international convergence of
accounting standards Each board decided to address the accounting for
business combinations in two phases The IASB and the FASB deliberated the
first phase separately The FASB concluded its first phase in June 2001 by issuing
FASB Statement No 141 Business Combinations The IASB concluded its first phase
in March 2004 by issuing the previous version of IFRS 3 Business Combinations The
boards’ primary conclusion in the first phase was that virtually all business
combinations are acquisitions Accordingly the boards decided to require the
use of one method of accounting for business combinations—the acquisition
method
IN2 The second phase of the project addressed the guidance for applying the
acquisition method The boards decided that a significant improvement could
be made to financial reporting if they had similar standards for accounting for
business combinations Thus they decided to conduct the second phase of the
project as a joint effort with the objective of reaching the same conclusions The
boards concluded the second phase of the project by issuing this IFRS and FASB
Statement No 141 (revised 2007) Business Combinations and the related
amendments to IAS 27 Consolidated and Separate Financial Statements and FASB
Statement No 160 Noncontrolling Interests in Consolidated Financial Statements1
IN3 The IFRS replaces IFRS 3 (as issued in 2004) and comes into effect for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009 Earlier
application is permitted provided that IAS 27 (as amended in 2008) is applied at
the same time
Main features of the IFRS
IN4 The objective of the IFRS is to enhance the relevance reliability and
comparability of the information that an entity provides in its financial
statements about a business combination and its effects It does that by
establishing principles and requirements for how an acquirer
(a) recognises and measures in its financial statements the identifiable
assets acquired the liabilities assumed and any noncontrolling interest
in the acquiree
1 The requirements for consolidated financial statements in IAS 27 were superseded by IFRS 10
Consolidated Financial Statements issued in May 2011 Topic 810 Consolidation in the FASB Accounting
Standards Codification® codified the guidance in SFAS 160
IFRS 3
IFRS Foundation A131(b) recognises and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and
(c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination
Core principle
IN5 An acquirer of a business recognises the assets acquired and liabilities assumed
at their acquisitiondate fair values and discloses information that enables users
to evaluate the nature and financial effects of the acquisition
Applying the acquisition method
IN6 A business combination must be accounted for by applying the acquisition
method unless it is a combination involving entities or businesses under
common control or the acquiree is a subsidiary of an investment entity as
defined in IFRS 10 Consolidated Financial Statements which is required to be
measured at fair value through profit or loss One of the parties to a business
combination can always be identified as the acquirer being the entity that
obtains control of the other business (the acquiree) Formations of a joint
venture or the acquisition of an asset or a group of assets that does not
constitute a business are not business combinations
IN7 The IFRS establishes principles for recognising and measuring the identifiable
assets acquired the liabilities assumed and any noncontrolling interest in the
acquiree Any classifications or designations made in recognising these items
must be made in accordance with the contractual terms economic conditions
acquirer’s operating or accounting policies and other factors that exist at the
acquisition date
IN8 Each identifiable asset and liability is measured at its acquisitiondate fair value
Noncontrolling interests in an acquiree that are present ownership interests
and entitle their holders to a proportionate share of the entity’s net assets in the
event of liquidation are measured at either fair value or the present ownership
instruments’ proportionate share in the recognised amounts of the acquiree’s
net identifiable assets All other components of noncontrolling interests shall
be measured at their acquisitiondate fair values unless another measurement
basis is required by IFRSs
IN9 The IFRS provides limited exceptions to these recognition and measurement
principles
(a) Leases and insurance contracts are required to be classified on the basis
of the contractual terms and other factors at the inception of the
contract (or when the terms have changed) rather than on the basis of
the factors that exist at the acquisition date
(b) Only those contingent liabilities assumed in a business combination that
are a present obligation and can be measured reliably are recognised
(c) Some assets and liabilities are required to be recognised or measured in
accordance with other IFRSs rather than at fair value The assets and
liabilities affected are those falling within the scope of IAS 12 Income
IFRS 3
IFRS FoundationA132Taxes IAS 19 Employee Benefits IFRS 2 Sharebased Payment and IFRS 5
Noncurrent Assets Held for Sale and Discontinued Operations
(d) There are special requirements for measuring a reacquired right
(e) Indemnification assets are recognised and measured on a basis that is
consistent with the item that is subject to the indemnification even if
that measure is not fair value
IN10 The IFRS requires the acquirer having recognised the identifiable assets the
liabilities and any noncontrolling interests to identify any difference between
(a) the aggregate of the consideration transferred any noncontrolling
interest in the acquiree and in a business combination achieved in
stages the acquisitiondate fair value of the acquirer’s previously held
equity interest in the acquiree and
(b) the net identifiable assets acquired
The difference will generally be recognised as goodwill If the acquirer has
made a gain from a bargain purchase that gain is recognised in profit or loss
IN11 The consideration transferred in a business combination (including any
contingent consideration) is measured at fair value
IN12 In general an acquirer measures and accounts for assets acquired and liabilities
assumed or incurred in a business combination after the business combination
has been completed in accordance with other applicable IFRSs However the
IFRS provides accounting requirements for reacquired rights contingent
liabilities contingent consideration and indemnification assets
Disclosure
IN13 The IFRS requires the acquirer to disclose information that enables users of its
financial statements to evaluate the nature and financial effect of business
combinations that occurred during the current reporting period or after the
reporting date but before the financial statements are authorised for issue After
a business combination the acquirer must disclose any adjustments recognised
in the current reporting period that relate to business combinations that
occurred in the current or previous reporting periods
IFRS 3
IFRS Foundation A133International Financial Reporting Standard 3
Business Combinations
Objective
1 The objective of this IFRS is to improve the relevance reliability and
comparability of the information that a reporting entity provides in its financial
statements about a business combination and its effects To accomplish that this
IFRS establishes principles and requirements for how the acquirer
(a) recognises and measures in its financial statements the identifiable assets
acquired the liabilities assumed and any noncontrolling interest in the
acquiree
(b) recognises and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and
(c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination
Scope
2 This IFRS applies to a transaction or other event that meets the definition of a
business combination This IFRS does not apply to
(a) the accounting for the formation of a joint arrangement in the financial
statements of the joint arrangement itself
(b) the acquisition of an asset or a group of assets that does not constitute a
business In such cases the acquirer shall identify and recognise the
individual identifiable assets acquired (including those assets that meet
the definition of and recognition criteria for intangible assets in IAS 38
Intangible Assets) and liabilities assumed The cost of the group shall be
allocated to the individual identifiable assets and liabilities on the basis
of their relative fair values at the date of purchase Such a transaction or
event does not give rise to goodwill
(c) a combination of entities or businesses under common control
(paragraphs B1–B4 provide related application guidance)
2A The requirements of this Standard do not apply to the acquisition by an
investment entity as defined in IFRS 10 Consolidated Financial Statementsofan
investment in a subsidiary that is required to be measured at fair value through
profit or loss
Identifying a business combination
3 An entity shall determine whether a transaction or other event is a
business combination by applying the definition in this IFRS which
requires that the assets acquired and liabilities assumed constitute a
business If the assets acquired are not a business the reporting entity
IFRS 3
IFRS FoundationA134shall account for the transaction or other event as an asset acquisition
Paragraphs B5–B12 provide guidance on identifying a business
combination and the definition of a business
The acquisition method
4 An entity shall account for each business combination by applying the
acquisition method
5 Applying the acquisition method requires
(a) identifying the acquirer
(b) determining the acquisition date
(c) recognising and measuring the identifiable assets acquired the
liabilities assumed and any noncontrolling interest in the acquiree and
(d) recognising and measuring goodwill or a gain from a bargain purchase
Identifying the acquirer
6 For each business combination one of the combining entities shall be
identified as the acquirer
7 The guidance in IFRS 10 shall be used to identify the acquirer—the entity that
obtains control of another entity ie the acquiree If a business combination has
occurred but applying the guidance in IFRS 10 does not clearly indicate which of
the combining entities is the acquirer the factors in paragraphs B14–B18 shall
be considered in making that determination
Determining the acquisition date
8 The acquirer shall identify the acquisition date which is the date on
which it obtains control of the acquiree
9 The date on which the acquirer obtains control of the acquiree is generally the
date on which the acquirer legally transfers the consideration acquires the
assets and assumes the liabilities of the acquiree—the closing date However the
acquirer might obtain control on a date that is either earlier or later than the
closing date For example the acquisition date precedes the closing date if a
written agreement provides that the acquirer obtains control of the acquiree on
a date before the closing date An acquirer shall consider all pertinent facts and
circumstances in identifying the acquisition date
Recognising and measuring the identifiable assets
acquired the liabilities assumed and any noncontrolling
interest in the acquiree
Recognition principle
10 As of the acquisition date the acquirer shall recognise separately from
goodwill the identifiable assets acquired the liabilities assumed and any
noncontrolling interest in the acquiree Recognition of identifiable
assets acquired and liabilities assumed is subject to the conditions
specified in paragraphs 11 and 12
IFRS 3
IFRS Foundation A135Recognition conditions
11 To qualify for recognition as part of applying the acquisition method the
identifiable assets acquired and liabilities assumed must meet the definitions of
assets and liabilities in the Framework2 for the Preparation and Presentation of
Financial Statements at the acquisition date For example costs the acquirer
expects but is not obliged to incur in the future to effect its plan to exit an
activity of an acquiree or to terminate the employment of or relocate an
acquiree’s employees are not liabilities at the acquisition date Therefore the
acquirer does not recognise those costs as part of applying the acquisition
method Instead the acquirer recognises those costs in its postcombination
financial statements in accordance with other IFRSs
12 In addition to qualify for recognition as part of applying the acquisition
method the identifiable assets acquired and liabilities assumed must be part of
what the acquirer and the acquiree (or its former owners) exchanged in the
business combination transaction rather than the result of separate
transactions The acquirer shall apply the guidance in paragraphs 51–53 to
determine which assets acquired or liabilities assumed are part of the exchange
for the acquiree and which if any are the result of separate transactions to be
accounted for in accordance with their nature and the applicable IFRSs
13 The acquirer’s application of the recognition principle and conditions may
result in recognising some assets and liabilities that the acquiree had not
previously recognised as assets and liabilities in its financial statements For
example the acquirer recognises the acquired identifiable intangible assets
such as a brand name a patent or a customer relationship that the acquiree did
not recognise as assets in its financial statements because it developed them
internally and charged the related costs to expense
14 Paragraphs B31–B40 provide guidance on recognising intangible assets
Paragraphs 22–28B specify the types of identifiable assets and liabilities that
include items for which this IFRS provides limited exceptions to the recognition
principle and conditions
Classifying or designating identifiable assets acquired and liabilities
assumed in a business combination
15 At the acquisition date the acquirer shall classify or designate the
identifiable assets acquired and liabilities assumed as necessary to apply
other IFRSs subsequently The acquirer shall make those classifications
or designations on the basis of the contractual terms economic
conditions its operating or accounting policies and other pertinent
conditions as they exist at the acquisition date
16 In some situations IFRSs provide for different accounting depending on how an
entity classifies or designates a particular asset or liability Examples of
2 IASC’s Framework for the Preparation and Presentation of Financial Statements was adopted by the IASB in
2001 In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial
Reporting
IFRS 3
IFRS FoundationA136classifications or designations that the acquirer shall make on the basis of the
pertinent conditions as they exist at the acquisition date include but are not
limited to
(a) classification of particular financial assets and liabilities as measured at
fair value through profit or loss or at amortised cost or as a financial
asset measured at fair value through other comprehensive income in
accordance with IFRS 9 Financial Instruments
(b) designation of a derivative instrument as a hedging instrument in
accordance with IFRS 9 and
(c) assessment of whether an embedded derivative should be separated from
a host contract in accordance with IFRS 9 (which is a matter of
classification’ as this IFRS uses that term)
17 This IFRS provides two exceptions to the principle in paragraph 15
(a) classification of a lease contract in which the acquiree is the lessor as
either an operating lease or a finance lease in accordance with IFRS 16
Leases and
(b) classification of a contract as an insurance contract in accordance with
IFRS 4 Insurance Contracts
The acquirer shall classify those contracts on the basis of the contractual terms
and other factors at the inception of the contract (or if the terms of the contract
have been modified in a manner that would change its classification at the date
of that modification which might be the acquisition date)
Measurement principle
18 The acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisitiondate fair values
19 For each business combination the acquirer shall measure at the acquisition
date components of noncontrolling interests in the acquiree that are present
ownership interests and entitle their holders to a proportionate share of the
entity’s net assets in the event of liquidation at either
(a) fair value or
(b) the present ownership instruments’ proportionate share in the
recognised amounts of the acquiree’s identifiable net assets
All other components of noncontrolling interests shall be measured at their
acquisitiondate fair values unless another measurement basis is required by
IFRSs
20 Paragraphs 24–31 specify the types of identifiable assets and liabilities that
include items for which this IFRS provides limited exceptions to the
measurement principle
Exceptions to the recognition or measurement principles
21 This IFRS provides limited exceptions to its recognition and measurement
principles Paragraphs 22–31 specify both the particular items for which
IFRS 3
IFRS Foundation A137exceptions are provided and the nature of those exceptions The acquirer shall
account for those items by applying the requirements in paragraphs 22–31
which will result in some items being
(a) recognised either by applying recognition conditions in addition to those
in paragraphs 11 and 12 or by applying the requirements of other IFRSs
with results that differ from applying the recognition principle and
conditions
(b) measured at an amount other than their acquisitiondate fair values
Exception to the recognition principle
Contingent liabilities
22 IAS 37 Provisions Contingent Liabilities and Contingent Assets defines a contingent
liability as
(a) a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or nonoccurrence of one or
more uncertain future events not wholly within the control of the entity
or
(b) a present obligation that arises from past events but is not recognised
because
(i) it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation or
(ii) the amount of the obligation cannot be measured with sufficient
reliability
23 The requirements in IAS 37 do not apply in determining which contingent
liabilities to recognise as of the acquisition date Instead the acquirer shall
recognise as of the acquisition date a contingent liability assumed in a business
combination if it is a present obligation that arises from past events and its fair
value can be measured reliably Therefore contrary to IAS 37 the acquirer
recognises a contingent liability assumed in a business combination at the
acquisition date even if it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation
Paragraph 56 provides guidance on the subsequent accounting for contingent
liabilities
Exceptions to both the recognition and measurement principles
Income taxes
24 The acquirer shall recognise and measure a deferred tax asset or liability arising
from the assets acquired and liabilities assumed in a business combination in
accordance with IAS 12 Income Taxes
25 The acquirer shall account for the potential tax effects of temporary differences
and carryforwards of an acquiree that exist at the acquisition date or arise as a
result of the acquisition in accordance with IAS 12
IFRS 3
IFRS FoundationA138Employee benefits
26 The acquirer shall recognise and measure a liability (or asset if any) related to
the acquiree’s employee benefit arrangements in accordance with IAS 19
Employee Benefits
Indemnification assets
27 The seller in a business combination may contractually indemnify the acquirer
for the outcome of a contingency or uncertainty related to all or part of a
specific asset or liability For example the seller may indemnify the acquirer
against losses above a specified amount on a liability arising from a particular
contingency in other words the seller will guarantee that the acquirer’s
liability will not exceed a specified amount As a result the acquirer obtains an
indemnification asset The acquirer shall recognise an indemnification asset at
the same time that it recognises the indemnified item measured on the same
basis as the indemnified item subject to the need for a valuation allowance for
uncollectible amounts Therefore if the indemnification relates to an asset or a
liability that is recognised at the acquisition date and measured at its
acquisitiondate fair value the acquirer shall recognise the indemnification
asset at the acquisition date measured at its acquisitiondate fair value For an
indemnification asset measured at fair value the effects of uncertainty about
future cash flows because of collectibility considerations are included in the fair
value measure and a separate valuation allowance is not necessary
(paragraph B41 provides related application guidance)
28 In some circumstances the indemnification may relate to an asset or a liability
that is an exception to the recognition or measurement principles For example
an indemnification may relate to a contingent liability that is not recognised at
the acquisition date because its fair value is not reliably measurable at that date
Alternatively an indemnification may relate to an asset or a liability for
example one that results from an employee benefit that is measured on a basis
other than acquisitiondate fair value In those circumstances the
indemnification asset shall be recognised and measured using assumptions
consistent with those used to measure the indemnified item subject to
management’s assessment of the collectibility of the indemnification asset and
any contractual limitations on the indemnified amount Paragraph 57 provides
guidance on the subsequent accounting for an indemnification asset
Leases in which the acquiree is the lessee
28A The acquirer shall recognise rightofuse assets and lease liabilities for leases
identified in accordance with IFRS 16 in which the acquiree is the lessee The
acquirer is not required to recognise rightofuse assets and lease liabilities for
(a) leases for which the lease term (as defined in IFRS 16) ends within
12 months of the acquisition date or
(b) leases for which the underlying asset is of low value (as described in
paragraphs B3–B8 of IFRS 16)
28B The acquirer shall measure the lease liability at the present value of the
remaining lease payments (as defined in IFRS 16) as if the acquired lease were a
new lease at the acquisition date The acquirer shall measure the rightofuse
IFRS 3
IFRS Foundation A139asset at the same amount as the lease liability adjusted to reflect favourable or
unfavourable terms of the lease when compared with market terms
Exceptions to the measurement principle
Reacquired rights
29 The acquirer shall measure the value of a reacquired right recognised as an
intangible asset on the basis of the remaining contractual term of the related
contract regardless of whether market participants would consider potential
contractual renewals when measuring its fair value Paragraphs B35 and B36
provide related application guidance
Sharebased payment transactions
30 The acquirer shall measure a liability or an equity instrument related to
sharebased payment transactions of the acquiree or the replacement of an
acquiree’s sharebased payment transactions with sharebased payment
transactions of the acquirer in accordance with the method in IFRS 2 Sharebased
Payment at the acquisition date (This IFRS refers to the result of that method as
the marketbased measure’ of the sharebased payment transaction)
Assets held for sale
31 The acquirer shall measure an acquired noncurrent asset (or disposal group)
that is classified as held for sale at the acquisition date in accordance with IFRS 5
Noncurrent Assets Held for Sale and Discontinued Operations at fair value less costs to
sell in accordance with paragraphs 15–18 of that IFRS
Recognising and measuring goodwill or a gain from a
bargain purchase
32 The acquirer shall recognise goodwill as of the acquisition date measured
as the excess of (a) over (b) below
(a) the aggregate of
(i) the consideration transferred measured in accordance with
this IFRS which generally requires acquisitiondate fair
value (see paragraph 37)
(ii) the amount of any noncontrolling interest in the acquiree
measured in accordance with this IFRS and
(iii) in a business combination achieved in stages (see
paragraphs 41 and 42) the acquisitiondate fair value of the
acquirer’s previously held equity interest in the acquiree
(b) the net of the acquisitiondate amounts of the identifiable assets
acquired and the liabilities assumed measured in accordance with
this IFRS
33 In a business combination in which the acquirer and the acquiree (or its former
owners) exchange only equity interests the acquisitiondate fair value of the
acquiree’s equity interests may be more reliably measurable than the
acquisitiondate fair value of the acquirer’s equity interests If so the acquirer
shall determine the amount of goodwill by using the acquisitiondate fair value
IFRS 3
IFRS FoundationA140of the acquiree’s equity interests instead of the acquisitiondate fair value of the
equity interests transferred To determine the amount of goodwill in a business
combination in which no consideration is transferred the acquirer shall use the
acquisitiondate fair value of the acquirer’s interest in the acquiree in place of
the acquisitiondate fair value of the consideration transferred
(paragraph 32(a)(i)) Paragraphs B46–B49 provide related application guidance
Bargain purchases
34 Occasionally an acquirer will make a bargain purchase which is a business
combination in which the amount in paragraph 32(b) exceeds the aggregate of
the amounts specified in paragraph 32(a) If that excess remains after applying
the requirements in paragraph 36 the acquirer shall recognise the resulting
gain in profit or loss on the acquisition date The gain shall be attributed to the
acquirer
35 A bargain purchase might happen for example in a business combination that
is a forced sale in which the seller is acting under compulsion However the
recognition or measurement exceptions for particular items discussed in
paragraphs 22–31 may also result in recognising a gain (or change the amount
of a recognised gain) on a bargain purchase
36 Before recognising a gain on a bargain purchase the acquirer shall reassess
whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and shall recognise any additional assets or liabilities that are
identified in that review The acquirer shall then review the procedures used to
measure the amounts this IFRS requires to be recognised at the acquisition date
for all of the following
(a) the identifiable assets acquired and liabilities assumed
(b) the noncontrolling interest in the acquiree if any
(c) for a business combination achieved in stages the acquirer’s previously
held equity interest in the acquiree and
(d) the consideration transferred
The objective of the review is to ensure that the measurements appropriately
reflect consideration of all available information as of the acquisition date
Consideration transferred
37 The consideration transferred in a business combination shall be measured at
fair value which shall be calculated as the sum of the acquisitiondate fair
values of the assets transferred by the acquirer the liabilities incurred by the
acquirer to former owners of the acquiree and the equity interests issued by the
acquirer (However any portion of the acquirer’s sharebased payment awards
exchanged for awards held by the acquiree’s employees that is included in
consideration transferred in the business combination shall be measured in
accordance with paragraph 30 rather than at fair value) Examples of potential
forms of consideration include cash other assets a business or a subsidiary of
the acquirer contingent consideration ordinary or preference equity instruments
options warrants and member interests of mutual entities
IFRS 3
IFRS Foundation A14138 The consideration transferred may include assets or liabilities of the acquirer
that have carrying amounts that differ from their fair values at the acquisition
date (for example nonmonetary assets or a business of the acquirer) If so the
acquirer shall remeasure the transferred assets or liabilities to their fair values
as of the acquisition date and recognise the resulting gains or losses if any in
profit or loss However sometimes the transferred assets or liabilities remain
within the combined entity after the business combination (for example
because the assets or liabilities were transferred to the acquiree rather than to
its former owners) and the acquirer therefore retains control of them In that
situation the acquirer shall measure those assets and liabilities at their carrying
amounts immediately before the acquisition date and shall not recognise a gain
or loss in profit or loss on assets or liabilities it controls both before and after the
business combination
Contingent consideration
39 The consideration the acquirer transfers in exchange for the acquiree includes
any asset or liability resulting from a contingent consideration arrangement (see
paragraph 37) The acquirer shall recognise the acquisitiondate fair value of
contingent consideration as part of the consideration transferred in exchange
for the acquiree
40 The acquirer shall classify an obligation to pay contingent consideration that
meets the definition of a financial instrument as a financial liability or as equity
on the basis of the definitions of an equity instrument and a financial liability in
paragraph 11 of IAS 32 Financial Instruments Presentation The acquirer shall
classify as an asset a right to the return of previously transferred consideration if
specified conditions are met Paragraph 58 provides guidance on the
subsequent accounting for contingent consideration
Additional guidance for applying the acquisition method
to particular types of business combinations
A business combination achieved in stages
41 An acquirer sometimes obtains control of an acquiree in which it held an equity
interest immediately before the acquisition date For example on 31 December
20X1 Entity A holds a 35 per cent noncontrolling equity interest in Entity B On
that date Entity A purchases an additional 40 per cent interest in Entity B
which gives it control of Entity B This IFRS refers to such a transaction as a
business combination achieved in stages sometimes also referred to as a step
acquisition
42 In a business combination achieved in stages the acquirer shall remeasure its
previously held equity interest in the acquiree at its acquisitiondate fair value
and recognise the resulting gain or loss if any in profit or loss or other
comprehensive income as appropriate In prior reporting periods the acquirer
may have recognised changes in the value of its equity interest in the acquiree in
other comprehensive income If so the amount that was recognised in other
comprehensive income shall be recognised on the same basis as would be
required if the acquirer had disposed directly of the previously held equity
interest
IFRS 3
IFRS FoundationA142A business combination achieved without the transfer of
consideration
43 An acquirer sometimes obtains control of an acquiree without transferring
consideration The acquisition method of accounting for a business
combination applies to those combinations Such circumstances include
(a) The acquiree repurchases a sufficient number of its own shares for an
existing investor (the acquirer) to obtain control
(b) Minority veto rights lapse that previously kept the acquirer from
controlling an acquiree in which the acquirer held the majority voting
rights
(c) The acquirer and acquiree agree to combine their businesses by contract
alone The acquirer transfers no consideration in exchange for control of
an acquiree and holds no equity interests in the acquiree either on the
acquisition date or previously Examples of business combinations
achieved by contract alone include bringing two businesses together in a
stapling arrangement or forming a dual listed corporation
44 In a business combination achieved by contract alone the acquirer shall
attribute to the owners of the acquiree the amount of the acquiree’s net assets
recognised in accordance with this IFRS In other words the equity interests in
the acquiree held by parties other than the acquirer are a noncontrolling
interest in the acquirer’s postcombination financial statements even if the
result is that all of the equity interests in the acquiree are attributed to the
noncontrolling interest
Measurement period
45 If the initial accounting for a business combination is incomplete by the
end of the reporting period in which the combination occurs the
acquirer shall report in its financial statements provisional amounts for
the items for which the accounting is incomplete During the
measurement period the acquirer shall retrospectively adjust the
provisional amounts recognised at the acquisition date to reflect new
information obtained about facts and circumstances that existed as of
the acquisition date and if known would have affected the measurement
of the amounts recognised as of that date During the measurement
period the acquirer shall also recognise additional assets or liabilities if
new information is obtained about facts and circumstances that existed
as of the acquisition date and if known would have resulted in the
recognition of those assets and liabilities as of that date The
measurement period ends as soon as the acquirer receives the
information it was seeking about facts and circumstances that existed as
of the acquisition date or learns that more information is not obtainable
However the measurement period shall not exceed one year from the
acquisition date
46 The measurement period is the period after the acquisition date during which
the acquirer may adjust the provisional amounts recognised for a business
combination The measurement period provides the acquirer with a reasonable
IFRS 3
IFRS Foundation A143time to obtain the information necessary to identify and measure the following
as of the acquisition date in accordance with the requirements of this IFRS
(a) the identifiable assets acquired liabilities assumed and any
noncontrolling interest in the acquiree
(b) the consideration transferred for the acquiree (or the other amount used
in measuring goodwill)
(c) in a business combination achieved in stages the equity interest in the
acquiree previously held by the acquirer and
(d) the resulting goodwill or gain on a bargain purchase
47 The acquirer shall consider all pertinent factors in determining whether
information obtained after the acquisition date should result in an adjustment
to the provisional amounts recognised or whether that information results from
events that occurred after the acquisition date Pertinent factors include the
date when additional information is obtained and whether the acquirer can
identify a reason for a change to provisional amounts Information that is
obtained shortly after the acquisition date is more likely to reflect circumstances
that existed at the acquisition date than is information obtained several months
later For example unless an intervening event that changed its fair value can
be identified the sale of an asset to a third party shortly after the acquisition
date for an amount that differs significantly from its provisional fair value
measured at that date is likely to indicate an error in the provisional amount
48 The acquirer recognises an increase (decrease) in the provisional amount
recognised for an identifiable asset (liability) by means of a decrease (increase) in
goodwill However new information obtained during the measurement period
may sometimes result in an adjustment to the provisional amount of more than
one asset or liability For example the acquirer might have assumed a liability
to pay damages related to an accident in one of the acquiree’s facilities part or
all of which are covered by the acquiree’s liability insurance policy If the
acquirer obtains new information during the measurement period about the
acquisitiondate fair value of that liability the adjustment to goodwill resulting
from a change to the provisional amount recognised for the liability would be
offset (in whole or in part) by a corresponding adjustment to goodwill resulting
from a change to the provisional amount recognised for the claim receivable
from the insurer
49 During the measurement period the acquirer shall recognise adjustments to the
provisional amounts as if the accounting for the business combination had been
completed at the acquisition date Thus the acquirer shall revise comparative
information for prior periods presented in financial statements as needed
including making any change in depreciation amortisation or other income
effects recognised in completing the initial accounting
50 After the measurement period ends the acquirer shall revise the accounting for
a business combination only to correct an error in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors
IFRS 3
IFRS FoundationA144Determining what is part of the business combination
transaction
51 The acquirer and the acquiree may have a preexisting relationship or
other arrangement before negotiations for the business combination
began or they may enter into an arrangement during the negotiations
that is separate from the business combination In either situation the
acquirer shall identify any amounts that are not part of what the acquirer
and the acquiree (or its former owners) exchanged in the business
combination ie amounts that are not part of the exchange for the
acquiree The acquirer shall recognise as part of applying the acquisition
method only the consideration transferred for the acquiree and the assets
acquired and liabilities assumed in the exchange for the acquiree
Separate transactions shall be accounted for in accordance with the
relevant IFRSs
52 A transaction entered into by or on behalf of the acquirer or primarily for the
benefit of the acquirer or the combined entity rather than primarily for the
benefit of the acquiree (or its former owners) before the combination is likely to
be a separate transaction The following are examples of separate transactions
that are not to be included in applying the acquisition method
(a) a transaction that in effect settles preexisting relationships between the
acquirer and acquiree
(b) a transaction that remunerates employees or former owners of the
acquiree for future services and
(c) a transaction that reimburses the acquiree or its former owners for
paying the acquirer’s acquisitionrelated costs
Paragraphs B50–B62 provide related application guidance
Acquisitionrelated costs
53 Acquisitionrelated costs are costs the acquirer incurs to effect a business
combination Those costs include finder’s fees advisory legal accounting
valuation and other professional or consulting fees general administrative
costs including the costs of maintaining an internal acquisitions department
and costs of registering and issuing debt and equity securities The acquirer
shall account for acquisitionrelated costs as expenses in the periods in which
the costs are incurred and the services are received with one exception The
costs to issue debt or equity securities shall be recognised in accordance with
IAS 32 and IFRS 9
Subsequent measurement and accounting
54 In general an acquirer shall subsequently measure and account for assets
acquired liabilities assumed or incurred and equity instruments issued
in a business combination in accordance with other applicable IFRSs for
those items depending on their nature However this IFRS provides
IFRS 3
IFRS Foundation A145guidance on subsequently measuring and accounting for the following
assets acquired liabilities assumed or incurred and equity instruments
issued in a business combination
(a) reacquired rights
(b) contingent liabilities recognised as of the acquisition date
(c) indemnification assets and
(d) contingent consideration
Paragraph B63 provides related application guidance
Reacquired rights
55 A reacquired right recognised as an intangible asset shall be amortised over the
remaining contractual period of the contract in which the right was granted
An acquirer that subsequently sells a reacquired right to a third party shall
include the carrying amount of the intangible asset in determining the gain or
loss on the sale
Contingent liabilities
56 After initial recognition and until the liability is settled cancelled or expires the
acquirer shall measure a contingent liability recognised in a business
combination at the higher of
(a) the amount that would be recognised in accordance with IAS 37 and
(b) the amount initially recognised less if appropriate the cumulative
amount of income recognised in accordance with the principles of
IFRS 15 Revenue from Contracts with Customers
This requirement does not apply to contracts accounted for in accordance with
IFRS 9
Indemnification assets
57 At the end of each subsequent reporting period the acquirer shall measure an
indemnification asset that was recognised at the acquisition date on the same
basis as the indemnified liability or asset subject to any contractual limitations
on its amount and for an indemnification asset that is not subsequently
measured at its fair value management’s assessment of the collectibility of the
indemnification asset The acquirer shall derecognise the indemnification asset
only when it collects the asset sells it or otherwise loses the right to it
Contingent consideration
58 Some changes in the fair value of contingent consideration that the acquirer
recognises after the acquisition date may be the result of additional information
that the acquirer obtained after that date about facts and circumstances that
existed at the acquisition date Such changes are measurement period
adjustments in accordance with paragraphs 45–49 However changes resulting
from events after the acquisition date such as meeting an earnings target
reaching a specified share price or reaching a milestone on a research and
development project are not measurement period adjustments The acquirer
IFRS 3
IFRS FoundationA146shall account for changes in the fair value of contingent consideration that are
not measurement period adjustments as follows
(a) Contingent consideration classified as equity shall not be remeasured
and its subsequent settlement shall be accounted for within equity
(b) Other contingent consideration that
(i) is within the scope of IFRS 9 shall be measured at fair value at
each reporting date and changes in fair value shall be recognised
in profit or loss in accordance with IFRS 9
(ii) is not within the scope of IFRS 9 shall be measured at fair value at
each reporting date and changes in fair value shall be recognised
in profit or loss
Disclosures
59 The acquirer shall disclose information that enables users of its financial
statements to evaluate the nature and financial effect of a business
combination that occurs either
(a) during the current reporting period or
(b) after the end of the reporting period but before the financial
statements are authorised for issue
60 To meet the objective in paragraph 59 the acquirer shall disclose the
information specified in paragraphs B64—B66
61 The acquirer shall disclose information that enables users of its financial
statements to evaluate the financial effects of adjustments recognised in
the current reporting period that relate to business combinations that
occurred in the period or previous reporting periods
62 To meet the objective in paragraph 61 the acquirer shall disclose the
information specified in paragraph B67
63 If the specific disclosures required by this and other IFRSs do not meet the
objectives set out in paragraphs 59 and 61 the acquirer shall disclose whatever
additional information is necessary to meet those objectives
Effective date and transition
Effective date
64 This IFRS shall be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after 1 July 2009 Earlier application is permitted However
this IFRS shall be applied only at the beginning of an annual reporting period
that begins on or after 30 June 2007 If an entity applies this IFRS before 1 July
2009 it shall disclose that fact and apply IAS 27 (as amended in 2008) at the
same time
64A [Deleted]
IFRS 3
IFRS Foundation A14764B Improvements to IFRSs issued in May 2010 amended paragraphs 19 30 and B56 and
added paragraphs B62A and B62B An entity shall apply those amendments for
annual periods beginning on or after 1 July 2010 Earlier application is
permitted If an entity applies the amendments for an earlier period it shall
disclose that fact Application should be prospective from the date when the
entity first applied this IFRS
64C Paragraphs 65A–65E were added by Improvements to IFRSs issued in May 2010 An
entity shall apply those amendments for annual periods beginning on or after
1 July 2010 Earlier application is permitted If an entity applies the
amendments for an earlier period it shall disclose that fact The amendments
shall be applied to contingent consideration balances arising from business
combinations with an acquisition date prior to the application of this IFRS as
issued in 2008
64D [Deleted]
64E IFRS 10 issued in May 2011 amended paragraphs 7 B13 B63(e) and Appendix A
An entity shall apply those amendments when it applies IFRS 10
64F IFRS 13 Fair Value Measurement issued in May 2011 amended paragraphs 20 29
33 47 amended the definition of fair value in Appendix A and amended
paragraphs B22 B40 B43–B46 B49 and B64 An entity shall apply those
amendments when it applies IFRS 13
64G Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraph 7 and added paragraph 2A An entity shall apply
those amendments for annual periods beginning on or after 1 January 2014
Earlier application of Investment Entities is permitted If an entity applies these
amendments earlier it shall also apply all amendments included in Investment
Entities at the same time
64H [Deleted]
64I Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 40 and 58 and added paragraph 67A and its related heading An
entity shall apply that amendment prospectively to business combinations for
which the acquisition date is on or after 1 July 2014 Earlier application is
permitted An entity may apply the amendment earlier provided that IFRS 9 and
IAS 37 (both as amended by Annual Improvements to IFRSs 2010–2012 Cycle) have also
been applied If an entity applies that amendment earlier it shall disclose that
fact
64J Annual Improvements Cycle 2011–2013 issued in December 2013 amended
paragraph 2(a) An entity shall apply that amendment prospectively for annual
periods beginning on or after 1 July 2014 Earlier application is permitted If an
entity applies that amendment for an earlier period it shall disclose that fact
64K IFRS 15 Revenue from Contracts with Customers issued in May 2014 amended
paragraph 56 An entity shall apply that amendment when it applies IFRS 15
64L IFRS 9 as issued in July 2014 amended paragraphs 16 42 53 56 58 and B41
and deleted paragraphs 64A 64D and 64H An entity shall apply those
amendments when it applies IFRS 9
IFRS 3
IFRS FoundationA14864M IFRS 16 issued in January 2016 amended paragraphs 14 17 B32 and B42
deleted paragraphs B28–B30 and their related heading and added paragraphs
28A–28B and their related heading An entity shall apply those amendments
when it applies IFRS 16
Transition
65 Assets and liabilities that arose from business combinations whose acquisition
dates preceded the application of this IFRS shall not be adjusted upon
application of this IFRS
65A Contingent consideration balances arising from business combinations whose
acquisition dates preceded the date when an entity first applied this IFRS as
issued in 2008 shall not be adjusted upon first application of this IFRS
Paragraphs 65B–65E shall be applied in the subsequent accounting for those
balances Paragraphs 65B–65E shall not apply to the accounting for contingent
consideration balances arising from business combinations with acquisition
dates on or after the date when the entity first applied this IFRS as issued in
2008 In paragraphs 65B–65E business combination refers exclusively to
business combinations whose acquisition date preceded the application of this
IFRS as issued in 2008
65B If a business combination agreement provides for an adjustment to the cost of
the combination contingent on future events the acquirer shall include the
amount of that adjustment in the cost of the combination at the acquisition
date if the adjustment is probable and can be measured reliably
65C A business combination agreement may allow for adjustments to the cost of the
combination that are contingent on one or more future events The adjustment
might for example be contingent on a specified level of profit being maintained
or achieved in future periods or on the market price of the instruments issued
being maintained It is usually possible to estimate the amount of any such
adjustment at the time of initially accounting for the combination without
impairing the reliability of the information even though some uncertainty
exists If the future events do not occur or the estimate needs to be revised the
cost of the business combination shall be adjusted accordingly
65D However when a business combination agreement provides for such an
adjustment that adjustment is not included in the cost of the combination at
the time of initially accounting for the combination if it either is not probable or
cannot be measured reliably If that adjustment subsequently becomes probable
and can be measured reliably the additional consideration shall be treated as an
adjustment to the cost of the combination
65E In some circumstances the acquirer may be required to make a subsequent
payment to the seller as compensation for a reduction in the value of the assets
given equity instruments issued or liabilities incurred or assumed by the
acquirer in exchange for control of the acquiree This is the case for example
when the acquirer guarantees the market price of equity or debt instruments
issued as part of the cost of the business combination and is required to issue
additional equity or debt instruments to restore the originally determined cost
In such cases no increase in the cost of the business combination is recognised
In the case of equity instruments the fair value of the additional payment is
IFRS 3
IFRS Foundation A149offset by an equal reduction in the value attributed to the instruments initially
issued In the case of debt instruments the additional payment is regarded as a
reduction in the premium or an increase in the discount on the initial issue
66 An entity such as a mutual entity that has not yet applied IFRS 3 and had one or
more business combinations that were accounted for using the purchase
method shall apply the transition provisions in paragraphs B68 and B69
Income taxes
67 For business combinations in which the acquisition date was before this IFRS is
applied the acquirer shall apply the requirements of paragraph 68 of IAS 12 as
amended by this IFRS prospectively That is to say the acquirer shall not adjust
the accounting for prior business combinations for previously recognised
changes in recognised deferred tax assets However from the date when this
IFRS is applied the acquirer shall recognise as an adjustment to profit or loss
(or if IAS 12 requires outside profit or loss) changes in recognised deferred tax
assets
Reference to IFRS 9
67A If an entity applies this Standard but does not yet apply IFRS 9 any reference to
IFRS 9 should be read as a reference to IAS 39
Withdrawal of IFRS 3 (2004)
68 This IFRS supersedes IFRS 3 Business Combinations (as issued in 2004)
IFRS 3
IFRS FoundationA150Appendix A
Defined terms
This appendix is an integral part of the IFRS
acquiree The business or businesses that the acquirer obtains control of in
a business combination
acquirer The entity that obtains control of the acquiree
acquisition date The date on which the acquirer obtains control of the acquiree
business An integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in
the form of dividends lower costs or other economic benefits
directly to investors or other owners members or participants
business combination A transaction or other event in which an acquirer obtains
control of one or more businesses Transactions sometimes
referred to as true mergers’ or mergers of equals’ are also
business combinations as that term is used in this IFRS
contingent
consideration
Usually an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree
as part of the exchange for control of the acquiree if specified
future events occur or conditions are met However contingent
consideration also may give the acquirer the right to the return of
previously transferred consideration if specified conditions are
met
equity interests For the purposes of this IFRS equity interests is used broadly to
mean ownership interests of investorowned entities and owner
member or participant interests of mutual entities
fair value Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (See IFRS 13)
goodwill An asset representing the future economic benefits arising from
other assets acquired in a business combination that are not
individually identified and separately recognised
identifiable An asset is identifiable if it either
(a) is separable ie capable of being separated or divided from
the entity and sold transferred licensed rented or
exchanged either individually or together with a related
contract identifiable asset or liability regardless of
whether the entity intends to do so or
(b) 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
intangible asset An identifiable nonmonetary asset without physical substance
IFRS 3
IFRS Foundation A151mutual entity An entity other than an investorowned entity that provides
dividends lower costs or other economic benefits directly to its
owners members or participants For example a mutual
insurance company a credit union and a cooperative entity are
all mutual entities
noncontrolling
interest
The equity in a subsidiary not attributable directly or indirectly
to a parent
owners For the purposes of this IFRS owners is used broadly to include
holders of equity interests of investorowned entities and
owners or members of or participants in mutual entities
IFRS 3
IFRS FoundationA152Appendix B
Application guidance
This appendix is an integral part of the IFRS
Business combinations of entities under common control
(application of paragraph 2(c))
B1 This IFRS does not apply to a business combination of entities or businesses
under common control A business combination involving entities or businesses
under common control is a business combination in which all of the combining
entities or businesses are ultimately controlled by the same party or parties both
before and after the business combination and that control is not transitory
B2 A group of individuals shall be regarded as controlling an entity when as a
result of contractual arrangements they collectively have the power to govern
its financial and operating policies so as to obtain benefits from its activities
Therefore a business combination is outside the scope of this IFRS when the
same group of individuals has as a result of contractual arrangements ultimate
collective power to govern the financial and operating policies of each of the
combining entities so as to obtain benefits from their activities and that
ultimate collective power is not transitory
B3 An entity may be controlled by an individual or by a group of individuals acting
together under a contractual arrangement and that individual or group of
individuals may not be subject to the financial reporting requirements of IFRSs
Therefore it is not necessary for combining entities to be included as part of the
same consolidated financial statements for a business combination to be
regarded as one involving entities under common control
B4 The extent of noncontrolling interests in each of the combining entities before
and after the business combination is not relevant to determining whether the
combination involves entities under common control Similarly the fact that
one of the combining entities is a subsidiary that has been excluded from the
consolidated financial statements is not relevant to determining whether a
combination involves entities under common control
Identifying a business combination (application of paragraph 3)
B5 This IFRS defines a business combination as a transaction or other event in
which an acquirer obtains control of one or more businesses An acquirer might
obtain control of an acquiree in a variety of ways for example
(a) by transferring cash cash equivalents or other assets (including net
assets that constitute a business)
(b) by incurring liabilities
(c) by issuing equity interests
(d) by providing more than one type of consideration or
(e) without transferring consideration including by contract alone (see
paragraph 43)
IFRS 3
IFRS Foundation A153B6 A business combination may be structured in a variety of ways for legal taxation
or other reasons which include but are not limited to
(a) one or more businesses become subsidiaries of an acquirer or the net
assets of one or more businesses are legally merged into the acquirer
(b) one combining entity transfers its net assets or its owners transfer their
equity interests to another combining entity or its owners
(c) all of the combining entities transfer their net assets or the owners of
those entities transfer their equity interests to a newly formed entity
(sometimes referred to as a rollup or puttogether transaction) or
(d) a group of former owners of one of the combining entities obtains
control of the combined entity
Definition of a business (application of paragraph 3)
B7 A business consists of inputs and processes applied to those inputs that have the
ability to create outputs Although businesses usually have outputs outputs are
not required for an integrated set to qualify as a business The three elements of
a business are defined as follows
(a) Input Any economic resource that creates or has the ability to create
outputs when one or more processes are applied to it Examples include
noncurrent assets (including intangible assets or rights to use
noncurrent assets) intellectual property the ability to obtain access to
necessary materials or rights and employees
(b) Process Any system standard protocol convention or rule that when
applied to an input or inputs creates or has the ability to create outputs
Examples include strategic management processes operational
processes and resource management processes These processes typically
are documented but an organised workforce having the necessary skills
and experience following rules and conventions may provide the
necessary processes that are capable of being applied to inputs to create
outputs (Accounting billing payroll and other administrative systems
typically are not processes used to create outputs)
(c) Output The result of inputs and processes applied to those inputs that
provide or have the ability to provide a return in the form of dividends
lower costs or other economic benefits directly to investors or other
owners members or participants
B8 To be capable of being conducted and managed for the purposes defined an
integrated set of activities and assets requires two essential elements—inputs and
processes applied to those inputs which together are or will be used to create
outputs However a business need not include all of the inputs or processes that
the seller used in operating that business if market participants are capable of
acquiring the business and continuing to produce outputs for example by
integrating the business with their own inputs and processes
B9 The nature of the elements of a business varies by industry and by the structure
of an entity’s operations (activities) including the entity’s stage of development
IFRS 3
IFRS FoundationA154Established businesses often have many different types of inputs processes and
outputs whereas new businesses often have few inputs and processes and
sometimes only a single output (product) Nearly all businesses also have
liabilities but a business need not have liabilities
B10 An integrated set of activities and assets in the development stage might not
have outputs If not the acquirer should consider other factors to determine
whether the set is a business Those factors include but are not limited to
whether the set
(a) has begun planned principal activities
(b) has employees intellectual property and other inputs and processes that
could be applied to those inputs
(c) is pursuing a plan to produce outputs and
(d) will be able to obtain access to customers that will purchase the outputs
Not all of those factors need to be present for a particular integrated set of
activities and assets in the development stage to qualify as a business
B11 Determining whether a particular set of assets and activities is a business should
be based on whether the integrated set is capable of being conducted and
managed as a business by a market participant Thus in evaluating whether a
particular set is a business it is not relevant whether a seller operated the set as
a business or whether the acquirer intends to operate the set as a business
B12 In the absence of evidence to the contrary a particular set of assets and activities
in which goodwill is present shall be presumed to be a business However a
business need not have goodwill
Identifying the acquirer (application of paragraphs 6 and 7)
B13 The guidance in IFRS 10 Consolidated Financial Statements shall be used to identify
the acquirer—the entity that obtains control of the acquiree If a business
combination has occurred but applying the guidance in IFRS 10 does not clearly
indicate which of the combining entities is the acquirer the factors in
paragraphs B14–B18 shall be considered in making that determination
B14 In a business combination effected primarily by transferring cash or other assets
or by incurring liabilities the acquirer is usually the entity that transfers the
cash or other assets or incurs the liabilities
B15 In a business combination effected primarily by exchanging equity interests the
acquirer is usually the entity that issues its equity interests However in some
business combinations commonly called reverse acquisitions’ the issuing
entity is the acquiree Paragraphs B19–B27 provide guidance on accounting for
reverse acquisitions Other pertinent facts and circumstances shall also be
considered in identifying the acquirer in a business combination effected by
exchanging equity interests including
(a) the relative voting rights in the combined entity after the business
combination—The acquirer is usually the combining entity whose owners
as a group retain or receive the largest portion of the voting rights in the
IFRS 3
IFRS Foundation A155combined entity In determining which group of owners retains or
receives the largest portion of the voting rights an entity shall consider
the existence of any unusual or special voting arrangements and options
warrants or convertible securities
(b) the existence of a large minority voting interest in the combined entity if no other
owner or organised group of owners has a significant voting interest—The
acquirer is usually the combining entity whose single owner or
organised group of owners holds the largest minority voting interest in
the combined entity
(c) the composition of the governing body of the combined entity—The acquirer is
usually the combining entity whose owners have the ability to elect or
appoint or to remove a majority of the members of the governing body of
the combined entity
(d) the composition of the senior management of the combined entity—The acquirer is
usually the combining entity whose (former) management dominates
the management of the combined entity
(e) the terms of the exchange of equity interests—The acquirer is usually the
combining entity that pays a premium over the precombination fair
value of the equity interests of the other combining entity or entities
B16 The acquirer is usually the combining entity whose relative size (measured in
for example assets revenues or profit) is significantly greater than that of the
other combining entity or entities
B17 In a business combination involving more than two entities determining the
acquirer shall include a consideration of among other things which of the
combining entities initiated the combination as well as the relative size of the
combining entities
B18 A new entity formed to effect a business combination is not necessarily the
acquirer If a new entity is formed to issue equity interests to effect a business
combination one of the combining entities that existed before the business
combination shall be identified as the acquirer by applying the guidance in
paragraphs B13–B17 In contrast a new entity that transfers cash or other assets
or incurs liabilities as consideration may be the acquirer
Reverse acquisitions
B19 A reverse acquisition occurs when the entity that issues securities (the legal
acquirer) is identified as the acquiree for accounting purposes on the basis of the
guidance in paragraphs B13–B18 The entity whose equity interests are acquired
(the legal acquiree) must be the acquirer for accounting purposes for the
transaction to be considered a reverse acquisition For example reverse
acquisitions sometimes occur when a private operating entity wants to become a
public entity but does not want to register its equity shares To accomplish that
the private entity will arrange for a public entity to acquire its equity interests in
exchange for the equity interests of the public entity In this example the
public entity is the legal acquirer because it issued its equity interests and the
IFRS 3
IFRS FoundationA156private entity is the legal acquiree because its equity interests were acquired
However application of the guidance in paragraphs B13–B18 results in
identifying
(a) the public entity as the acquiree for accounting purposes (the
accounting acquiree) and
(b) the private entity as the acquirer for accounting purposes (the
accounting acquirer)
The accounting acquiree must meet the definition of a business for the
transaction to be accounted for as a reverse acquisition and all of the
recognition and measurement principles in this IFRS including the requirement
to recognise goodwill apply
Measuring the consideration transferred
B20 In a reverse acquisition the accounting acquirer usually issues no consideration
for the acquiree Instead the accounting acquiree usually issues its equity
shares to the owners of the accounting acquirer Accordingly the
acquisitiondate fair value of the consideration transferred by the accounting
acquirer for its interest in the accounting acquiree is based on the number of
equity interests the legal subsidiary would have had to issue to give the owners
of the legal parent the same percentage equity interest in the combined entity
that results from the reverse acquisition The fair value of the number of equity
interests calculated in that way can be used as the fair value of consideration
transferred in exchange for the acquiree
Preparation and presentation of consolidated financial
statements
B21 Consolidated financial statements prepared following a reverse acquisition are
issued under the name of the legal parent (accounting acquiree) but described in
the notes as a continuation of the financial statements of the legal subsidiary
(accounting acquirer) with one adjustment which is to adjust retroactively the
accounting acquirer’s legal capital to reflect the legal capital of the accounting
acquiree That adjustment is required to reflect the capital of the legal parent
(the accounting acquiree) Comparative information presented in those
consolidated financial statements also is retroactively adjusted to reflect the
legal capital of the legal parent (accounting acquiree)
B22 Because the consolidated financial statements represent the continuation of the
financial statements of the legal subsidiary except for its capital structure the
consolidated financial statements reflect
(a) the assets and liabilities of the legal subsidiary (the accounting acquirer)
recognised and measured at their precombination carrying amounts
(b) the assets and liabilities of the legal parent (the accounting acquiree)
recognised and measured in accordance with this IFRS
(c) the retained earnings and other equity balances of the legal subsidiary
(accounting acquirer) before the business combination
IFRS 3
IFRS Foundation A157(d) the amount recognised as issued equity interests in the consolidated
financial statements determined by adding the issued equity interest of
the legal subsidiary (the accounting acquirer) outstanding immediately
before the business combination to the fair value of the legal parent
(accounting acquiree) However the equity structure (ie the number and
type of equity interests issued) reflects the equity structure of the legal
parent (the accounting acquiree) including the equity interests the legal
parent issued to effect the combination Accordingly the equity
structure of the legal subsidiary (the accounting acquirer) is restated
using the exchange ratio established in the acquisition agreement to
reflect the number of shares of the legal parent (the accounting acquiree)
issued in the reverse acquisition
(e) the noncontrolling interest’s proportionate share of the legal
subsidiary’s (accounting acquirer’s) precombination carrying amounts
of retained earnings and other equity interests as discussed in
paragraphs B23 and B24
Noncontrolling interest
B23 In a reverse acquisition some of the owners of the legal acquiree (the accounting
acquirer) might not exchange their equity interests for equity interests of the
legal parent (the accounting acquiree) Those owners are treated as a
noncontrolling interest in the consolidated financial statements after the
reverse acquisition That is because the owners of the legal acquiree that do not
exchange their equity interests for equity interests of the legal acquirer have an
interest in only the results and net assets of the legal acquiree—not in the results
and net assets of the combined entity Conversely even though the legal
acquirer is the acquiree for accounting purposes the owners of the legal
acquirer have an interest in the results and net assets of the combined entity
B24 The assets and liabilities of the legal acquiree are measured and recognised in
the consolidated financial statements at their precombination carrying
amounts (see paragraph B22(a)) Therefore in a reverse acquisition the
noncontrolling interest reflects the noncontrolling shareholders’ proportionate
interest in the precombination carrying amounts of the legal acquiree’s net
assets even if the noncontrolling interests in other acquisitions are measured at
their fair value at the acquisition date
Earnings per share
B25 As noted in paragraph B22(d) the equity structure in the consolidated financial
statements following a reverse acquisition reflects the equity structure of the
legal acquirer (the accounting acquiree) including the equity interests issued by
the legal acquirer to effect the business combination
B26 In calculating the weighted average number of ordinary shares outstanding (the
denominator of the earnings per share calculation) during the period in which
the reverse acquisition occurs
(a) the number of ordinary shares outstanding from the beginning of that
period to the acquisition date shall be computed on the basis of the
weighted average number of ordinary shares of the legal acquiree
IFRS 3
IFRS FoundationA158(accounting acquirer) outstanding during the period multiplied by the
exchange ratio established in the merger agreement and
(b) the number of ordinary shares outstanding from the acquisition date to
the end of that period shall be the actual number of ordinary shares of
the legal acquirer (the accounting acquiree) outstanding during that
period
B27 The basic earnings per share for each comparative period before the acquisition
date presented in the consolidated financial statements following a reverse
acquisition shall be calculated by dividing
(a) the profit or loss of the legal acquiree attributable to ordinary
shareholders in each of those periods by
(b) the legal acquiree’s historical weighted average number of ordinary
shares outstanding multiplied by the exchange ratio established in the
acquisition agreement
Recognising particular assets acquired and liabilities assumed
(application of paragraphs 10–13)
B28–
B30
[Deleted]
Intangible assets
B31 The acquirer shall recognise separately from goodwill the identifiable
intangible assets acquired in a business combination An intangible asset is
identifiable if it meets either the separability criterion or the contractuallegal
criterion
B32 An intangible asset that meets the contractuallegal criterion is identifiable even
if the asset is not transferable or separable from the acquiree or from other
rights and obligations For example
(a) [deleted]
(b) an acquiree owns and operates a nuclear power plant The licence to
operate that power plant is an intangible asset that meets the
contractuallegal criterion for recognition separately from goodwill even
if the acquirer cannot sell or transfer it separately from the acquired
power plant An acquirer may recognise the fair value of the operating
licence and the fair value of the power plant as a single asset for financial
reporting purposes if the useful lives of those assets are similar
(c) an acquiree owns a technology patent It has licensed that patent to
others for their exclusive use outside the domestic market receiving a
specified percentage of future foreign revenue in exchange Both the
technology patent and the related licence agreement meet the
contractuallegal criterion for recognition separately from goodwill even
if selling or exchanging the patent and the related licence agreement
separately from one another would not be practical
B33 The separability criterion means that an acquired intangible asset is capable of
being separated or divided from the acquiree and sold transferred licensed
IFRS 3
IFRS Foundation A159rented or exchanged either individually or together with a related contract
identifiable asset or liability An intangible asset that the acquirer would be able
to sell license or otherwise exchange for something else of value meets the
separability criterion even if the acquirer does not intend to sell license or
otherwise exchange it An acquired intangible asset meets the separability
criterion if there is evidence of exchange transactions for that type of asset or an
asset of a similar type even if those transactions are infrequent and regardless of
whether the acquirer is involved in them For example customer and subscriber
lists are frequently licensed and thus meet the separability criterion Even if an
acquiree believes its customer lists have characteristics different from other
customer lists the fact that customer lists are frequently licensed generally
means that the acquired customer list meets the separability criterion
However a customer list acquired in a business combination would not meet
the separability criterion if the terms of confidentiality or other agreements
prohibit an entity from selling leasing or otherwise exchanging information
about its customers
B34 An intangible asset that is not individually separable from the acquiree or
combined entity meets the separability criterion if it is separable in combination
with a related contract identifiable asset or liability For example
(a) market participants exchange deposit liabilities and related depositor
relationship intangible assets in observable exchange transactions
Therefore the acquirer should recognise the depositor relationship
intangible asset separately from goodwill
(b) an acquiree owns a registered trademark and documented but
unpatented technical expertise used to manufacture the trademarked
product To transfer ownership of a trademark the owner is also
required to transfer everything else necessary for the new owner to
produce a product or service indistinguishable from that produced by
the former owner Because the unpatented technical expertise must be
separated from the acquiree or combined entity and sold if the related
trademark is sold it meets the separability criterion
Reacquired rights
B35 As part of a business combination an acquirer may reacquire a right that it had
previously granted to the acquiree to use one or more of the acquirer’s
recognised or unrecognised assets Examples of such rights include a right to
use the acquirer’s trade name under a franchise agreement or a right to use the
acquirer’s technology under a technology licensing agreement A reacquired
right is an identifiable intangible asset that the acquirer recognises separately
from goodwill Paragraph 29 provides guidance on measuring a reacquired
right and paragraph 55 provides guidance on the subsequent accounting for a
reacquired right
B36 If the terms of the contract giving rise to a reacquired right are favourable or
unfavourable relative to the terms of current market transactions for the same
or similar items the acquirer shall recognise a settlement gain or loss
Paragraph B52 provides guidance for measuring that settlement gain or loss
IFRS 3
IFRS FoundationA160Assembled workforce and other items that are not identifiable
B37 The acquirer subsumes into goodwill the value of an acquired intangible asset
that is not identifiable as of the acquisition date For example an acquirer may
attribute value to the existence of an assembled workforce which is an existing
collection of employees that permits the acquirer to continue to operate an
acquired business from the acquisition date An assembled workforce does not
represent the intellectual capital of the skilled workforce—the (often specialised)
knowledge and experience that employees of an acquiree bring to their jobs
Because the assembled workforce is not an identifiable asset to be recognised
separately from goodwill any value attributed to it is subsumed into goodwill
B38 The acquirer also subsumes into goodwill any value attributed to items that do
not qualify as assets at the acquisition date For example the acquirer might
attribute value to potential contracts the acquiree is negotiating with
prospective new customers at the acquisition date Because those potential
contracts are not themselves assets at the acquisition date the acquirer does not
recognise them separately from goodwill The acquirer should not subsequently
reclassify the value of those contracts from goodwill for events that occur after
the acquisition date However the acquirer should assess the facts and
circumstances surrounding events occurring shortly after the acquisition to
determine whether a separately recognisable intangible asset existed at the
acquisition date
B39 After initial recognition an acquirer accounts for intangible assets acquired in a
business combination in accordance with the provisions of IAS 38 Intangible
Assets However as described in paragraph 3 of IAS 38 the accounting for some
acquired intangible assets after initial recognition is prescribed by other IFRSs
B40 The identifiability criteria determine whether an intangible asset is recognised
separately from goodwill However the criteria neither provide guidance for
measuring the fair value of an intangible asset nor restrict the assumptions used
in measuring the fair value of an intangible asset For example the acquirer
would take into account the assumptions that market participants would use
when pricing the intangible asset such as expectations of future contract
renewals in measuring fair value It is not necessary for the renewals
themselves to meet the identifiability criteria (However see paragraph 29
which establishes an exception to the fair value measurement principle for
reacquired rights recognised in a business combination) Paragraphs 36 and 37
of IAS 38 provide guidance for determining whether intangible assets should be
combined into a single unit of account with other intangible or tangible assets
Measuring the fair value of particular identifiable assets and a
noncontrolling interest in an acquiree (application of
paragraphs 18 and 19)
Assets with uncertain cash flows (valuation allowances)
B41 The acquirer shall not recognise a separate valuation allowance as of the
acquisition date for assets acquired in a business combination that are measured
at their acquisitiondate fair values because the effects of uncertainty about
future cash flows are included in the fair value measure For example because
IFRS 3
IFRS Foundation A161this IFRS requires the acquirer to measure acquired receivables including loans
at their acquisitiondate fair values in accounting for a business combination
the acquirer does not recognise a separate valuation allowance for the
contractual cash flows that are deemed to be uncollectible at that date or a loss
allowance for expected credit losses
Assets subject to operating leases in which the acquiree
is the lessor
B42 In measuring the acquisitiondate fair value of an asset such as a building or a
patent that is subject to an operating lease in which the acquiree is the lessor
the acquirer shall take into account the terms of the lease The acquirer does not
recognise a separate asset or liability if the terms of an operating lease are either
favourable or unfavourable when compared with market terms
Assets that the acquirer intends not to use or to use in a
way that is different from the way other market
participants would use them
B43 To protect its competitive position or for other reasons the acquirer may intend
not to use an acquired nonfinancial asset actively or it may not intend to use
the asset according to its highest and best use For example that might be the
case for an acquired research and development intangible asset that the acquirer
plans to use defensively by preventing others from using it Nevertheless the
acquirer shall measure the fair value of the nonfinancial asset assuming its
highest and best use by market participants in accordance with the appropriate
valuation premise both initially and when measuring fair value less costs of
disposal for subsequent impairment testing
Noncontrolling interest in an acquiree
B44 This IFRS allows the acquirer to measure a noncontrolling interest in the
acquiree at its fair value at the acquisition date Sometimes an acquirer will be
able to measure the acquisitiondate fair value of a noncontrolling interest on
the basis of a quoted price in an active market for the equity shares (ie those not
held by the acquirer) In other situations however a quoted price in an active
market for the equity shares will not be available In those situations the
acquirer would measure the fair value of the noncontrolling interest using
other valuation techniques
B45 The fair values of the acquirer’s interest in the acquiree and the noncontrolling
interest on a pershare basis might differ The main difference is likely to be the
inclusion of a control premium in the pershare fair value of the acquirer’s
interest in the acquiree or conversely the inclusion of a discount for lack of
control (also referred to as a noncontrolling interest discount) in the pershare
fair value of the noncontrolling interest if market participants would take into
account such a premium or discount when pricing the noncontrolling interest
IFRS 3
IFRS FoundationA162Measuring goodwill or a gain from a bargain purchase
Measuring the acquisitiondate fair value of the
acquirer’s interest in the acquiree using valuation
techniques (application of paragraph 33)
B46 In a business combination achieved without the transfer of consideration the
acquirer must substitute the acquisitiondate fair value of its interest in the
acquiree for the acquisitiondate fair value of the consideration transferred to
measure goodwill or a gain on a bargain purchase (see paragraphs 32–34)
Special considerations in applying the acquisition
method to combinations of mutual entities (application
of paragraph 33)
B47 When two mutual entities combine the fair value of the equity or member
interests in the acquiree (or the fair value of the acquiree) may be more reliably
measurable than the fair value of the member interests transferred by the
acquirer In that situation paragraph 33 requires the acquirer to determine the
amount of goodwill by using the acquisitiondate fair value of the acquiree’s
equity interests instead of the acquisitiondate fair value of the acquirer’s equity
interests transferred as consideration In addition the acquirer in a
combination of mutual entities shall recognise the acquiree’s net assets as a
direct addition to capital or equity in its statement of financial position not as
an addition to retained earnings which is consistent with the way in which
other types of entities apply the acquisition method
B48 Although they are similar in many ways to other businesses mutual entities
have distinct characteristics that arise primarily because their members are both
customers and owners Members of mutual entities generally expect to receive
benefits for their membership often in the form of reduced fees charged for
goods and services or patronage dividends The portion of patronage dividends
allocated to each member is often based on the amount of business the member
did with the mutual entity during the year
B49 A fair value measurement of a mutual entity should include the assumptions
that market participants would make about future member benefits as well as
any other relevant assumptions market participants would make about the
mutual entity For example a present value technique may be used to measure
the fair value of a mutual entity The cash flows used as inputs to the model
should be based on the expected cash flows of the mutual entity which are
likely to reflect reductions for member benefits such as reduced fees charged for
goods and services
Determining what is part of the business combination
transaction (application of paragraphs 51 and 52)
B50 The acquirer should consider the following factors which are neither mutually
exclusive nor individually conclusive to determine whether a transaction is part
of the exchange for the acquiree or whether the transaction is separate from the
business combination
IFRS 3
IFRS Foundation A163(a) the reasons for the transaction—Understanding the reasons why the
parties to the combination (the acquirer and the acquiree and their
owners directors and managers—and their agents) entered into a
particular transaction or arrangement may provide insight into whether
it is part of the consideration transferred and the assets acquired or
liabilities assumed For example if a transaction is arranged primarily
for the benefit of the acquirer or the combined entity rather than
primarily for the benefit of the acquiree or its former owners before the
combination that portion of the transaction price paid (and any related
assets or liabilities) is less likely to be part of the exchange for the
acquiree Accordingly the acquirer would account for that portion
separately from the business combination
(b) who initiated the transaction—Understanding who initiated the
transaction may also provide insight into whether it is part of the
exchange for the acquiree For example a transaction or other event
that is initiated by the acquirer may be entered into for the purpose of
providing future economic benefits to the acquirer or combined entity
with little or no benefit received by the acquiree or its former owners
before the combination On the other hand a transaction or
arrangement initiated by the acquiree or its former owners is less likely
to be for the benefit of the acquirer or the combined entity and more
likely to be part of the business combination transaction
(c) the timing of the transaction—The timing of the transaction may also
provide insight into whether it is part of the exchange for the acquiree
For example a transaction between the acquirer and the acquiree that
takes place during the negotiations of the terms of a business
combination may have been entered into in contemplation of the
business combination to provide future economic benefits to the
acquirer or the combined entity If so the acquiree or its former owners
before the business combination are likely to receive little or no benefit
from the transaction except for benefits they receive as part of the
combined entity
Effective settlement of a preexisting relationship
between the acquirer and acquiree in a business
combination (application of paragraph 52(a))
B51 The acquirer and acquiree may have a relationship that existed before they
contemplated the business combination referred to here as a preexisting
relationship’ A preexisting relationship between the acquirer and acquiree
may be contractual (for example vendor and customer or licensor and licensee)
or noncontractual (for example plaintiff and defendant)
B52 If the business combination in effect settles a preexisting relationship the
acquirer recognises a gain or loss measured as follows
(a) for a preexisting noncontractual relationship (such as a lawsuit) fair
value
(b) for a preexisting contractual relationship the lesser of (i) and (ii)
IFRS 3
IFRS FoundationA164(i) the amount by which the contract is favourable or unfavourable
from the perspective of the acquirer when compared with terms
for current market transactions for the same or similar items
(An unfavourable contract is a contract that is unfavourable in
terms of current market terms It is not necessarily an onerous
contract in which the unavoidable costs of meeting the
obligations under the contract exceed the economic benefits
expected to be received under it)
(ii) the amount of any stated settlement provisions in the contract
available to the counterparty to whom the contract is
unfavourable
If (ii) is less than (i) the difference is included as part of the business
combination accounting
The amount of gain or loss recognised may depend in part on whether the
acquirer had previously recognised a related asset or liability and the reported
gain or loss therefore may differ from the amount calculated by applying the
above requirements
B53 A preexisting relationship may be a contract that the acquirer recognises as a
reacquired right If the contract includes terms that are favourable or
unfavourable when compared with pricing for current market transactions for
the same or similar items the acquirer recognises separately from the business
combination a gain or loss for the effective settlement of the contract measured
in accordance with paragraph B52
Arrangements for contingent payments to employees or
selling shareholders (application of paragraph 52(b))
B54 Whether arrangements for contingent payments to employees or selling
shareholders are contingent consideration in the business combination or are
separate transactions depends on the nature of the arrangements
Understanding the reasons why the acquisition agreement includes a provision
for contingent payments who initiated the arrangement and when the parties
entered into the arrangement may be helpful in assessing the nature of the
arrangement
B55 If it is not clear whether an arrangement for payments to employees or selling
shareholders is part of the exchange for the acquiree or is a transaction separate
from the business combination the acquirer should consider the following
indicators
(a) Continuing employment—The terms of continuing employment by the
selling shareholders who become key employees may be an indicator of
the substance of a contingent consideration arrangement The relevant
terms of continuing employment may be included in an employment
agreement acquisition agreement or some other document A
contingent consideration arrangement in which the payments are
automatically forfeited if employment terminates is remuneration for
postcombination services Arrangements in which the contingent
IFRS 3
IFRS Foundation A165payments are not affected by employment termination may indicate that
the contingent payments are additional consideration rather than
remuneration
(b) Duration of continuing employment—If the period of required employment
coincides with or is longer than the contingent payment period that fact
may indicate that the contingent payments are in substance
remuneration
(c) Level of remuneration—Situations in which employee remuneration other
than the contingent payments is at a reasonable level in comparison
with that of other key employees in the combined entity may indicate
that the contingent payments are additional consideration rather than
remuneration
(d) Incremental payments to employees—If selling shareholders who do not
become employees receive lower contingent payments on a pershare
basis than the selling shareholders who become employees of the
combined entity that fact may indicate that the incremental amount of
contingent payments to the selling shareholders who become employees
is remuneration
(e) Number of shares owned—The relative number of shares owned by the
selling shareholders who remain as key employees may be an indicator
of the substance of the contingent consideration arrangement For
example if the selling shareholders who owned substantially all of the
shares in the acquiree continue as key employees that fact may indicate
that the arrangement is in substance a profitsharing arrangement
intended to provide remuneration for postcombination services
Alternatively if selling shareholders who continue as key employees
owned only a small number of shares of the acquiree and all selling
shareholders receive the same amount of contingent consideration on a
pershare basis that fact may indicate that the contingent payments are
additional consideration The preacquisition ownership interests held
by parties related to selling shareholders who continue as key employees
such as family members should also be considered
(f) Linkage to the valuation—If the initial consideration transferred at the
acquisition date is based on the low end of a range established in the
valuation of the acquiree and the contingent formula relates to that
valuation approach that fact may suggest that the contingent payments
are additional consideration Alternatively if the contingent payment
formula is consistent with prior profitsharing arrangements that fact
may suggest that the substance of the arrangement is to provide
remuneration
(g) Formula for determining consideration—The formula used to determine the
contingent payment may be helpful in assessing the substance of the
arrangement For example if a contingent payment is determined on
the basis of a multiple of earnings that might suggest that the obligation
is contingent consideration in the business combination and that the
formula is intended to establish or verify the fair value of the acquiree
In contrast a contingent payment that is a specified percentage of
IFRS 3
IFRS FoundationA166earnings might suggest that the obligation to employees is a
profitsharing arrangement to remunerate employees for services
rendered
(h) Other agreements and issues—The terms of other arrangements with selling
shareholders (such as agreements not to compete executory contracts
consulting contracts and property lease agreements) and the income tax
treatment of contingent payments may indicate that contingent
payments are attributable to something other than consideration for the
acquiree For example in connection with the acquisition the acquirer
might enter into a property lease arrangement with a significant selling
shareholder If the lease payments specified in the lease contract are
significantly below market some or all of the contingent payments to
the lessor (the selling shareholder) required by a separate arrangement
for contingent payments might be in substance payments for the use of
the leased property that the acquirer should recognise separately in its
postcombination financial statements In contrast if the lease contract
specifies lease payments that are consistent with market terms for the
leased property the arrangement for contingent payments to the selling
shareholder may be contingent consideration in the business
combination
Acquirer sharebased payment awards exchanged for
awards held by the acquiree’s employees (application of
paragraph 52(b))
B56 An acquirer may exchange its sharebased payment awards3 (replacement
awards) for awards held by employees of the acquiree Exchanges of share
options or other sharebased payment awards in conjunction with a business
combination are accounted for as modifications of sharebased payment awards
in accordance with IFRS 2 Sharebased Payment If the acquirer replaces the
acquiree awards either all or a portion of the marketbased measure of the
acquirer’s replacement awards shall be included in measuring the consideration
transferred in the business combination Paragraphs B57–B62 provide guidance
on how to allocate the marketbased measure However in situations in which
acquiree awards would expire as a consequence of a business combination and if
the acquirer replaces those awards when it is not obliged to do so all of the
marketbased measure of the replacement awards shall be recognised as
remuneration cost in the postcombination financial statements in accordance
with IFRS 2 That is to say none of the marketbased measure of those awards
shall be included in measuring the consideration transferred in the business
combination The acquirer is obliged to replace the acquiree awards if the
acquiree or its employees have the ability to enforce replacement For example
for the purposes of applying this guidance the acquirer is obliged to replace the
acquiree’s awards if replacement is required by
(a) the terms of the acquisition agreement
(b) the terms of the acquiree’s awards or
3 In paragraphs B56–B62 the term sharebased payment awards’ refers to vested or unvested
sharebased payment transactions
IFRS 3
IFRS Foundation A167(c) applicable laws or regulations
B57 To determine the portion of a replacement award that is part of the
consideration transferred for the acquiree and the portion that is remuneration
for postcombination service the acquirer shall measure both the replacement
awards granted by the acquirer and the acquiree awards as of the acquisition
date in accordance with IFRS 2 The portion of the marketbased measure of the
replacement award that is part of the consideration transferred in exchange for
the acquiree equals the portion of the acquiree award that is attributable to
precombination service
B58 The portion of the replacement award attributable to precombination service is
the marketbased measure of the acquiree award multiplied by the ratio of the
portion of the vesting period completed to the greater of the total vesting period
or the original vesting period of the acquiree award The vesting period is the
period during which all the specified vesting conditions are to be satisfied
Vesting conditions are defined in IFRS 2
B59 The portion of a nonvested replacement award attributable to postcombination
service and therefore recognised as remuneration cost in the postcombination
financial statements equals the total marketbased measure of the replacement
award less the amount attributed to precombination service Therefore the
acquirer attributes any excess of the marketbased measure of the replacement
award over the marketbased measure of the acquiree award to postcombination
service and recognises that excess as remuneration cost in the postcombination
financial statements The acquirer shall attribute a portion of a replacement
award to postcombination service if it requires postcombination service
regardless of whether employees had rendered all of the service required for
their acquiree awards to vest before the acquisition date
B60 The portion of a nonvested replacement award attributable to precombination
service as well as the portion attributable to postcombination service shall
reflect the best available estimate of the number of replacement awards
expected to vest For example if the marketbased measure of the portion of a
replacement award attributed to precombination service is CU100 and the
acquirer expects that only 95 per cent of the award will vest the amount
included in consideration transferred in the business combination is CU95
Changes in the estimated number of replacement awards expected to vest are
reflected in remuneration cost for the periods in which the changes or
forfeitures occur not as adjustments to the consideration transferred in the
business combination Similarly the effects of other events such as
modifications or the ultimate outcome of awards with performance conditions
that occur after the acquisition date are accounted for in accordance with IFRS 2
in determining remuneration cost for the period in which an event occurs
B61 The same requirements for determining the portions of a replacement award
attributable to precombination and postcombination service apply regardless
of whether a replacement award is classified as a liability or as an equity
instrument in accordance with the provisions of IFRS 2 All changes in the
marketbased measure of awards classified as liabilities after the acquisition date
IFRS 3
IFRS FoundationA168and the related income tax effects are recognised in the acquirer’s
postcombination financial statements in the period(s) in which the changes
occur
B62 The income tax effects of replacement awards of sharebased payments shall be
recognised in accordance with the provisions of IAS 12 Income Taxes
Equitysettled sharebased payment transactions of the
acquiree
B62A The acquiree may have outstanding sharebased payment transactions that the
acquirer does not exchange for its sharebased payment transactions If vested
those acquiree sharebased payment transactions are part of the noncontrolling
interest in the acquiree and are measured at their marketbased measure If
unvested they are measured at their marketbased measure as if the acquisition
date were the grant date in accordance with paragraphs 19 and 30
B62B The marketbased measure of unvested sharebased payment transactions is
allocated to the noncontrolling interest on the basis of the ratio of the portion
of the vesting period completed to the greater of the total vesting period and the
original vesting period of the sharebased payment transaction The balance is
allocated to postcombination service
Other IFRSs that provide guidance on subsequent measurement
and accounting (application of paragraph 54)
B63 Examples of other IFRSs that provide guidance on subsequently measuring and
accounting for assets acquired and liabilities assumed or incurred in a business
combination include
(a) IAS 38 prescribes the accounting for identifiable intangible assets
acquired in a business combination The acquirer measures goodwill at
the amount recognised at the acquisition date less any accumulated
impairment losses IAS 36 Impairment of Assets prescribes the accounting
for impairment losses
(b) IFRS 4 Insurance Contracts provides guidance on the subsequent
accounting for an insurance contract acquired in a business
combination
(c) IAS 12 prescribes the subsequent accounting for deferred tax assets
(including unrecognised deferred tax assets) and liabilities acquired in a
business combination
(d) IFRS 2 provides guidance on subsequent measurement and accounting
for the portion of replacement sharebased payment awards issued by an
acquirer that is attributable to employees’ future services
(e) IFRS 10 provides guidance on accounting for changes in a parent’s
ownership interest in a subsidiary after control is obtained
IFRS 3
IFRS Foundation A169Disclosures (application of paragraphs 59 and 61)
B64 To meet the objective in paragraph 59 the acquirer shall disclose the following
information for each business combination that occurs during the reporting
period
(a) the name and a description of the acquiree
(b) the acquisition date
(c) the percentage of voting equity interests acquired
(d) the primary reasons for the business combination and a description of
how the acquirer obtained control of the acquiree
(e) a qualitative description of the factors that make up the goodwill
recognised such as expected synergies from combining operations of the
acquiree and the acquirer intangible assets that do not qualify for
separate recognition or other factors
(f) the acquisitiondate fair value of the total consideration transferred and
the acquisitiondate fair value of each major class of consideration such
as
(i) cash
(ii) other tangible or intangible assets including a business or
subsidiary of the acquirer
(iii) liabilities incurred for example a liability for contingent
consideration and
(iv) equity interests of the acquirer including the number of
instruments or interests issued or issuable and the method of
measuring the fair value of those instruments or interests
(g) for contingent consideration arrangements and indemnification assets
(i) the amount recognised as of the acquisition date
(ii) a description of the arrangement and the basis for determining
the amount of the payment and
(iii) an estimate of the range of outcomes (undiscounted) or if a
range cannot be estimated that fact and the reasons why a range
cannot be estimated If the maximum amount of the payment is
unlimited the acquirer shall disclose that fact
(h) for acquired receivables
(i) the fair value of the receivables
(ii) the gross contractual amounts receivable and
(iii) the best estimate at the acquisition date of the contractual cash
flows not expected to be collected
The disclosures shall be provided by major class of receivable such as
loans direct finance leases and any other class of receivables
IFRS 3
IFRS FoundationA170(i) the amounts recognised as of the acquisition date for each major class of
assets acquired and liabilities assumed
(j) for each contingent liability recognised in accordance with
paragraph 23 the information required in paragraph 85 of IAS 37
Provisions Contingent Liabilities and Contingent Assets If a contingent liability
is not recognised because its fair value cannot be measured reliably the
acquirer shall disclose
(i) the information required by paragraph 86 of IAS 37 and
(ii) the reasons why the liability cannot be measured reliably
(k) the total amount of goodwill that is expected to be deductible for tax
purposes
(l) for transactions that are recognised separately from the acquisition of
assets and assumption of liabilities in the business combination in
accordance with paragraph 51
(i) a description of each transaction
(ii) how the acquirer accounted for each transaction
(iii) the amounts recognised for each transaction and the line item in
the financial statements in which each amount is recognised
and
(iv) if the transaction is the effective settlement of a preexisting
relationship the method used to determine the settlement
amount
(m) the disclosure of separately recognised transactions required by (l) shall
include the amount of acquisitionrelated costs and separately the
amount of those costs recognised as an expense and the line item or
items in the statement of comprehensive income in which those
expenses are recognised The amount of any issue costs not recognised as
an expense and how they were recognised shall also be disclosed
(n) in a bargain purchase (see paragraphs 34–36)
(i) the amount of any gain recognised in accordance with
paragraph 34 and the line item in the statement of
comprehensive income in which the gain is recognised and
(ii) a description of the reasons why the transaction resulted in a
gain
(o) for each business combination in which the acquirer holds less than
100 per cent of the equity interests in the acquiree at the acquisition
date
(i) the amount of the noncontrolling interest in the acquiree
recognised at the acquisition date and the measurement basis for
that amount and
(ii) for each noncontrolling interest in an acquiree measured at fair
value the valuation technique(s) and significant inputs used to
measure that value
IFRS 3
IFRS Foundation A171(p) in a business combination achieved in stages
(i) the acquisitiondate fair value of the equity interest in the
acquiree held by the acquirer immediately before the acquisition
date and
(ii) the amount of any gain or loss recognised as a result of
remeasuring to fair value the equity interest in the acquiree held
by the acquirer before the business combination (see
paragraph 42) and the line item in the statement of
comprehensive income in which that gain or loss is recognised
(q) the following information
(i) the amounts of revenue and profit or loss of the acquiree since
the acquisition date included in the consolidated statement of
comprehensive income for the reporting period and
(ii) the revenue and profit or loss of the combined entity for the
current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as
of the beginning of the annual reporting period
If disclosure of any of the information required by this subparagraph is
impracticable the acquirer shall disclose that fact and explain why the
disclosure is impracticable This IFRS uses the term impracticable’ with
the same meaning as in IAS 8 Accounting Policies Changes in Accounting
Estimates and Errors
B65 For individually immaterial business combinations occurring during the
reporting period that are material collectively the acquirer shall disclose in
aggregate the information required by paragraph B64(e)–(q)
B66 If the acquisition date of a business combination is after the end of the reporting
period but before the financial statements are authorised for issue the acquirer
shall disclose the information required by paragraph B64 unless the initial
accounting for the business combination is incomplete at the time the financial
statements are authorised for issue In that situation the acquirer shall describe
which disclosures could not be made and the reasons why they cannot be made
B67 To meet the objective in paragraph 61 the acquirer shall disclose the following
information for each material business combination or in the aggregate for
individually immaterial business combinations that are material collectively
(a) if the initial accounting for a business combination is incomplete (see
paragraph 45) for particular assets liabilities noncontrolling interests
or items of consideration and the amounts recognised in the financial
statements for the business combination thus have been determined
only provisionally
(i) the reasons why the initial accounting for the business
combination is incomplete
(ii) the assets liabilities equity interests or items of consideration
for which the initial accounting is incomplete and
IFRS 3
IFRS FoundationA172(iii) the nature and amount of any measurement period adjustments
recognised during the reporting period in accordance with
paragraph 49
(b) for each reporting period after the acquisition date until the entity
collects sells or otherwise loses the right to a contingent consideration
asset or until the entity settles a contingent consideration liability or the
liability is cancelled or expires
(i) any changes in the recognised amounts including any
differences arising upon settlement
(ii) any changes in the range of outcomes (undiscounted) and the
reasons for those changes and
(iii) the valuation techniques and key model inputs used to measure
contingent consideration
(c) for contingent liabilities recognised in a business combination the
acquirer shall disclose the information required by paragraphs 84 and 85
of IAS 37 for each class of provision
(d) a reconciliation of the carrying amount of goodwill at the beginning and
end of the reporting period showing separately
(i) the gross amount and accumulated impairment losses at the
beginning of the reporting period
(ii) additional goodwill recognised during the reporting period
except goodwill included in a disposal group that on acquisition
meets the criteria to be classified as held for sale in accordance
with IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations
(iii) adjustments resulting from the subsequent recognition of
deferred tax assets during the reporting period in accordance
with paragraph 67
(iv) goodwill included in a disposal group classified as held for sale in
accordance with IFRS 5 and goodwill derecognised during the
reporting period without having previously been included in a
disposal group classified as held for sale
(v) impairment losses recognised during the reporting period in
accordance with IAS 36 (IAS 36 requires disclosure of
information about the recoverable amount and impairment of
goodwill in addition to this requirement)
(vi) net exchange rate differences arising during the reporting period
in accordance with IAS 21 The Effects of Changes in Foreign Exchange
Rates
(vii) any other changes in the carrying amount during the reporting
period
(viii) the gross amount and accumulated impairment losses at the end
of the reporting period
IFRS 3
IFRS Foundation A173(e) the amount and an explanation of any gain or loss recognised in the
current reporting period that both
(i) relates to the identifiable assets acquired or liabilities assumed in
a business combination that was effected in the current or
previous reporting period and
(ii) is of such a size nature or incidence that disclosure is relevant to
understanding the combined entity’s financial statements
Transitional provisions for business combinations involving only
mutual entities or by contract alone (application of paragraph 66)
B68 Paragraph 64 provides that this IFRS applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009 Earlier
application is permitted However an entity shall apply this IFRS only at the
beginning of an annual reporting period that begins on or after 30 June 2007 If
an entity applies this IFRS before its effective date the entity shall disclose that
fact and shall apply IAS 27 (as amended in 2008) at the same time
B69 The requirement to apply this IFRS prospectively has the following effect for a
business combination involving only mutual entities or by contract alone if the
acquisition date for that business combination is before the application of this
IFRS
(a) Classification—An entity shall continue to classify the prior business
combination in accordance with the entity’s previous accounting
policies for such combinations
(b) Previously recognised goodwill—At the beginning of the first annual period
in which this IFRS is applied the carrying amount of goodwill arising
from the prior business combination shall be its carrying amount at that
date in accordance with the entity’s previous accounting policies In
determining that amount the entity shall eliminate the carrying
amount of any accumulated amortisation of that goodwill and the
corresponding decrease in goodwill No other adjustments shall be made
to the carrying amount of goodwill
(c) Goodwill previously recognised as a deduction from equity—The entity’s previous
accounting policies may have resulted in goodwill arising from the prior
business combination being recognised as a deduction from equity In
that situation the entity shall not recognise that goodwill as an asset at
the beginning of the first annual period in which this IFRS is applied
Furthermore the entity shall not recognise in profit or loss any part of
that goodwill when it disposes of all or part of the business to which that
goodwill relates or when a cashgenerating unit to which the goodwill
relates becomes impaired
(d) Subsequent accounting for goodwill—From the beginning of the first annual
period in which this IFRS is applied an entity shall discontinue
amortising goodwill arising from the prior business combination and
shall test goodwill for impairment in accordance with IAS 36
IFRS 3
IFRS FoundationA174(e) Previously recognised negative goodwill—An entity that accounted for the
prior business combination by applying the purchase method may have
recognised a deferred credit for an excess of its interest in the net fair
value of the acquiree’s identifiable assets and liabilities over the cost of
that interest (sometimes called negative goodwill) If so the entity shall
derecognise the carrying amount of that deferred credit at the beginning
of the first annual period in which this IFRS is applied with a
corresponding adjustment to the opening balance of retained earnings
at that date
IFRS 3
IFRS Foundation A175Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual reporting periods beginning on or
after 1 July 2009 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period Amended paragraphs are shown with new text underlined and
deleted text struck through
*****
The amendments contained in this appendix when this revised IFRS was issued in 2008 have been
incorporated into the relevant IFRSs published in this volume
IFRS 3
IFRS FoundationA176IFRS Standard 4
Insurance Contracts
In March 2004 the International Accounting Standards Board (the Board) issued IFRS 4
Insurance Contracts In August 2005 the Board amended the scope of IFRS 4 to clarify that
most financial guarantee contracts would apply the financial instruments requirements In
December 2005 the Board issued revised guidance on implementing IFRS 4
Other Standards have made minor consequential amendments to IFRS 4 They include
IFRS 13 Fair Value Measurement (issued May 2011) IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued November 2013) IFRS 15
Revenue from Contracts with Customers (issued May 2014) IFRS 9 Financial Instruments (issued July
2014) and IFRS 16 Leases (issued January 2016)
IFRS 4
IFRS Foundation A177CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 4
INSURANCE CONTRACTS
OBJECTIVE 1
SCOPE 2
Embedded derivatives 7
Unbundling of deposit components 10
RECOGNITION AND MEASUREMENT 13
Temporary exemption from some other IFRSs 13
Changes in accounting policies 21
Insurance contracts acquired in a business combination or portfolio transfer 31
Discretionary participation features 34
DISCLOSURE 36
Explanation of recognised amounts 36
Nature and extent of risks arising from insurance contracts 38
EFFECTIVE DATE AND TRANSITION 40
Disclosure 42
Redesignation of financial assets 45
APPENDICES
A Defined terms
B Definition of an insurance contract
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 4 ISSUED IN MARCH 2004
APPROVAL BY THE BOARD OF FINANCIAL GUARANTEE CONTRACTS
(AMENDMENTS TO IAS 39 AND IFRS 4) ISSUED IN AUGUST 2005
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
IFRS 4
IFRS FoundationA178International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) is set out in
paragraphs 1–45 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 4 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 4
IFRS Foundation A179Introduction
Reasons for issuing the IFRS
IN1 This is the first IFRS to deal with insurance contracts Accounting practices for
insurance contracts have been diverse and have often differed from practices in
other sectors Because many entities will adopt IFRSs in 2005 the International
Accounting Standards Board has issued this IFRS
(a) to make limited improvements to accounting for insurance contracts
until the Board completes the second phase of its project on insurance
contracts
(b) to require any entity issuing insurance contracts (an insurer) to disclose
information about those contracts
IN2 This IFRS is a stepping stone to phase II of this project The Board is committed
to completing phase II without delay once it has investigated all relevant
conceptual and practical questions and completed its full due process
Main features of the IFRS
IN3 The IFRS applies to all insurance contracts (including reinsurance contracts) that
an entity issues and to reinsurance contracts that it holds except for specified
contracts covered by other IFRSs It does not apply to other assets and liabilities
of an insurer such as financial assets and financial liabilities within the scope of
IFRS 9 Financial Instruments Furthermore it does not address accounting by
policyholders
IN4 The IFRS exempts an insurer temporarily (ie during phase I of this project) from
some requirements of other IFRSs including the requirement to consider the
Framework1 in selecting accounting policies for insurance contracts However
the IFRS
(a) prohibits provisions for possible claims under contracts that are not in
existence at the end of the reporting period (such as catastrophe and
equalisation provisions)
(b) requires a test for the adequacy of recognised insurance liabilities and an
impairment test for reinsurance assets
(c) requires an insurer to keep insurance liabilities in its statement of
financial position until they are discharged or cancelled or expire and
to present insurance liabilities without offsetting them against related
reinsurance assets
IN5 The IFRS permits an insurer to change its accounting policies for insurance
contracts only if as a result its financial statements present information that is
more relevant and no less reliable or more reliable and no less relevant
1 The reference to the Framework is to IASC’s Framework for the Preparation and Presentation of Financial
Statements adopted by the IASB in 2001 In September 2010 the IASB replaced the Framework with
the Conceptual Framework for Financial Reporting
IFRS 4
IFRS FoundationA180In particular an insurer cannot introduce any of the following practices
although it may continue using accounting policies that involve them
(a) measuring insurance liabilities on an undiscounted basis
(b) measuring contractual rights to future investment management fees at
an amount that exceeds their fair value as implied by a comparison with
current fees charged by other market participants for similar services
(c) using nonuniform accounting policies for the insurance liabilities of
subsidiaries
IN6 The IFRS permits the introduction of an accounting policy that involves
remeasuring designated insurance liabilities consistently in each period to
reflect current market interest rates (and if the insurer so elects other current
estimates and assumptions) Without this permission an insurer would have
been required to apply the change in accounting policies consistently to all
similar liabilities
IN7 An insurer need not change its accounting policies for insurance contracts to
eliminate excessive prudence However if an insurer already measures its
insurance contracts with sufficient prudence it should not introduce additional
prudence
IN8 There is a rebuttable presumption that an insurer’s financial statements will
become less relevant and reliable if it introduces an accounting policy that
reflects future investment margins in the measurement of insurance contracts
IN9 When an insurer changes its accounting policies for insurance liabilities it may
reclassify some or all financial assets as at fair value through profit or loss’
IN10 The IFRS
(a) clarifies that an insurer need not account for an embedded derivative
separately at fair value if the embedded derivative meets the definition of
an insurance contract
(b) requires an insurer to unbundle (ie account separately for) deposit
components of some insurance contracts to avoid the omission of assets
and liabilities from its statement of financial position
(c) clarifies the applicability of the practice sometimes known as shadow
accounting’
(d) permits an expanded presentation for insurance contracts acquired in a
business combination or portfolio transfer
(e) addresses limited aspects of discretionary participation features
contained in insurance contracts or financial instruments
IN11 The IFRS requires disclosure to help users understand
(a) the amounts in the insurer’s financial statements that arise from
insurance contracts
(b) the nature and extent of risks arising from insurance contracts
IN12–
IN13
[Deleted]
IFRS 4
IFRS Foundation A181International Financial Reporting Standard 4
Insurance Contracts
Objective
1 The objective of this IFRS is to specify the financial reporting for insurance
contracts by any entity that issues such contracts (described in this IFRS as an
insurer) until the Board completes the second phase of its project on insurance
contracts In particular this IFRS requires
(a) limited improvements to accounting by insurers for insurance contracts
(b) disclosure that identifies and explains the amounts in an insurer’s
financial statements arising from insurance contracts and helps users of
those financial statements understand the amount timing and
uncertainty of future cash flows from insurance contracts
Scope
2 An entity shall apply this IFRS to
(a) insurance contracts (including reinsurance contracts) that it issues and
reinsurance contracts that it holds
(b) financial instruments that it issues with a discretionary participation feature
(see paragraph 35) IFRS 7 Financial Instruments Disclosures requires
disclosure about financial instruments including financial instruments
that contain such features
3 This IFRS does not address other aspects of accounting by insurers such as
accounting for financial assets held by insurers and financial liabilities issued by
insurers (see IAS 32 Financial Instruments Presentation IFRS 7 and IFRS 9 Financial
Instruments) except in the transitional provisions in paragraph 45
4 An entity shall not apply this IFRS to
(a) product warranties issued directly by a manufacturer dealer or retailer
(see IFRS 15 Revenue from Contracts with Customers and IAS 37 Provisions
Contingent Liabilities and Contingent Assets)
(b) employers’ assets and liabilities under employee benefit plans (see IAS 19
Employee Benefits and IFRS 2 Sharebased Payment) and retirement benefit
obligations reported by defined benefit retirement plans (see IAS 26
Accounting and Reporting by Retirement Benefit Plans)
(c) contractual rights or contractual obligations that are contingent on the
future use of or right to use a nonfinancial item (for example some
licence fees royalties variable lease payments and similar items) as well
as a lessee’s residual value guarantee embedded in a lease (see IFRS 16
Leases IFRS 15 Revenue from Contracts with Customers and IAS 38 Intangible
Assets)
IFRS 4
IFRS FoundationA182(d) financial guarantee contracts unless the issuer has previously asserted
explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts in which case the
issuer may elect to apply either IAS 32 IFRS 7 and IFRS 9 or this IFRS to
such financial guarantee contracts The issuer may make that election
contract by contract but the election for each contract is irrevocable
(e) contingent consideration payable or receivable in a business
combination (see IFRS 3 Business Combinations)
(f) direct insurance contracts that the entity holds (ie direct insurance contracts
in which the entity is the policyholder) However a cedant shall apply this
IFRS to reinsurance contracts that it holds
5 For ease of reference this IFRS describes any entity that issues an insurance
contract as an insurer whether or not the issuer is regarded as an insurer for
legal or supervisory purposes
6 A reinsurance contract is a type of insurance contract Accordingly all
references in this IFRS to insurance contracts also apply to reinsurance
contracts
Embedded derivatives
7 IFRS 9 requires an entity to separate some embedded derivatives from their host
contract measure them at fair value and include changes in their fair value in
profit or loss IFRS 9 applies to derivatives embedded in an insurance contract
unless the embedded derivative is itself an insurance contract
8 As an exception to the requirements in IFRS 9 an insurer need not separate and
measure at fair value a policyholder’s option to surrender an insurance contract
for a fixed amount (or for an amount based on a fixed amount and an interest
rate) even if the exercise price differs from the carrying amount of the host
insurance liability However the requirements in IFRS 9 do apply to a put option
or cash surrender option embedded in an insurance contract if the surrender
value varies in response to the change in a financial variable (such as an equity
or commodity price or index) or a nonfinancial variable that is not specific to a
party to the contract Furthermore those requirements also apply if the
holder’s ability to exercise a put option or cash surrender option is triggered by
a change in such a variable (for example a put option that can be exercised if a
stock market index reaches a specified level)
9 Paragraph 8 applies equally to options to surrender a financial instrument
containing a discretionary participation feature
Unbundling of deposit components
10 Some insurance contracts contain both an insurance component and a deposit
component In some cases an insurer is required or permitted to unbundle those
components
(a) unbundling is required if both the following conditions are met
IFRS 4
IFRS Foundation A183(i) the insurer can measure the deposit component (including
any embedded surrender options) separately (ie without
considering the insurance component)
(ii) the insurer’s accounting policies do not otherwise require it to
recognise all obligations and rights arising from the deposit
component
(b) unbundling is permitted but not required if the insurer can measure
the deposit component separately as in (a)(i) but its accounting policies
require it to recognise all obligations and rights arising from the deposit
component regardless of the basis used to measure those rights and
obligations
(c) unbundling is prohibited if an insurer cannot measure the deposit
component separately as in (a)(i)
11 The following is an example of a case when an insurer’s accounting policies do
not require it to recognise all obligations arising from a deposit component A
cedant receives compensation for losses from a reinsurer but the contract obliges
the cedant to repay the compensation in future years That obligation arises
from a deposit component If the cedant’s accounting policies would otherwise
permit it to recognise the compensation as income without recognising the
resulting obligation unbundling is required
12 To unbundle a contract an insurer shall
(a) apply this IFRS to the insurance component
(b) apply IFRS 9 to the deposit component
Recognition and measurement
Temporary exemption from some other IFRSs
13 Paragraphs 10–12 of IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors specify criteria for an entity to use in developing an accounting policy if
no IFRS applies specifically to an item However this IFRS exempts an insurer
from applying those criteria to its accounting policies for
(a) insurance contracts that it issues (including related acquisition costs and
related intangible assets such as those described in paragraphs 31 and
32) and
(b) reinsurance contracts that it holds
14 Nevertheless this IFRS does not exempt an insurer from some implications of
the criteria in paragraphs 10–12 of IAS 8 Specifically an insurer
(a) shall not recognise as a liability any provisions for possible future claims
if those claims arise under insurance contracts that are not in existence
at the end of the reporting period (such as catastrophe provisions and
equalisation provisions)
(b) shall carry out the liability adequacy test described in paragraphs 15–19
IFRS 4
IFRS FoundationA184(c) shall remove an insurance liability (or a part of an insurance liability)
from its statement of financial position when and only when it is
extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires
(d) shall not offset
(i) reinsurance assets against the related insurance liabilities or
(ii) income or expense from reinsurance contracts against the
expense or income from the related insurance contracts
(e) shall consider whether its reinsurance assets are impaired (see
paragraph 20)
Liability adequacy test
15 An insurer shall assess at the end of each reporting period whether its
recognised insurance liabilities are adequate using current estimates of
future cash flows under its insurance contracts If that assessment shows
that the carrying amount of its insurance liabilities (less related deferred
acquisition costs and related intangible assets such as those discussed in
paragraphs 31 and 32) is inadequate in the light of the estimated future
cash flows the entire deficiency shall be recognised in profit or loss
16 If an insurer applies a liability adequacy test that meets specified minimum
requirements this IFRS imposes no further requirements The minimum
requirements are the following
(a) The test considers current estimates of all contractual cash flows and of
related cash flows such as claims handling costs as well as cash flows
resulting from embedded options and guarantees
(b) If the test shows that the liability is inadequate the entire deficiency is
recognised in profit or loss
17 If an insurer’s accounting policies do not require a liability adequacy test that
meets the minimum requirements of paragraph 16 the insurer shall
(a) determine the carrying amount of the relevant insurance liabilities2 less
the carrying amount of
(i) any related deferred acquisition costs and
(ii) any related intangible assets such as those acquired in a business
combination or portfolio transfer (see paragraphs 31 and 32)
However related reinsurance assets are not considered because
an insurer accounts for them separately (see paragraph 20)
(b) determine whether the amount described in (a) is less than the carrying
amount that would be required if the relevant insurance liabilities were
within the scope of IAS 37 If it is less the insurer shall recognise the
entire difference in profit or loss and decrease the carrying amount of
2 The relevant insurance liabilities are those insurance liabilities (and related deferred acquisition
costs and related intangible assets) for which the insurer’s accounting policies do not require a
liability adequacy test that meets the minimum requirements of paragraph 16
IFRS 4
IFRS Foundation A185the related deferred acquisition costs or related intangible assets or
increase the carrying amount of the relevant insurance liabilities
18 If an insurer’s liability adequacy test meets the minimum requirements of
paragraph 16 the test is applied at the level of aggregation specified in that test
If its liability adequacy test does not meet those minimum requirements the
comparison described in paragraph 17 shall be made at the level of a portfolio of
contracts that are subject to broadly similar risks and managed together as a
single portfolio
19 The amount described in paragraph 17(b) (ie the result of applying IAS 37) shall
reflect future investment margins (see paragraphs 27–29) if and only if the
amount described in paragraph 17(a) also reflects those margins
Impairment of reinsurance assets
20 If a cedant’s reinsurance asset is impaired the cedant shall reduce its carrying
amount accordingly and recognise that impairment loss in profit or loss
A reinsurance asset is impaired if and only if
(a) there is objective evidence as a result of an event that occurred after
initial recognition of the reinsurance asset that the cedant may not
receive all amounts due to it under the terms of the contract and
(b) that event has a reliably measurable impact on the amounts that the
cedant will receive from the reinsurer
Changes in accounting policies
21 Paragraphs 22–30 apply both to changes made by an insurer that already applies
IFRSs and to changes made by an insurer adopting IFRSs for the first time
22 An insurer may change its accounting policies for insurance contracts if
and only if the change makes the financial statements more relevant to
the economic decisionmaking needs of users and no less reliable or
more reliable and no less relevant to those needs An insurer shall judge
relevance and reliability by the criteria in IAS 8
23 To justify changing its accounting policies for insurance contracts an insurer
shall show that the change brings its financial statements closer to meeting the
criteria in IAS 8 but the change need not achieve full compliance with those
criteria The following specific issues are discussed below
(a) current interest rates (paragraph 24)
(b) continuation of existing practices (paragraph 25)
(c) prudence (paragraph 26)
(d) future investment margins (paragraphs 27–29) and
(e) shadow accounting (paragraph 30)
IFRS 4
IFRS FoundationA186Current market interest rates
24 An insurer is permitted but not required to change its accounting policies so
that it remeasures designated insurance liabilities3 to reflect current market
interest rates and recognises changes in those liabilities in profit or loss At that
time it may also introduce accounting policies that require other current
estimates and assumptions for the designated liabilities The election in this
paragraph permits an insurer to change its accounting policies for designated
liabilities without applying those policies consistently to all similar liabilities as
IAS 8 would otherwise require If an insurer designates liabilities for this
election it shall continue to apply current market interest rates (and if
applicable the other current estimates and assumptions) consistently in all
periods to all these liabilities until they are extinguished
Continuation of existing practices
25 An insurer may continue the following practices but the introduction of any of
them does not satisfy paragraph 22
(a) measuring insurance liabilities on an undiscounted basis
(b) measuring contractual rights to future investment management fees at
an amount that exceeds their fair value as implied by a comparison with
current fees charged by other market participants for similar services It
is likely that the fair value at inception of those contractual rights equals
the origination costs paid unless future investment management fees
and related costs are out of line with market comparables
(c) using nonuniform accounting policies for the insurance contracts (and
related deferred acquisition costs and related intangible assets if any) of
subsidiaries except as permitted by paragraph 24 If those accounting
policies are not uniform an insurer may change them if the change does
not make the accounting policies more diverse and also satisfies the
other requirements in this IFRS
Prudence
26 An insurer need not change its accounting policies for insurance contracts to
eliminate excessive prudence However if an insurer already measures its
insurance contracts with sufficient prudence it shall not introduce additional
prudence
Future investment margins
27 An insurer need not change its accounting policies for insurance contracts to
eliminate future investment margins However there is a rebuttable
presumption that an insurer’s financial statements will become less relevant
and reliable if it introduces an accounting policy that reflects future investment
margins in the measurement of insurance contracts unless those margins affect
the contractual payments Two examples of accounting policies that reflect
those margins are
3 In this paragraph insurance liabilities include related deferred acquisition costs and related
intangible assets such as those discussed in paragraphs 31 and 32
IFRS 4
IFRS Foundation A187(a) using a discount rate that reflects the estimated return on the insurer’s
assets or
(b) projecting the returns on those assets at an estimated rate of return
discounting those projected returns at a different rate and including the
result in the measurement of the liability
28 An insurer may overcome the rebuttable presumption described in paragraph 27
if and only if the other components of a change in accounting policies increase
the relevance and reliability of its financial statements sufficiently to outweigh
the decrease in relevance and reliability caused by the inclusion of future
investment margins For example suppose that an insurer’s existing accounting
policies for insurance contracts involve excessively prudent assumptions set at
inception and a discount rate prescribed by a regulator without direct reference
to market conditions and ignore some embedded options and guarantees
The insurer might make its financial statements more relevant and no less
reliable by switching to a comprehensive investororiented basis of accounting
that is widely used and involves
(a) current estimates and assumptions
(b) a reasonable (but not excessively prudent) adjustment to reflect risk and
uncertainty
(c) measurements that reflect both the intrinsic value and time value of
embedded options and guarantees and
(d) a current market discount rate even if that discount rate reflects the
estimated return on the insurer’s assets
29 In some measurement approaches the discount rate is used to determine the
present value of a future profit margin That profit margin is then attributed to
different periods using a formula In those approaches the discount rate affects
the measurement of the liability only indirectly In particular the use of a less
appropriate discount rate has a limited or no effect on the measurement of the
liability at inception However in other approaches the discount rate
determines the measurement of the liability directly In the latter case because
the introduction of an assetbased discount rate has a more significant effect it
is highly unlikely that an insurer could overcome the rebuttable presumption
described in paragraph 27
Shadow accounting
30 In some accounting models realised gains or losses on an insurer’s assets have a
direct effect on the measurement of some or all of (a) its insurance liabilities
(b) related deferred acquisition costs and (c) related intangible assets such as
those described in paragraphs 31 and 32 An insurer is permitted but not
required to change its accounting policies so that a recognised but unrealised
gain or loss on an asset affects those measurements in the same way that a
realised gain or loss does The related adjustment to the insurance liability (or
deferred acquisition costs or intangible assets) shall be recognised in other
comprehensive income if and only if the unrealised gains or losses are
recognised in other comprehensive income This practice is sometimes
described as shadow accounting’
IFRS 4
IFRS FoundationA188Insurance contracts acquired in a business combination
or portfolio transfer
31 To comply with IFRS 3 an insurer shall at the acquisition date measure at fair
value the insurance liabilities assumed and insurance assets acquired in a business
combination However an insurer is permitted but not required to use an
expanded presentation that splits the fair value of acquired insurance contracts
into two components
(a) a liability measured in accordance with the insurer’s accounting policies
for insurance contracts that it issues and
(b) an intangible asset representing the difference between (i) the fair value
of the contractual insurance rights acquired and insurance obligations
assumed and (ii) the amount described in (a) The subsequent
measurement of this asset shall be consistent with the measurement of
the related insurance liability
32 An insurer acquiring a portfolio of insurance contracts may use the expanded
presentation described in paragraph 31
33 The intangible assets described in paragraphs 31 and 32 are excluded from the
scope of IAS 36 Impairment of Assets and IAS 38 However IAS 36 and IAS 38 apply
to customer lists and customer relationships reflecting the expectation of future
contracts that are not part of the contractual insurance rights and contractual
insurance obligations that existed at the date of a business combination or
portfolio transfer
Discretionary participation features
Discretionary participation features in insurance contracts
34 Some insurance contracts contain a discretionary participation feature as well as
a guaranteed element The issuer of such a contract
(a) may but need not recognise the guaranteed element separately from
the discretionary participation feature If the issuer does not recognise
them separately it shall classify the whole contract as a liability If the
issuer classifies them separately it shall classify the guaranteed element
as a liability
(b) shall if it recognises the discretionary participation feature separately
from the guaranteed element classify that feature as either a liability or
a separate component of equity This IFRS does not specify how the
issuer determines whether that feature is a liability or equity The issuer
may split that feature into liability and equity components and shall use
a consistent accounting policy for that split The issuer shall not classify
that feature as an intermediate category that is neither liability nor
equity
(c) may recognise all premiums received as revenue without separating any
portion that relates to the equity component The resulting changes in
the guaranteed element and in the portion of the discretionary
participation feature classified as a liability shall be recognised in profit
IFRS 4
IFRS Foundation A189or loss If part or all of the discretionary participation feature is
classified in equity a portion of profit or loss may be attributable to that
feature (in the same way that a portion may be attributable to
noncontrolling interests) The issuer shall recognise the portion of
profit or loss attributable to any equity component of a discretionary
participation feature as an allocation of profit or loss not as expense or
income (see IAS 1 Presentation of Financial Statements)
(d) shall if the contract contains an embedded derivative within the scope
of IFRS 9 apply IFRS 9 to that embedded derivative
(e) shall in all respects not described in paragraphs 14–20 and 34(a)–(d)
continue its existing accounting policies for such contracts unless it
changes those accounting policies in a way that complies with
paragraphs 21–30
Discretionary participation features in financial instruments
35 The requirements in paragraph 34 also apply to a financial instrument that
contains a discretionary participation feature In addition
(a) if the issuer classifies the entire discretionary participation feature as a
liability it shall apply the liability adequacy test in paragraphs 15–19 to
the whole contract (ie both the guaranteed element and the
discretionary participation feature) The issuer need not determine the
amount that would result from applying IFRS 9 to the guaranteed
element
(b) if the issuer classifies part or all of that feature as a separate component
of equity the liability recognised for the whole contract shall not be less
than the amount that would result from applying IFRS 9 to the
guaranteed element That amount shall include the intrinsic value of an
option to surrender the contract but need not include its time value if
paragraph 9 exempts that option from measurement at fair value The
issuer need not disclose the amount that would result from applying
IFRS 9 to the guaranteed element nor need it present that amount
separately Furthermore the issuer need not determine that amount if
the total liability recognised is clearly higher
(c) although these contracts are financial instruments the issuer may
continue to recognise the premiums for those contracts as revenue and
recognise as an expense the resulting increase in the carrying amount of
the liability
(d) although these contracts are financial instruments an issuer applying
paragraph 20(b) of IFRS 7 to contracts with a discretionary participation
feature shall disclose the total interest expense recognised in profit or
loss but need not calculate such interest expense using the effective
interest method
IFRS 4
IFRS FoundationA190Disclosure
Explanation of recognised amounts
36 An insurer shall disclose information that identifies and explains the
amounts in its financial statements arising from insurance contracts
37 To comply with paragraph 36 an insurer shall disclose
(a) its accounting policies for insurance contracts and related assets
liabilities income and expense
(b) the recognised assets liabilities income and expense (and if it presents
its statement of cash flows using the direct method cash flows) arising
from insurance contracts Furthermore if the insurer is a cedant it shall
disclose
(i) gains and losses recognised in profit or loss on buying
reinsurance and
(ii) if the cedant defers and amortises gains and losses arising on
buying reinsurance the amortisation for the period and the
amounts remaining unamortised at the beginning and end of the
period
(c) the process used to determine the assumptions that have the greatest
effect on the measurement of the recognised amounts described in (b)
When practicable an insurer shall also give quantified disclosure of
those assumptions
(d) the effect of changes in assumptions used to measure insurance assets
and insurance liabilities showing separately the effect of each change
that has a material effect on the financial statements
(e) reconciliations of changes in insurance liabilities reinsurance assets
and if any related deferred acquisition costs
Nature and extent of risks arising from insurance
contracts
38 An insurer shall disclose information that enables users of its financial
statements to evaluate the nature and extent of risks arising from
insurance contracts
39 To comply with paragraph 38 an insurer shall disclose
(a) its objectives policies and processes for managing risks arising from
insurance contracts and the methods used to manage those risks
(b) [deleted]
(c) information about insurance risk (both before and after risk mitigation by
reinsurance) including information about
(i) sensitivity to insurance risk (see paragraph 39A)
IFRS 4
IFRS Foundation A191(ii) concentrations of insurance risk including a description of how
management determines concentrations and a description of the
shared characteristic that identifies each concentration (eg type
of insured event geographical area or currency)
(iii) actual claims compared with previous estimates (ie claims
development) The disclosure about claims development shall go
back to the period when the earliest material claim arose for
which there is still uncertainty about the amount and timing of
the claims payments but need not go back more than ten years
An insurer need not disclose this information for claims for
which uncertainty about the amount and timing of claims
payments is typically resolved within one year
(d) information about credit risk liquidity risk and market risk that
paragraphs 31–42 of IFRS 7 would require if the insurance contracts were
within the scope of IFRS 7 However
(i) an insurer need not provide the maturity analyses required by
paragraph 39(a) and (b) of IFRS 7 if it discloses information about
the estimated timing of the net cash outflows resulting from
recognised insurance liabilities instead This may take the form
of an analysis by estimated timing of the amounts recognised in
the statement of financial position
(ii) if an insurer uses an alternative method to manage sensitivity to
market conditions such as an embedded value analysis it may
use that sensitivity analysis to meet the requirement in
paragraph 40(a) of IFRS 7 Such an insurer shall also provide the
disclosures required by paragraph 41 of IFRS 7
(e) information about exposures to market risk arising from embedded
derivatives contained in a host insurance contract if the insurer is not
required to and does not measure the embedded derivatives at fair
value
39A To comply with paragraph 39(c)(i) an insurer shall disclose either (a) or (b) as
follows
(a) a sensitivity analysis that shows how profit or loss and equity would have
been affected if changes in the relevant risk variable that were
reasonably possible at the end of the reporting period had occurred the
methods and assumptions used in preparing the sensitivity analysis and
any changes from the previous period in the methods and assumptions
used However if an insurer uses an alternative method to manage
sensitivity to market conditions such as an embedded value analysis it
may meet this requirement by disclosing that alternative sensitivity
analysis and the disclosures required by paragraph 41 of IFRS 7
(b) qualitative information about sensitivity and information about those
terms and conditions of insurance contracts that have a material effect
on the amount timing and uncertainty of the insurer’s future cash
flows
IFRS 4
IFRS FoundationA192Effective date and transition
40 The transitional provisions in paragraphs 41–45 apply both to an entity that is
already applying IFRSs when it first applies this IFRS and to an entity that
applies IFRSs for the first time (a firsttime adopter)
41 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005 Earlier application is encouraged If an entity applies this IFRS
for an earlier period it shall disclose that fact
41A Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4) issued in August
2005 amended paragraphs 4(d) B18(g) and B19(f) An entity shall apply those
amendments for annual periods beginning on or after 1 January 2006 Earlier
application is encouraged If an entity applies those amendments for an earlier
period it shall disclose that fact and apply the related amendments to IAS 39
and IAS 324 at the same time
41B IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraph 30 An entity shall apply those amendments for
annual periods beginning on or after 1 January 2009 If an entity applies IAS 1
(revised 2007) for an earlier period the amendments shall be applied for that
earlier period
41C [Deleted]
41D [Deleted]
41E IFRS 13 Fair Value Measurement issued in May 2011 amended the definition of fair
value in Appendix A An entity shall apply that amendment when it applies
IFRS 13
41F [Deleted]
41G IFRS 15 Revenue from Contracts with Customers issued in May 2014 amended
paragraphs 4(a) and (c) B7 B18(h) and B21 An entity shall apply those
amendments when it applies IFRS 15
41H IFRS 9 as issued in July 2014 amended paragraphs 3 4 7 8 12 34 35 45
Appendix A and paragraphs B18–B20 and deleted paragraphs 41C 41D and 41F
An entity shall apply those amendments when it applies IFRS 9
41I IFRS 16 issued in January 2016 amended paragraph 4 An entity shall apply
that amendment when it applies IFRS 16
Disclosure
42 An entity need not apply the disclosure requirements in this IFRS to comparative
information that relates to annual periods beginning before 1 January 2005
except for the disclosures required by paragraph 37(a) and (b) about accounting
policies and recognised assets liabilities income and expense (and cash flows if
the direct method is used)
4 When an entity applies IFRS 7 the reference to IAS 32 is replaced by a reference to IFRS 7
IFRS 4
IFRS Foundation A19343 If it is impracticable to apply a particular requirement of paragraphs 10–35 to
comparative information that relates to annual periods beginning before
1 January 2005 an entity shall disclose that fact Applying the liability adequacy
test (paragraphs 15–19) to such comparative information might sometimes be
impracticable but it is highly unlikely to be impracticable to apply other
requirements of paragraphs 10–35 to such comparative information
IAS 8 explains the term impracticable’
44 In applying paragraph 39(c)(iii) an entity need not disclose information about
claims development that occurred earlier than five years before the end of the
first financial year in which it applies this IFRS Furthermore if it is
impracticable when an entity first applies this IFRS to prepare information
about claims development that occurred before the beginning of the earliest
period for which an entity presents full comparative information that complies
with this IFRS the entity shall disclose that fact
Redesignation of financial assets
45 Notwithstanding paragraph 441 of IFRS 9 when an insurer changes its
accounting policies for insurance liabilities it is permitted but not required to
reclassify some or all of its financial assets so that they are measured at fair value
through profit or loss This reclassification is permitted if an insurer changes
accounting policies when it first applies this IFRS and if it makes a subsequent
policy change permitted by paragraph 22 The reclassification is a change in
accounting policy and IAS 8 applies
IFRS 4
IFRS FoundationA194Appendix A
Defined terms
This appendix is an integral part of the IFRS
cedant The policyholder under a reinsurance contract
deposit component A contractual component that is not accounted for as a derivative
under IFRS 9 and would be within the scope of IFRS 9 if it were a
separate instrument
direct insurance
contract
An insurance contract that is not a reinsurance
contract
discretionary
participation feature
A contractual right to receive as a supplement to guaranteed
benefits additional benefits
(a) that are likely to be a significant portion of the total
contractual benefits
(b) whose amount or timing is contractually at the discretion
of the issuer and
(c) that are contractually based on
(i) the performance of a specified pool of contracts or
a specified type of contract
(ii) realised andor unrealised investment returns on
a specified pool of assets held by the issuer or
(iii) the profit or loss of the company fund or other
entity that issues the contract
fair value Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (See IFRS 13)
financial guarantee
contract
A contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument
financial risk The risk of a possible future change in one or more of a specified
interest rate financial instrument price commodity price
foreign exchange rate index of prices or rates credit rating or
credit index or other variable provided in the case of a
nonfinancial variable that the variable is not specific to a party
to the contract
guaranteed benefits Payments or other benefits to which a particular policyholder or
investor has an unconditional right that is not subject to the
contractual discretion of the issuer
guaranteed element An obligation to pay guaranteed benefits included in a
contract that contains a discretionary participation feature
IFRS 4
IFRS Foundation A195insurance asset An insurer’s net contractual rights under an insurance
contract
insurance contract A contract under which one party (the insurer) accepts
significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder if a
specified uncertain future event (the insured event) adversely
affects the policyholder (See Appendix B for guidance on this
definition)
insurance liability An insurer’s net contractual obligations under an insurance
contract
insurance risk Risk other than financial risk transferred from the holder of a
contract to the issuer
insured event An uncertain future event that is covered by an insurance
contract and creates insurance risk
insurer The party that has an obligation under an insurance contract to
compensate a policyholder if an insured event occurs
liability adequacy test An assessment of whether the carrying amount of an insurance
liability needs to be increased (or the carrying amount of related
deferred acquisition costs or related intangible assets decreased)
based on a review of future cash flows
policyholder A party that has a right to compensation under an insurance
contract if an insured event occurs
reinsurance assets A cedant’s net contractual rights under a reinsurance contract
reinsurance contract An insurance contract issued by one insurer (the reinsurer)to
compensate another insurer (the cedant) for losses on one or
more contracts issued by the cedant
reinsurer The party that has an obligation under a reinsurance contract
to compensate a cedant if an insured event occurs
unbundle Account for the components of a contract as if they were separate
contracts
IFRS 4
IFRS FoundationA196Appendix B
Definition of an insurance contract
This appendix is an integral part of the IFRS
B1 This appendix gives guidance on the definition of an insurance contract in
Appendix A It addresses the following issues
(a) the term uncertain future event’ (paragraphs B2–B4)
(b) payments in kind (paragraphs B5–B7)
(c) insurance risk and other risks (paragraphs B8–B17)
(d) examples of insurance contracts (paragraphs B18–B21)
(e) significant insurance risk (paragraphs B22–B28) and
(f) changes in the level of insurance risk (paragraphs B29 and B30)
Uncertain future event
B2 Uncertainty (or risk) is the essence of an insurance contract Accordingly at
least one of the following is uncertain at the inception of an insurance contract
(a) whether an insured event will occur
(b) when it will occur or
(c) how much the insurer will need to pay if it occurs
B3 In some insurance contracts the insured event is the discovery of a loss during
the term of the contract even if the loss arises from an event that occurred
before the inception of the contract In other insurance contracts the insured
event is an event that occurs during the term of the contract even if the
resulting loss is discovered after the end of the contract term
B4 Some insurance contracts cover events that have already occurred but whose
financial effect is still uncertain An example is a reinsurance contract that
covers the direct insurer against adverse development of claims already reported
by policyholders In such contracts the insured event is the discovery of the
ultimate cost of those claims
Payments in kind
B5 Some insurance contracts require or permit payments to be made in kind
An example is when the insurer replaces a stolen article directly instead of
reimbursing the policyholder Another example is when an insurer uses its own
hospitals and medical staff to provide medical services covered by the contracts
B6 Some fixedfee service contracts in which the level of service depends on an
uncertain event meet the definition of an insurance contract in this IFRS but are
not regulated as insurance contracts in some countries One example is a
maintenance contract in which the service provider agrees to repair specified
equipment after a malfunction The fixed service fee is based on the expected
number of malfunctions but it is uncertain whether a particular machine will
break down The malfunction of the equipment adversely affects its owner and
the contract compensates the owner (in kind rather than cash) Another
IFRS 4
IFRS Foundation A197example is a contract for car breakdown services in which the provider agrees
for a fixed annual fee to provide roadside assistance or tow the car to a nearby
garage The latter contract could meet the definition of an insurance contract
even if the provider does not agree to carry out repairs or replace parts
B7 Applying the IFRS to the contracts described in paragraph B6 is likely to be no
more burdensome than applying the IFRSs that would be applicable if such
contracts were outside the scope of this IFRS
(a) There are unlikely to be material liabilities for malfunctions and
breakdowns that have already occurred
(b) If IFRS 15 applied the service provider would recognise revenue when
(or as) it transfers services to the customer (subject to other specified
criteria) That approach is also acceptable under this IFRS which
permits the service provider (i) to continue its existing accounting
policies for these contracts unless they involve practices prohibited by
paragraph 14 and (ii) to improve its accounting policies if so permitted
by paragraphs 22–30
(c) The service provider considers whether the cost of meeting its
contractual obligation to provide services exceeds the revenue received
in advance To do this it applies the liability adequacy test described in
paragraphs 15–19 of this IFRS If this IFRS did not apply to these
contracts the service provider would apply IAS 37 to determine whether
the contracts are onerous
(d) For these contracts the disclosure requirements in this IFRS are unlikely
to add significantly to disclosures required by other IFRSs
Distinction between insurance risk and other risks
B8 The definition of an insurance contract refers to insurance risk which this IFRS
defines as risk other than financial risk transferred from the holder of a contract
to the issuer A contract that exposes the issuer to financial risk without
significant insurance risk is not an insurance contract
B9 The definition of financial risk in Appendix A includes a list of financial and
nonfinancial variables That list includes nonfinancial variables that are not
specific to a party to the contract such as an index of earthquake losses in a
particular region or an index of temperatures in a particular city It excludes
nonfinancial variables that are specific to a party to the contract such as the
occurrence or nonoccurrence of a fire that damages or destroys an asset of that
party Furthermore the risk of changes in the fair value of a nonfinancial asset
is not a financial risk if the fair value reflects not only changes in market prices
for such assets (a financial variable) but also the condition of a specific
nonfinancial asset held by a party to a contract (a nonfinancial variable) For
example if a guarantee of the residual value of a specific car exposes the
guarantor to the risk of changes in the car’s physical condition that risk is
insurance risk not financial risk
B10 Some contracts expose the issuer to financial risk in addition to significant
insurance risk For example many life insurance contracts both guarantee a
minimum rate of return to policyholders (creating financial risk) and promise
IFRS 4
IFRS FoundationA198death benefits that at some times significantly exceed the policyholder’s account
balance (creating insurance risk in the form of mortality risk) Such contracts
are insurance contracts
B11 Under some contracts an insured event triggers the payment of an amount
linked to a price index Such contracts are insurance contracts provided the
payment that is contingent on the insured event can be significant For
example a lifecontingent annuity linked to a costofliving index transfers
insurance risk because payment is triggered by an uncertain event—the survival
of the annuitant The link to the price index is an embedded derivative but it
also transfers insurance risk If the resulting transfer of insurance risk is
significant the embedded derivative meets the definition of an insurance
contract in which case it need not be separated and measured at fair value (see
paragraph 7 of this IFRS)
B12 The definition of insurance risk refers to risk that the insurer accepts from the
policyholder In other words insurance risk is a preexisting risk transferred
from the policyholder to the insurer Thus a new risk created by the contract is
not insurance risk
B13 The definition of an insurance contract refers to an adverse effect on the
policyholder The definition does not limit the payment by the insurer to an
amount equal to the financial impact of the adverse event For example the
definition does not exclude newforold’ coverage that pays the policyholder
sufficient to permit replacement of a damaged old asset by a new asset
Similarly the definition does not limit payment under a term life insurance
contract to the financial loss suffered by the deceased’s dependants nor does it
preclude the payment of predetermined amounts to quantify the loss caused by
death or an accident
B14 Some contracts require a payment if a specified uncertain event occurs but do
not require an adverse effect on the policyholder as a precondition for payment
Such a contract is not an insurance contract even if the holder uses the contract
to mitigate an underlying risk exposure For example if the holder uses a
derivative to hedge an underlying nonfinancial variable that is correlated with
cash flows from an asset of the entity the derivative is not an insurance contract
because payment is not conditional on whether the holder is adversely affected
by a reduction in the cash flows from the asset Conversely the definition of an
insurance contract refers to an uncertain event for which an adverse effect on
the policyholder is a contractual precondition for payment This contractual
precondition does not require the insurer to investigate whether the event
actually caused an adverse effect but permits the insurer to deny payment if it is
not satisfied that the event caused an adverse effect
B15 Lapse or persistency risk (ie the risk that the counterparty will cancel the
contract earlier or later than the issuer had expected in pricing the contract) is
not insurance risk because the payment to the counterparty is not contingent on
an uncertain future event that adversely affects the counterparty Similarly
expense risk (ie the risk of unexpected increases in the administrative costs
associated with the servicing of a contract rather than in costs associated with
insured events) is not insurance risk because an unexpected increase in expenses
does not adversely affect the counterparty
IFRS 4
IFRS Foundation A199B16 Therefore a contract that exposes the issuer to lapse risk persistency risk or
expense risk is not an insurance contract unless it also exposes the issuer to
insurance risk However if the issuer of that contract mitigates that risk by
using a second contract to transfer part of that risk to another party the second
contract exposes that other party to insurance risk
B17 An insurer can accept significant insurance risk from the policyholder only if
the insurer is an entity separate from the policyholder In the case of a mutual
insurer the mutual accepts risk from each policyholder and pools that risk
Although policyholders bear that pooled risk collectively in their capacity as
owners the mutual has still accepted the risk that is the essence of an insurance
contract
Examples of insurance contracts
B18 The following are examples of contracts that are insurance contracts if the
transfer of insurance risk is significant
(a) insurance against theft or damage to property
(b) insurance against product liability professional liability civil liability or
legal expenses
(c) life insurance and prepaid funeral plans (although death is certain it is
uncertain when death will occur or for some types of life insurance
whether death will occur within the period covered by the insurance)
(d) lifecontingent annuities and pensions (ie contracts that provide
compensation for the uncertain future event—the survival of the
annuitant or pensioner—to assist the annuitant or pensioner in
maintaining a given standard of living which would otherwise be
adversely affected by his or her survival)
(e) disability and medical cover
(f) surety bonds fidelity bonds performance bonds and bid bonds
(ie contracts that provide compensation if another party fails to perform
a contractual obligation for example an obligation to construct a
building)
(g) credit insurance that provides for specified payments to be made to
reimburse the holder for a loss it incurs because a specified debtor fails
to make payment when due under the original or modified terms of a
debt instrument These contracts could have various legal forms such as
that of a guarantee some types of letter of credit a credit derivative
default contract or an insurance contract However although these
contracts meet the definition of an insurance contract they also meet
the definition of a financial guarantee contract in IFRS 9 and are within
the scope of IAS 325 and IFRS 9 not this IFRS (see paragraph 4(d))
Nevertheless if an issuer of financial guarantee contracts has previously
asserted explicitly that it regards such contracts as insurance contracts
5 When an entity applies IFRS 7 the reference to IAS 32 is replaced by a reference to IFRS 7
IFRS 4
IFRS FoundationA200and has used accounting applicable to insurance contracts the issuer
may elect to apply either IAS 326 and IFRS 9 or this IFRS to such financial
guarantee contracts
(h) product warranties Product warranties issued by another party for
goods sold by a manufacturer dealer or retailer are within the scope of
this IFRS However product warranties issued directly by a
manufacturer dealer or retailer are outside its scope because they are
within the scope of IFRS 15 and IAS 37
(i) title insurance (ie insurance against the discovery of defects in title to
land that were not apparent when the insurance contract was written)
In this case the insured event is the discovery of a defect in the title not
the defect itself
(j) travel assistance (ie compensation in cash or in kind to policyholders for
losses suffered while they are travelling) Paragraphs B6 and B7 discuss
some contracts of this kind
(k) catastrophe bonds that provide for reduced payments of principal
interest or both if a specified event adversely affects the issuer of the
bond (unless the specified event does not create significant insurance
risk for example if the event is a change in an interest rate or foreign
exchange rate)
(l) insurance swaps and other contracts that require a payment based on
changes in climatic geological or other physical variables that are
specific to a party to the contract
(m) reinsurance contracts
B19 The following are examples of items that are not insurance contracts
(a) investment contracts that have the legal form of an insurance contract
but do not expose the insurer to significant insurance risk for example
life insurance contracts in which the insurer bears no significant
mortality risk (such contracts are noninsurance financial instruments or
service contracts see paragraphs B20 and B21)
(b) contracts that have the legal form of insurance but pass all significant
insurance risk back to the policyholder through noncancellable and
enforceable mechanisms that adjust future payments by the
policyholder as a direct result of insured losses for example some
financial reinsurance contracts or some group contracts (such contracts
are normally noninsurance financial instruments or service contracts
see paragraphs B20 and B21)
(c) selfinsurance in other words retaining a risk that could have been
covered by insurance (there is no insurance contract because there is no
agreement with another party)
(d) contracts (such as gambling contracts) that require a payment if a
specified uncertain future event occurs but do not require as a
contractual precondition for payment that the event adversely affects
6 When an entity applies IFRS 7 the reference to IAS 32 is replaced by a reference to IFRS 7
IFRS 4
IFRS Foundation A201the policyholder However this does not preclude the specification of a
predetermined payout to quantify the loss caused by a specified event
such as death or an accident (see also paragraph B13)
(e) derivatives that expose one party to financial risk but not insurance risk
because they require that party to make payment based solely on
changes in one or more of a specified interest rate financial instrument
price commodity price foreign exchange rate index of prices or rates
credit rating or credit index or other variable provided in the case of a
nonfinancial variable that the variable is not specific to a party to the
contract (see IFRS 9)
(f) a creditrelated guarantee (or letter of credit credit derivative default
contract or credit insurance contract) that requires payments even if the
holder has not incurred a loss on the failure of the debtor to make
payments when due (see IFRS 9)
(g) contracts that require a payment based on a climatic geological or other
physical variable that is not specific to a party to the contract (commonly
described as weather derivatives)
(h) catastrophe bonds that provide for reduced payments of principal
interest or both based on a climatic geological or other physical variable
that is not specific to a party to the contract
B20 If the contracts described in paragraph B19 create financial assets or financial
liabilities they are within the scope of IFRS 9 Among other things this means
that the parties to the contract use what is sometimes called deposit accounting
which involves the following
(a) one party recognises the consideration received as a financial liability
rather than as revenue
(b) the other party recognises the consideration paid as a financial asset
rather than as an expense
B21 If the contracts described in paragraph B19 do not create financial assets or
financial liabilities IFRS 15 applies Under IFRS 15 revenue is recognised when
(or as) an entity satisfies a performance obligation by transferring a promised
good or service to a customer in an amount that reflects the consideration to
which the entity expects to be entitled
Significant insurance risk
B22 A contract is an insurance contract only if it transfers significant insurance risk
Paragraphs B8–B21 discuss insurance risk The following paragraphs discuss the
assessment of whether insurance risk is significant
B23 Insurance risk is significant if and only if an insured event could cause an
insurer to pay significant additional benefits in any scenario excluding
scenarios that lack commercial substance (ie have no discernible effect on the
economics of the transaction) If significant additional benefits would be
payable in scenarios that have commercial substance the condition in the
previous sentence may be met even if the insured event is extremely unlikely or
IFRS 4
IFRS FoundationA202even if the expected (ie probabilityweighted) present value of contingent cash
flows is a small proportion of the expected present value of all the remaining
contractual cash flows
B24 The additional benefits described in paragraph B23 refer to amounts that exceed
those that would be payable if no insured event occurred (excluding scenarios
that lack commercial substance) Those additional amounts include claims
handling and claims assessment costs but exclude
(a) the loss of the ability to charge the policyholder for future services
For example in an investmentlinked life insurance contract the death
of the policyholder means that the insurer can no longer perform
investment management services and collect a fee for doing so
However this economic loss for the insurer does not reflect insurance
risk just as a mutual fund manager does not take on insurance risk in
relation to the possible death of the client Therefore the potential loss
of future investment management fees is not relevant in assessing how
much insurance risk is transferred by a contract
(b) waiver on death of charges that would be made on cancellation or
surrender Because the contract brought those charges into existence
the waiver of these charges does not compensate the policyholder for a
preexisting risk Hence they are not relevant in assessing how much
insurance risk is transferred by a contract
(c) a payment conditional on an event that does not cause a significant loss
to the holder of the contract For example consider a contract that
requires the issuer to pay one million currency units if an asset suffers
physical damage causing an insignificant economic loss of one currency
unit to the holder In this contract the holder transfers to the insurer
the insignificant risk of losing one currency unit At the same time the
contract creates noninsurance risk that the issuer will need to pay
999999 currency units if the specified event occurs Because the issuer
does not accept significant insurance risk from the holder this contract
is not an insurance contract
(d) possible reinsurance recoveries The insurer accounts for these
separately
B25 An insurer shall assess the significance of insurance risk contract by contract
rather than by reference to materiality to the financial statements7 Thus
insurance risk may be significant even if there is a minimal probability of
material losses for a whole book of contracts This contractbycontract
assessment makes it easier to classify a contract as an insurance contract
However if a relatively homogeneous book of small contracts is known to
consist of contracts that all transfer insurance risk an insurer need not examine
each contract within that book to identify a few nonderivative contracts that
transfer insignificant insurance risk
7 For this purpose contracts entered into simultaneously with a single counterparty (or contracts
that are otherwise interdependent) form a single contract
IFRS 4
IFRS Foundation A203B26 It follows from paragraphs B23–B25 that if a contract pays a death benefit
exceeding the amount payable on survival the contract is an insurance contract
unless the additional death benefit is insignificant (judged by reference to the
contract rather than to an entire book of contracts) As noted in
paragraph B24(b) the waiver on death of cancellation or surrender charges is
not included in this assessment if this waiver does not compensate the
policyholder for a preexisting risk Similarly an annuity contract that pays out
regular sums for the rest of a policyholder’s life is an insurance contract unless
the aggregate lifecontingent payments are insignificant
B27 Paragraph B23 refers to additional benefits These additional benefits could
include a requirement to pay benefits earlier if the insured event occurs earlier
and the payment is not adjusted for the time value of money An example is
whole life insurance for a fixed amount (in other words insurance that provides
a fixed death benefit whenever the policyholder dies with no expiry date for the
cover) It is certain that the policyholder will die but the date of death is
uncertain The insurer will suffer a loss on those individual contracts for which
policyholders die early even if there is no overall loss on the whole book of
contracts
B28 If an insurance contract is unbundled into a deposit component and an
insurance component the significance of insurance risk transfer is assessed by
reference to the insurance component The significance of insurance risk
transferred by an embedded derivative is assessed by reference to the embedded
derivative
Changes in the level of insurance risk
B29 Some contracts do not transfer any insurance risk to the issuer at inception
although they do transfer insurance risk at a later time For example consider a
contract that provides a specified investment return and includes an option for
the policyholder to use the proceeds of the investment on maturity to buy a
lifecontingent annuity at the current annuity rates charged by the insurer to
other new annuitants when the policyholder exercises the option The contract
transfers no insurance risk to the issuer until the option is exercised because
the insurer remains free to price the annuity on a basis that reflects the
insurance risk transferred to the insurer at that time However if the contract
specifies the annuity rates (or a basis for setting the annuity rates) the contract
transfers insurance risk to the issuer at inception
B30 A contract that qualifies as an insurance contract remains an insurance contract
until all rights and obligations are extinguished or expire
IFRS 4
IFRS FoundationA204Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005 If an entity adopts this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume
IFRS 4
IFRS Foundation A205IFRS Standard 5
Noncurrent Assets Held for Sale and
Discontinued Operations
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 35
Discontinuing Operations which had originally been issued by the International Accounting
Standards Committee in June 1998
In March 2004 the Board issued IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations to replace IAS 35
Other Standards have made minor consequential amendments to IFRS 5 They include
Improvement to IFRSs (issued April 2009) IFRS 11 Joint Arrangements (issued May 2011) IFRS 13
Fair Value Measurement (issued May 2011) Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) (issued June 2011) IFRS 9 Financial Instruments (Hedge Accounting and
amendments to IFRS 9 IFRS 7 and IAS 39) (issued November 2013) IFRS 9 Financial
Instruments (issued July 2014) Annual Improvements to IFRSs 2012–2014 Cycle (issued September
2014) and IFRS 16 Leases (issued January 2016)
IFRS 5
IFRS Foundation A207CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 5
NONCURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
OBJECTIVE 1
SCOPE 2
CLASSIFICATION OF NONCURRENT ASSETS (OR DISPOSAL GROUPS) AS
HELD FOR SALE OR AS HELD FOR DISTRIBUTION TO OWNERS 6
Noncurrent assets that are to be abandoned 13
MEASUREMENT OF NONCURRENT ASSETS (OR DISPOSAL GROUPS)
CLASSIFIED AS HELD FOR SALE 15
Measurement of a noncurrent asset (or disposal group) 15
Recognition of impairment losses and reversals 20
Changes to a plan of sale or to a plan of distribution to owners 26
PRESENTATION AND DISCLOSURE 30
Presenting discontinued operations 31
Gains or losses relating to continuing operations 37
Presentation of a noncurrent asset or disposal group classified as held for
sale 38
Additional disclosures 41
TRANSITIONAL PROVISIONS 43
EFFECTIVE DATE 44
WITHDRAWAL OF IAS 35 45
APPENDICES
A Defined terms
B Application supplement
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 5 ISSUED IN MARCH 2004
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
IFRS 5
IFRS FoundationA208International Financial Reporting Standard 5 Noncurrent Assets Held for Sale and
Discontinued Operations (IFRS 5) is set out in paragraphs 1–45 and Appendices A–C All the
paragraphs have equal authority Paragraphs in bold type state the main principles
Terms defined in Appendix A are in italics the first time they appear in the Standard
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards IFRS 5 should be read in the context of its objective and the Basis for
Conclusions the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance
IFRS 5
IFRS Foundation A209Introduction
Reasons for issuing the IFRS
IN1 International Financial Reporting Standard 5 Noncurrent Assets Held for Sale and
Discontinued Operations (IFRS 5) sets out requirements for the classification
measurement and presentation of noncurrent assets held for sale and replaces
IAS 35 Discontinuing Operations
IN2 Achieving convergence of accounting standards around the world is one of the
prime objectives of the International Accounting Standards Board In pursuit of
that objective one of the strategies adopted by the Board has been to enter into
a memorandum of understanding with the Financial Accounting Standards
Board (FASB) in the United States that sets out the two boards’ commitment to
convergence As a result of that understanding the boards have undertaken a
joint shortterm project with the objective of reducing differences between IFRSs
and US GAAP that are capable of resolution in a relatively short time and can be
addressed outside major projects
IN3 One aspect of that project involves the two boards considering each other’s
recent standards with a view to adopting high quality accounting solutions The
IFRS arises from the IASB’s consideration of FASB Statement No 144 Accounting
for the Impairment or Disposal of LongLived Assets (SFAS 144) issued in 2001
IN4 SFAS 144 addresses three areas (i) the impairment of longlived assets to be held
and used (ii) the classification measurement and presentation of assets held for
sale and (iii) the classification and presentation of discontinued operations
The impairment of longlived assets to be held and used is an area in which there
are extensive differences between IFRSs and US GAAP However those
differences were not thought to be capable of resolution in a relatively short
time Convergence on the other two areas was thought to be worth pursuing
within the context of the shortterm project
IN5 The IFRS achieves substantial convergence with the requirements of SFAS 144
relating to assets held for sale the timing of the classification of operations as
discontinued and the presentation of such operations
Main features of the IFRS
IN6 The IFRS
(a) adopts the classification held for sale’
(b) introduces the concept of a disposal group being a group of assets to be
disposed of by sale or otherwise together as a group in a single
transaction and liabilities directly associated with those assets that will
be transferred in the transaction
(c) specifies that assets or disposal groups that are classified as held for sale
are carried at the lower of carrying amount and fair value less costs to
sell
IFRS 5
IFRS FoundationA210(d) specifies that an asset classified as held for sale or included within a
disposal group that is classified as held for sale is not depreciated
(e) specifies that an asset classified as held for sale and the assets and
liabilities included within a disposal group classified as held for sale are
presented separately in the statement of financial position
(f) withdraws IAS 35 Discontinuing Operations and replaces it with
requirements that
(i) change the timing of the classification of an operation as
discontinued IAS 35 classified an operation as discontinuing at
the earlier of (a) the entity entering into a binding sale agreement
and (b) the board of directors approving and announcing a
formal disposal plan The IFRS classifies an operation as
discontinued at the date the operation meets the criteria to be
classified as held for sale or when the entity has disposed of the
operation
(ii) specify that the results of discontinued operations are to be
shown separately in the statement of comprehensive income
(iii) prohibit retroactive classification of an operation as
discontinued when the criteria for that classification are not met
until after the reporting period
IFRS 5
IFRS Foundation A211International Financial Reporting Standard 5
Noncurrent Assets Held for Sale and Discontinued
Operations
Objective
1 The objective of this IFRS is to specify the accounting for assets held for sale and
the presentation and disclosure of discontinued operations In particular the IFRS
requires
(a) assets that meet the criteria to be classified as held for sale to be
measured at the lower of carrying amount and fair value less costs to sell
and depreciation on such assets to cease and
(b) assets that meet the criteria to be classified as held for sale to be
presented separately in the statement of financial position and the
results of discontinued operations to be presented separately in the
statement of comprehensive income
Scope
2 The classification and presentation requirements of this IFRS apply to all
recognised noncurrent assets1 and to all disposal groups of an entity The
measurement requirements of this IFRS apply to all recognised noncurrent
assets and disposal groups (as set out in paragraph 4) except for those assets
listed in paragraph 5 which shall continue to be measured in accordance with
the Standard noted
3 Assets classified as noncurrent in accordance with IAS 1 Presentation of Financial
Statements shall not be reclassified as current assets until they meet the criteria to
be classified as held for sale in accordance with this IFRS Assets of a class that
an entity would normally regard as noncurrent that are acquired exclusively
with a view to resale shall not be classified as current unless they meet the
criteria to be classified as held for sale in accordance with this IFRS
4 Sometimes an entity disposes of a group of assets possibly with some directly
associated liabilities together in a single transaction Such a disposal group
may be a group of cashgenerating units a single cashgenerating unit or part of a
cashgenerating unit2 The group may include any assets and any liabilities of
the entity including current assets current liabilities and assets excluded by
paragraph 5 from the measurement requirements of this IFRS If a noncurrent
asset within the scope of the measurement requirements of this IFRS is part of a
disposal group the measurement requirements of this IFRS apply to the group
1 For assets classified according to a liquidity presentation noncurrent assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period
Paragraph 3 applies to the classification of such assets
2 However once the cash flows from an asset or group of assets are expected to arise principally from
sale rather than continuing use they become less dependent on cash flows arising from other
assets and a disposal group that was part of a cashgenerating unit becomes a separate
cashgenerating unit
IFRS 5
IFRS FoundationA212as a whole so that the group is measured at the lower of its carrying amount
and fair value less costs to sell The requirements for measuring the individual
assets and liabilities within the disposal group are set out in paragraphs 18 19
and 23
5 The measurement provisions of this IFRS3 do not apply to the following assets
which are covered by the IFRSs listed either as individual assets or as part of a
disposal group
(a) deferred tax assets (IAS 12 Income Taxes)
(b) assets arising from employee benefits (IAS 19 Employee Benefits)
(c) financial assets within the scope of IFRS 9 Financial Instruments
(d) noncurrent assets that are accounted for in accordance with the fair
value model in IAS 40 Investment Property
(e) noncurrent assets that are measured at fair value less costs to sell in
accordance with IAS 41 Agriculture
(f) contractual rights under insurance contracts as defined in IFRS 4
Insurance Contracts
5A The classification presentation and measurement requirements in this IFRS
applicable to a noncurrent asset (or disposal group) that is classified as held for
sale apply also to a noncurrent asset (or disposal group) that is classified as held
for distribution to owners acting in their capacity as owners (held for
distribution to owners)
5B This IFRS specifies the disclosures required in respect of noncurrent assets (or
disposal groups) classified as held for sale or discontinued operations
Disclosures in other IFRSs do not apply to such assets (or disposal groups) unless
those IFRSs require
(a) specific disclosures in respect of noncurrent assets (or disposal groups)
classified as held for sale or discontinued operations or
(b) disclosures about measurement of assets and liabilities within a disposal
group that are not within the scope of the measurement requirement of
IFRS 5 and such disclosures are not already provided in the other notes to
the financial statements
Additional disclosures about noncurrent assets (or disposal groups) classified as
held for sale or discontinued operations may be necessary to comply with the
general requirements of IAS 1 in particular paragraphs 15 and 125 of that
Standard
3 Other than paragraphs 18 and 19 which require the assets in question to be measured in
accordance with other applicable IFRSs
IFRS 5
IFRS Foundation A213Classification of noncurrent assets (or disposal groups) as held
for sale or as held for distribution to owners
6 An entity shall classify a noncurrent asset (or disposal group) as held for
sale if its carrying amount will be recovered principally through a sale
transaction rather than through continuing use
7 For this to be the case the asset (or disposal group) must be available for
immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets (or disposal groups) and its sale must be highly
probable
8 For the sale to be highly probable the appropriate level of management must be
committed to a plan to sell the asset (or disposal group) and an active
programme to locate a buyer and complete the plan must have been initiated
Further the asset (or disposal group) must be actively marketed for sale at a
price that is reasonable in relation to its current fair value In addition the sale
should be expected to qualify for recognition as a completed sale within one
year from the date of classification except as permitted by paragraph 9 and
actions required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn
The probability of shareholders’ approval (if required in the jurisdiction) should
be considered as part of the assessment of whether the sale is highly probable
8A An entity that is committed to a sale plan involving loss of control of a
subsidiary shall classify all the assets and liabilities of that subsidiary as held for
sale when the criteria set out in paragraphs 6–8 are met regardless of whether
the entity will retain a noncontrolling interest in its former subsidiary after the
sale
9 Events or circumstances may extend the period to complete the sale beyond one
year An extension of the period required to complete a sale does not preclude
an asset (or disposal group) from being classified as held for sale if the delay is
caused by events or circumstances beyond the entity’s control and there is
sufficient evidence that the entity remains committed to its plan to sell the asset
(or disposal group) This will be the case when the criteria in Appendix B are
met
10 Sale transactions include exchanges of noncurrent assets for other noncurrent
assets when the exchange has commercial substance in accordance with IAS 16
Property Plant and Equipment
11 When an entity acquires a noncurrent asset (or disposal group) exclusively with
a view to its subsequent disposal it shall classify the noncurrent asset (or
disposal group) as held for sale at the acquisition date only if the oneyear
requirement in paragraph 8 is met (except as permitted by paragraph 9) and it is
highly probable that any other criteria in paragraphs 7 and 8 that are not met at
that date will be met within a short period following the acquisition (usually
within three months)
12 If the criteria in paragraphs 7 and 8 are met after the reporting period an entity
shall not classify a noncurrent asset (or disposal group) as held for sale in those
IFRS 5
IFRS FoundationA214financial statements when issued However when those criteria are met after
the reporting period but before the authorisation of the financial statements for
issue the entity shall disclose the information specified in paragraph 41(a) (b)
and (d) in the notes
12A A noncurrent asset (or disposal group) is classified as held for distribution to
owners when the entity is committed to distribute the asset (or disposal group)
to the owners For this to be the case the assets must be available for immediate
distribution in their present condition and the distribution must be highly
probable For the distribution to be highly probable actions to complete the
distribution must have been initiated and should be expected to be completed
within one year from the date of classification Actions required to complete the
distribution should indicate that it is unlikely that significant changes to the
distribution will be made or that the distribution will be withdrawn The
probability of shareholders’ approval (if required in the jurisdiction) should be
considered as part of the assessment of whether the distribution is highly
probable
Noncurrent assets that are to be abandoned
13 An entity shall not classify as held for sale a noncurrent asset (or disposal group)
that is to be abandoned This is because its carrying amount will be recovered
principally through continuing use However if the disposal group to be
abandoned meets the criteria in paragraph 32(a)–(c) the entity shall present the
results and cash flows of the disposal group as discontinued operations in
accordance with paragraphs 33 and 34 at the date on which it ceases to be used
Noncurrent assets (or disposal groups) to be abandoned include noncurrent
assets (or disposal groups) that are to be used to the end of their economic life
and noncurrent assets (or disposal groups) that are to be closed rather than sold
14 An entity shall not account for a noncurrent asset that has been temporarily
taken out of use as if it had been abandoned
Measurement of noncurrent assets (or disposal groups)
classified as held for sale
Measurement of a noncurrent asset (or disposal group)
15 An entity shall measure a noncurrent asset (or disposal group) classified
as held for sale at the lower of its carrying amount and fair value less
costs to sell
15A An entity shall measure a noncurrent asset (or disposal group) classified
as held for distribution to owners at the lower of its carrying amount and
fair value less costs to distribute4
16 If a newly acquired asset (or disposal group) meets the criteria to be classified as
held for sale (see paragraph 11) applying paragraph 15 will result in the asset (or
disposal group) being measured on initial recognition at the lower of its carrying
amount had it not been so classified (for example cost) and fair value less costs
4 Costs to distribute are the incremental costs directly attributable to the distribution excluding
finance costs and income tax expense
IFRS 5
IFRS Foundation A215to sell Hence if the asset (or disposal group) is acquired as part of a business
combination it shall be measured at fair value less costs to sell
17 When the sale is expected to occur beyond one year the entity shall measure the
costs to sell at their present value Any increase in the present value of the costs
to sell that arises from the passage of time shall be presented in profit or loss as
a financing cost
18 Immediately before the initial classification of the asset (or disposal group) as
held for sale the carrying amounts of the asset (or all the assets and liabilities in
the group) shall be measured in accordance with applicable IFRSs
19 On subsequent remeasurement of a disposal group the carrying amounts of any
assets and liabilities that are not within the scope of the measurement
requirements of this IFRS but are included in a disposal group classified as held
for sale shall be remeasured in accordance with applicable IFRSs before the fair
value less costs to sell of the disposal group is remeasured
Recognition of impairment losses and reversals
20 An entity shall recognise an impairment loss for any initial or subsequent
writedown of the asset (or disposal group) to fair value less costs to sell to the
extent that it has not been recognised in accordance with paragraph 19
21 An entity shall recognise a gain for any subsequent increase in fair value less
costs to sell of an asset but not in excess of the cumulative impairment loss that
has been recognised either in accordance with this IFRS or previously in
accordance with IAS 36 Impairment of Assets
22 An entity shall recognise a gain for any subsequent increase in fair value less
costs to sell of a disposal group
(a) to the extent that it has not been recognised in accordance with
paragraph 19 but
(b) not in excess of the cumulative impairment loss that has been
recognised either in accordance with this IFRS or previously in
accordance with IAS 36 on the noncurrent assets that are within the
scope of the measurement requirements of this IFRS
23 The impairment loss (or any subsequent gain) recognised for a disposal group
shall reduce (or increase) the carrying amount of the noncurrent assets in the
group that are within the scope of the measurement requirements of this IFRS
in the order of allocation set out in paragraphs 104(a) and (b) and 122 of IAS 36
(as revised in 2004)
24 A gain or loss not previously recognised by the date of the sale of a noncurrent
asset (or disposal group) shall be recognised at the date of derecognition
Requirements relating to derecognition are set out in
(a) paragraphs 67–72 of IAS 16 (as revised in 2003) for property plant and
equipment and
(b) paragraphs 112–117 of IAS 38 Intangible Assets (as revised in 2004) for
intangible assets
IFRS 5
IFRS FoundationA21625 An entity shall not depreciate (or amortise) a noncurrent asset while it is
classified as held for sale or while it is part of a disposal group classified as held
for sale Interest and other expenses attributable to the liabilities of a disposal
group classified as held for sale shall continue to be recognised
Changes to a plan of sale or to a plan of distribution to
owners
26 If an entity has classified an asset (or disposal group) as held for sale or as held
for distribution to owners but the criteria in paragraphs 7–9 (for held for sale)
or in paragraph 12A (for held for distribution to owners) are no longer met the
entity shall cease to classify the asset (or disposal group) as held for sale or held
for distribution to owners (respectively) In such cases an entity shall follow the
guidance in paragraphs 27–29 to account for this change except when
paragraph 26A applies
26A If an entity reclassifies an asset (or disposal group) directly from being held for
sale to being held for distribution to owners or directly from being held for
distribution to owners to being held for sale then the change in classification is
considered a continuation of the original plan of disposal The entity
(a) shall not follow the guidance in paragraphs 27–29 to account for this
change The entity shall apply the classification presentation and
measurement requirements in this IFRS that are applicable to the new
method of disposal
(b) shall measure the noncurrent asset (or disposal group) by following the
requirements in paragraph 15 (if reclassified as held for sale) or 15A (if
reclassified as held for distribution to owners) and recognise any
reduction or increase in the fair value less costs to sellcosts to distribute
of the noncurrent asset (or disposal group) by following the
requirements in paragraphs 20–25
(c) shall not change the date of classification in accordance with
paragraphs 8 and 12A This does not preclude an extension of the period
required to complete a sale or a distribution to owners if the conditions
in paragraph 9 are met
27 The entity shall measure a noncurrent asset (or disposal group) that ceases to be
classified as held for sale or as held for distribution to owners (or ceases to be
included in a disposal group classified as held for sale or as held for distribution
to owners) at the lower of
(a) its carrying amount before the asset (or disposal group) was classified as
held for sale or as held for distribution to owners adjusted for any
depreciation amortisation or revaluations that would have been
recognised had the asset (or disposal group) not been classified as held
for sale or as held for distribution to owners and
IFRS 5
IFRS Foundation A217(b) its recoverable amount at the date of the subsequent decision not to sell or
distribute5
28 The entity shall include any required adjustment to the carrying amount of a
noncurrent asset that ceases to be classified as held for sale or as held for
distribution to owners in profit or loss6 from continuing operations in the
period in which the criteria in paragraphs 7–9 or 12A respectively are no longer
met Financial statements for the periods since classification as held for sale or
as held for distribution to owners shall be amended accordingly if the disposal
group or noncurrent asset that ceases to be classified as held for sale or as held
for distribution to owners is a subsidiary joint operation joint venture
associate or a portion of an interest in a joint venture or an associate The entity
shall present that adjustment in the same caption in the statement of
comprehensive income used to present a gain or loss if any recognised in
accordance with paragraph 37
29 If an entity removes an individual asset or liability from a disposal group
classified as held for sale the remaining assets and liabilities of the disposal
group to be sold shall continue to be measured as a group only if the group
meets the criteria in paragraphs 7–9 If an entity removes an individual asset or
liability from a disposal group classified as held for distribution to owners the
remaining assets and liabilities of the disposal group to be distributed shall
continue to be measured as a group only if the group meets the criteria in
paragraph 12A Otherwise the remaining noncurrent assets of the group that
individually meet the criteria to be classified as held for sale (or as held for
distribution to owners) shall be measured individually at the lower of their
carrying amounts and fair values less costs to sell (or costs to distribute) at that
date Any noncurrent assets that do not meet the criteria for held for sale shall
cease to be classified as held for sale in accordance with paragraph 26 Any
noncurrent assets that do not meet the criteria for held for distribution to
owners shall cease to be classified as held for distribution to owners in
accordance with paragraph 26
Presentation and disclosure
30 An entity shall present and disclose information that enables users of the
financial statements to evaluate the financial effects of discontinued
operations and disposals of noncurrent assets (or disposal groups)
Presenting discontinued operations
31 A component of an entity comprises operations and cash flows that can be clearly
distinguished operationally and for financial reporting purposes from the rest
5 If the noncurrent asset is part of a cashgenerating unit its recoverable amount is the carrying
amount that would have been recognised after the allocation of any impairment loss arising on that
cashgenerating unit in accordance with IAS 36
6 Unless the asset is property plant and equipment or an intangible asset that had been revalued in
accordance with IAS 16 or IAS 38 before classification as held for sale in which case the adjustment
shall be treated as a revaluation increase or decrease
IFRS 5
IFRS FoundationA218of the entity In other words a component of an entity will have been a
cashgenerating unit or a group of cashgenerating units while being held for
use
32 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 operations or
(c) is a subsidiary acquired exclusively with a view to resale
33 An entity shall disclose
(a) a single amount in the statement of comprehensive income comprising
the total of
(i) the posttax profit or loss of discontinued operations and
(ii) the posttax gain or loss recognised 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 pretax profit or loss of discontinued
operations
(ii) the related income tax expense as required by paragraph 81(h) of
IAS 12
(iii) the gain or loss recognised 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 and
(iv) the related income tax expense as required by paragraph 81(h) of
IAS 12
The analysis may be presented in the notes or in the statement of
comprehensive income If it is presented in the statement of
comprehensive income it shall be presented in a section identified as
relating to discontinued operations ie separately from continuing
operations The analysis is not required for disposal groups that are
newly acquired subsidiaries that meet the criteria to be classified as held
for sale on acquisition (see paragraph 11)
(c) the net cash flows attributable to the operating investing and financing
activities of discontinued operations These disclosures may be
presented either in the notes or in the financial statements These
disclosures are not required for disposal groups that are newly acquired
subsidiaries that meet the criteria to be classified as held for sale on
acquisition (see paragraph 11)
IFRS 5
IFRS Foundation A219(d) the amount of income from continuing operations and from
discontinued operations attributable to owners of the parent These
disclosures may be presented either in the notes or in the statement of
comprehensive income
33A If an entity presents the items of profit or loss in a separate statement as
described in paragraph 10A of IAS 1 (as amended in 2011) a section identified as
relating to discontinued operations is presented in that statement
34 An entity shall represent the disclosures in paragraph 33 for prior periods
presented in the financial statements so that the disclosures relate to all
operations that have been discontinued by the end of the reporting period for
the latest period presented
35 Adjustments in the current period to amounts previously presented in
discontinued operations that are directly related to the disposal of a
discontinued operation in a prior period shall be classified separately in
discontinued operations The nature and amount of such adjustments shall be
disclosed Examples of circumstances in which these adjustments may arise
include the following
(a) the resolution of uncertainties that arise from the terms of the disposal
transaction such as the resolution of purchase price adjustments and
indemnification issues with the purchaser
(b) the resolution of uncertainties that arise from and are directly related to
the operations of the component before its disposal such as
environmental and product warranty obligations retained by the seller
(c) the settlement of employee benefit plan obligations provided that the
settlement is directly related to the disposal transaction
36 If an entity ceases to classify a component of an entity as held for sale the results
of operations of the component previously presented in discontinued operations
in accordance with paragraphs 33–35 shall be reclassified and included in
income from continuing operations for all periods presented The amounts for
prior periods shall be described as having been represented
36A An entity that is committed to a sale plan involving loss of control of a
subsidiary shall disclose the information required in paragraphs 33–36 when
the subsidiary is a disposal group that meets the definition of a discontinued
operation in accordance with paragraph 32
Gains or losses relating to continuing operations
37 Any gain or loss on the remeasurement of a noncurrent asset (or disposal group)
classified as held for sale that does not meet the definition of a discontinued
operation shall be included in profit or loss from continuing operations
Presentation of a noncurrent asset or disposal group
classified as held for sale
38 An entity shall present a noncurrent 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 The liabilities of a disposal group
IFRS 5
IFRS FoundationA220classified as held for sale shall be presented separately from other liabilities in
the statement of financial position Those assets and liabilities shall not be
offset and presented as a single amount The major classes of assets and
liabilities classified as held for sale shall be separately disclosed either in the
statement of financial position or in the notes except as permitted by
paragraph 39 An entity shall present separately any cumulative income or
expense recognised in other comprehensive income relating to a noncurrent
asset (or disposal group) classified as held for sale
39 If the disposal group is a newly acquired subsidiary that meets the criteria to be
classified as held for sale on acquisition (see paragraph 11) disclosure of the
major classes of assets and liabilities is not required
40 An entity shall not reclassify or represent amounts presented for noncurrent
assets or for the assets and liabilities of disposal groups classified as held for sale
in the statements of financial position for prior periods to reflect the
classification in the statement of financial position for the latest period
presented
Additional disclosures
41 An entity shall disclose the following information in the notes in the period in
which a noncurrent asset (or disposal group) has been either classified as held
for sale or sold
(a) a description of the noncurrent asset (or disposal group)
(b) a description of the facts and circumstances of the sale or leading to the
expected disposal and the expected manner and timing of that disposal
(c) the gain or loss recognised in accordance with paragraphs 20–22 and if
not separately presented in the statement of comprehensive income the
caption in the statement of comprehensive income that includes that
gain or loss
(d) if applicable the reportable segment in which the noncurrent asset
(or disposal group) is presented in accordance with IFRS 8 Operating
Segments
42 If either paragraph 26 or paragraph 29 applies an entity shall disclose in the
period of the decision to change the plan to sell the noncurrent asset (or
disposal group) a description of the facts and circumstances leading to the
decision and the effect of the decision on the results of operations for the period
and any prior periods presented
Transitional provisions
43 The IFRS shall be applied prospectively to noncurrent assets (or disposal groups)
that meet the criteria to be classified as held for sale and operations that meet
the criteria to be classified as discontinued after the effective date of the IFRS
An entity may apply the requirements of the IFRS to all noncurrent assets (or
disposal groups) that meet the criteria to be classified as held for sale and
operations that meet the criteria to be classified as discontinued after any date
IFRS 5
IFRS Foundation A221before the effective date of the IFRS provided the valuations and other
information needed to apply the IFRS were obtained at the time those criteria
were originally met
Effective date
44 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005 Earlier application is encouraged If an entity applies the IFRS
for a period beginning before 1 January 2005 it shall disclose that fact
44A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraphs 3 and 38 and added paragraph 33A An entity
shall apply those amendments for annual periods beginning on or after
1 January 2009 If an entity applies IAS 1 (revised 2007) for an earlier period the
amendments shall be applied for that earlier period
44B IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) added
paragraph 33(d) An entity shall apply that amendment for annual periods
beginning on or after 1 July 2009 If an entity applies IAS 27 (amended 2008) for
an earlier period the amendment shall be applied for that earlier period The
amendment shall be applied retrospectively
44C Paragraphs 8A and 36A were added by Improvements to IFRSs issued in May 2008
An entity shall apply those amendments for annual periods beginning on or
after 1 July 2009 Earlier application is permitted However an entity shall not
apply the amendments for annual periods beginning before 1 July 2009 unless it
also applies IAS 27 (as amended in January 2008) If an entity applies the
amendments before 1 July 2009 it shall disclose that fact An entity shall apply
the amendments prospectively from the date at which it first applied IFRS 5
subject to the transitional provisions in paragraph 45 of IAS 27 (amended
January 2008)
44D Paragraphs 5A 12A and 15A were added and paragraph 8 was amended by
IFRIC 17 Distributions of Noncash Assets to Owners in November 2008 Those
amendments shall be applied prospectively to noncurrent assets (or disposal
groups) that are classified as held for distribution to owners in annual periods
beginning on or after 1 July 2009 Retrospective application is not permitted
Earlier application is permitted If an entity applies the amendments for a
period beginning before 1 July 2009 it shall disclose that fact and also apply
IFRS 3 Business Combinations (as revised in 2008) IAS 27 (as amended in January
2008) and IFRIC 17
44E Paragraph 5B was added by Improvements to IFRSs issued in April 2009 An entity
shall apply that amendment prospectively for annual periods beginning on or
after 1 January 2010 Earlier application is permitted If an entity applies the
amendment for an earlier period it shall disclose that fact
44F [Deleted]
44G IFRS 11 Joint Arrangements issued in May 2011 amended paragraph 28 An entity
shall apply that amendment when it applies IFRS 11
IFRS 5
IFRS FoundationA22244H IFRS 13 Fair Value Measurement issued in May 2011 amended the definition of fair
value in Appendix A An entity shall apply that amendment when it applies
IFRS 13
44I Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) issued in
June 2011 amended paragraph 33A An entity shall apply that amendment
when it applies IAS 1 as amended in June 2011
44J [Deleted]
44K IFRS 9 as issued in July 2014 amended paragraph 5 and deleted paragraphs 44F
and 44J An entity shall apply those amendments when it applies IFRS 9
44L Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014 amended
paragraphs 26–29 and added paragraph 26A An entity shall apply those
amendments prospectively in accordance with IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors to changes in a method of disposal that occur in
annual periods beginning on or after 1 January 2016 Earlier application is
permitted If an entity applies those amendments for an earlier period it shall
disclose that fact
Withdrawal of IAS 35
45 This IFRS supersedes IAS 35 Discontinuing Operations
IFRS 5
IFRS Foundation A223Appendix A
Defined terms
This appendix is an integral part of the IFRS
cashgenerating unit The smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from
other assets or groups of assets
component of an
entity
Operations and cash flows that can be clearly distinguished
operationally and for financial reporting purposes from the rest
of the entity
costs to sell The incremental costs directly attributable to the disposal of an
asset (or disposal group) excluding finance costs and income
tax expense
current asset An entity shall classify an asset as current when
(a) it expects to realise the asset or intends to sell or
consume it in its normal operating cycle
(b) it holds the asset primarily for the purpose of trading
(c) it expects to realise the asset within twelve months after
the reporting period or
(d) the asset is cash or a cash equivalent (as defined in IAS 7)
unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after
the reporting period
discontinued
operation
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
operations or
(c) is a subsidiary acquired exclusively with a view to resale
disposal group A group of assets to be disposed of by sale or otherwise together
as a group in a single transaction and liabilities directly
associated with those assets that will be transferred in the
transaction The group includes goodwill acquired in a business
combination if the group is a cashgenerating unit to which
goodwill has been allocated in accordance with the requirements
of paragraphs 80–87 of IAS 36 Impairment of Assets (as revised in
2004) or if it is an operation within such a cashgenerating unit
fair value Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (See IFRS 13)
IFRS 5
IFRS FoundationA224firm purchase
commitment
An agreement with an unrelated party binding on both parties
and usually legally enforceable that (a) specifies all significant
terms including the price and timing of the transactions and (b)
includes a disincentive for nonperformance that is sufficiently
large to make performance highly probable
highly probable Significantly more likely than probable
noncurrent asset An asset that does not meet the definition of a current asset
probable More likely than not
recoverable amount The higher of an asset’s fair value less costs to sell and its value
in use
value in use The present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the
end of its useful life
IFRS 5
IFRS Foundation A225Appendix B
Application supplement
This appendix is an integral part of the IFRS
Extension of the period required to complete a sale
B1 As noted in paragraph 9 an extension of the period required to complete a sale
does not preclude an asset (or disposal group) from being classified as held for
sale if the delay is caused by events or circumstances beyond the entity’s control
and there is sufficient evidence that the entity remains committed to its plan to
sell the asset (or disposal group) An exception to the oneyear requirement in
paragraph 8 shall therefore apply in the following situations in which such
events or circumstances arise
(a) at the date an entity commits itself to a plan to sell a noncurrent asset
(or disposal group) it reasonably expects that others (not a buyer) will
impose conditions on the transfer of the asset (or disposal group) that
will extend the period required to complete the sale and
(i) actions necessary to respond to those conditions cannot be
initiated until after a firm purchase commitment is obtained and
(ii) a firm purchase commitment is highly probable within one year
(b) an entity obtains a firm purchase commitment and as a result a buyer
or others unexpectedly impose conditions on the transfer of a
noncurrent asset (or disposal group) previously classified as held for sale
that will extend the period required to complete the sale and
(i) timely actions necessary to respond to the conditions have been
taken and
(ii) a favourable resolution of the delaying factors is expected
(c) during the initial oneyear period circumstances arise that were
previously considered unlikely and as a result a noncurrent asset (or
disposal group) previously classified as held for sale is not sold by the end
of that period and
(i) during the initial oneyear period the entity took action necessary
to respond to the change in circumstances
(ii) the noncurrent asset (or disposal group) is being actively
marketed at a price that is reasonable given the change in
circumstances and
(iii) the criteria in paragraphs 7 and 8 are met
IFRS 5
IFRS FoundationA226Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005 If an entity adopts this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume
IFRS 5
IFRS Foundation A227IFRS Standard 6
Exploration for and Evaluation of
Mineral Resources
In December 2004 the International Accounting Standards Board issued IFRS 6 Exploration
for and Evaluation of Mineral Resources
IFRS 6
IFRS Foundation A229CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 6
EXPLORATION FOR AND EVALUATION OF
MINERAL RESOURCES
OBJECTIVE 1
SCOPE 3
RECOGNITION OF EXPLORATION AND EVALUATION ASSETS 6
Temporary exemption from IAS 8 paragraphs 11 and 12 6
MEASUREMENT OF EXPLORATION AND EVALUATION ASSETS 8
Measurement at recognition 8
Elements of cost of exploration and evaluation assets 9
Measurement after recognition 12
Changes in accounting policies 13
PRESENTATION 15
Classification of exploration and evaluation assets 15
Reclassification of exploration and evaluation assets 17
IMPAIRMENT 18
Recognition and measurement 18
Specifying the level at which exploration and evaluation assets are assessed
for impairment 21
DISCLOSURE 23
EFFECTIVE DATE 26
TRANSITIONAL PROVISIONS 27
APPENDICES
A Defined terms
B Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 6 ISSUED IN DECEMBER 2004
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 1 AND IFRS 6
ISSUED IN JUNE 2005
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IFRS 6
IFRS FoundationA230International Financial Reporting Standard 6 Exploration for and Evaluation of Mineral
Resources (IFRS 6) is set out in paragraphs 1–27 and Appendices A and B All the
paragraphs have equal authority Paragraphs in bold type state the main principles
Terms defined in Appendix A are in italics the first time they appear in the Standard
Definitions of other terms are given in the Glossary for International Financial Reporting
Standards IFRS 6 should be read in the context of its objective and the Basis for
Conclusions the Preface to International Financial Reporting Standards and the Conceptual
Framework for Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and
Errors provides a basis for selecting and applying accounting policies in the absence of
explicit guidance
IFRS 6
IFRS Foundation A231Introduction
Reasons for issuing the IFRS
IN1 The International Accounting Standards Board decided to develop an
International Financial Reporting Standard (IFRS) on exploration for and
evaluation of mineral resources because
(a) until now there has been no IFRS that specifically addresses the
accounting for those activities and they are excluded from the scope of
IAS 38 Intangible Assets In addition mineral rights and mineral
resources such as oil natural gas and similar nonregenerative resources’
are excluded from the scope of IAS 16 Property Plant and Equipment
Consequently an entity was required to determine its accounting policy
for the exploration for and evaluation of mineral resources in
accordance with paragraphs 10–12 of IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors
(b) there are different views on how exploration and evaluation
expenditures should be accounted for in accordance with IFRSs
(c) accounting practices for exploration and evaluation assets under the
requirements of other standardsetting bodies are diverse and often
differ from practices in other sectors for expenditures that may be
considered analogous (eg accounting practices for research and
development costs in accordance with IAS 38)
(d) exploration and evaluation expenditures are significant to entities
engaged in extractive activities
(e) an increasing number of entities incurring exploration and evaluation
expenditures present their financial statements in accordance with
IFRSs and many more are expected to do so from 2005
IN2 The Board’s predecessor organisation the International Accounting Standards
Committee established a Steering Committee in 1998 to carry out initial work
on accounting and financial reporting by entities engaged in extractive
activities In November 2000 the Steering Committee published an Issues Paper
Extractive Industries
IN3 In July 2001 the Board announced that it would restart the project only when
agenda time permitted Although the Board recognised the importance of
accounting for extractive activities generally it decided in September 2002 that
it was not feasible to complete the detailed analysis required for this project
obtain appropriate input from constituents and undertake the Board’s normal
due process in time to implement changes before many entities adopted IFRSs in
2005
IN4 The Board’s objectives for this phase of its extractive activities project are
IFRS 6
IFRS FoundationA232(a) to make limited improvements to accounting practices for exploration
and evaluation expenditures without requiring major changes that
might be reversed when the Board undertakes a comprehensive review of
accounting practices used by entities engaged in the exploration for and
evaluation of mineral resources
(b) to specify the circumstances in which entities that recognise exploration
and evaluation assets should test such assets for impairment in
accordance with IAS 36 Impairment of Assets
(c) to require entities engaged in the exploration for and evaluation of
mineral resources to disclose information about exploration and
evaluation assets the level at which such assets are assessed for
impairment and any impairment losses recognised
Main features of the IFRS
IN5 The IFRS
(a) permits an entity to develop an accounting policy for exploration and
evaluation assets without specifically considering the requirements of
paragraphs 11 and 12 of IAS 8 Thus an entity adopting IFRS 6 may
continue to use the accounting policies applied immediately before
adopting the IFRS This includes continuing to use recognition and
measurement practices that are part of those accounting policies
(b) requires entities recognising exploration and evaluation assets to
perform an impairment test on those assets when facts and
circumstances suggest that the carrying amount of the assets may exceed
their recoverable amount
(c) varies the recognition of impairment from that in IAS 36 but measures
the impairment in accordance with that Standard once the impairment
is identified
IFRS 6
IFRS Foundation A233International Financial Reporting Standard 6
Exploration for and Evaluation of Mineral Resources
Objective
1 The objective of this IFRS is to specify the financial reporting for the exploration
for and evaluation of mineral resources
2 In particular the IFRS requires
(a) limited improvements to existing accounting practices for exploration and
evaluation expenditures
(b) entities that recognise exploration and evaluation assets to assess such assets
for impairment in accordance with this IFRS and measure any
impairment in accordance with IAS 36 Impairment of Assets
(c) disclosures that identify and explain the amounts in the entity’s
financial statements arising from the exploration for and evaluation of
mineral resources and help users of those financial statements
understand the amount timing and certainty of future cash flows from
any exploration and evaluation assets recognised
Scope
3 An entity shall apply the IFRS to exploration and evaluation expenditures that it
incurs
4 The IFRS does not address other aspects of accounting by entities engaged in the
exploration for and evaluation of mineral resources
5 An entity shall not apply the IFRS to expenditures incurred
(a) before the exploration for and evaluation of mineral resources such as
expenditures incurred before the entity has obtained the legal rights to
explore a specific area
(b) after the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable
Recognition of exploration and evaluation assets
Temporary exemption from IAS 8 paragraphs 11 and 12
6 When developing its accounting policies an entity recognising exploration and
evaluation assets shall apply paragraph 10 of IAS 8 Accounting Policies Changes in
Accounting Estimates and Errors
7 Paragraphs 11 and 12 of IAS 8 specify sources of authoritative requirements and
guidance that management is required to consider in developing an accounting
policy for an item if no IFRS applies specifically to that item Subject to
IFRS 6
IFRS FoundationA234paragraphs 9 and 10 below this IFRS exempts an entity from applying those
paragraphs to its accounting policies for the recognition and measurement of
exploration and evaluation assets
Measurement of exploration and evaluation assets
Measurement at recognition
8 Exploration and evaluation assets shall be measured at cost
Elements of cost of exploration and evaluation assets
9 An entity shall determine an accounting policy specifying which expenditures
are recognised as exploration and evaluation assets and apply the policy
consistently In making this determination an entity considers the degree to
which the expenditure can be associated with finding specific mineral resources
The following are examples of expenditures that might be included in the initial
measurement of exploration and evaluation assets (the list is not exhaustive)
(a) acquisition of rights to explore
(b) topographical geological geochemical and geophysical studies
(c) exploratory drilling
(d) trenching
(e) sampling and
(f) activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource
10 Expenditures related to the development of mineral resources shall not be
recognised as exploration and evaluation assets The Framework1 and IAS 38
Intangible Assets provide guidance on the recognition of assets arising from
development
11 In accordance with IAS 37 Provisions Contingent Liabilities and Contingent Assets an
entity recognises any obligations for removal and restoration that are incurred
during a particular period as a consequence of having undertaken the
exploration for and evaluation of mineral resources
Measurement after recognition
12 After recognition an entity shall apply either the cost model or the revaluation
model to the exploration and evaluation assets If the revaluation model is
applied (either the model in IAS 16 Property Plant and Equipment or the model in
IAS 38) it shall be consistent with the classification of the assets (see
paragraph 15)
1 The reference to the Framework is to IASC’s Framework for the Preparation and Presentation of Financial
Statements adopted by the IASB in 2001 In September 2010 the IASB replaced the Framework with
the Conceptual Framework for Financial Reporting
IFRS 6
IFRS Foundation A235Changes in accounting policies
13 An entity may change its accounting policies for exploration and
evaluation expenditures if the change makes the financial statements
more relevant to the economic decisionmaking needs of users and no
less reliable or more reliable and no less relevant to those needs An
entity shall judge relevance and reliability using the criteria in IAS 8
14 To justify changing its accounting policies for exploration and evaluation
expenditures an entity shall demonstrate that the change brings its financial
statements closer to meeting the criteria in IAS 8 but the change need not
achieve full compliance with those criteria
Presentation
Classification of exploration and evaluation assets
15 An entity shall classify exploration and evaluation assets as tangible or
intangible according to the nature of the assets acquired and apply the
classification consistently
16 Some exploration and evaluation assets are treated as intangible (eg drilling
rights) whereas others are tangible (eg vehicles and drilling rigs) To the extent
that a tangible asset is consumed in developing an intangible asset the amount
reflecting that consumption is part of the cost of the intangible asset However
using a tangible asset to develop an intangible asset does not change a tangible
asset into an intangible asset
Reclassification of exploration and evaluation assets
17 An exploration and evaluation asset shall no longer be classified as such when
the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable Exploration and evaluation assets shall be assessed
for impairment and any impairment loss recognised before reclassification
Impairment
Recognition and measurement
18 Exploration and evaluation assets shall be assessed for impairment when
facts and circumstances suggest that the carrying amount of an
exploration and evaluation asset may exceed its recoverable amount
When facts and circumstances suggest that the carrying amount exceeds
the recoverable amount an entity shall measure present and disclose any
resulting impairment loss in accordance with IAS 36 except as provided
by paragraph 21 below
19 For the purposes of exploration and evaluation assets only paragraph 20 of this
IFRS shall be applied rather than paragraphs 8–17 of IAS 36 when identifying an
exploration and evaluation asset that may be impaired Paragraph 20 uses the
term assets’ but applies equally to separate exploration and evaluation assets or
a cashgenerating unit
IFRS 6
IFRS FoundationA23620 One or more of the following facts and circumstances indicate that an entity
should test exploration and evaluation assets for impairment (the list is not
exhaustive)
(a) the period for which the entity has the right to explore in the specific
area has expired during the period or will expire in the near future and
is not expected to be renewed
(b) substantive expenditure on further exploration for and evaluation of
mineral resources in the specific area is neither budgeted nor planned
(c) exploration for and evaluation of mineral resources in the specific area
have not led to the discovery of commercially viable quantities of
mineral resources and the entity has decided to discontinue such
activities in the specific area
(d) sufficient data exist to indicate that although a development in the
specific area is likely to proceed the carrying amount of the exploration
and evaluation asset is unlikely to be recovered in full from successful
development or by sale
In any such case or similar cases the entity shall perform an impairment test in
accordance with IAS 36 Any impairment loss is recognised as an expense in
accordance with IAS 36
Specifying the level at which exploration and evaluation
assets are assessed for impairment
21 An entity shall determine an accounting policy for allocating exploration
and evaluation assets to cashgenerating units or groups of
cashgenerating units for the purpose of assessing such assets for
impairment Each cashgenerating unit or group of units to which an
exploration and evaluation asset is allocated shall not be larger than an
operating segment determined in accordance with IFRS 8 Operating
Segments
22 The level identified by the entity for the purposes of testing exploration and
evaluation assets for impairment may comprise one or more cashgenerating
units
Disclosure
23 An entity shall disclose information that identifies and explains the
amounts recognised in its financial statements arising from the
exploration for and evaluation of mineral resources
24 To comply with paragraph 23 an entity shall disclose
(a) its accounting policies for exploration and evaluation expenditures
including the recognition of exploration and evaluation assets
(b) the amounts of assets liabilities income and expense and operating and
investing cash flows arising from the exploration for and evaluation of
mineral resources
IFRS 6
IFRS Foundation A23725 An entity shall treat exploration and evaluation assets as a separate class of
assets and make the disclosures required by either IAS 16 or IAS 38 consistent
with how the assets are classified
Effective date
26 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2006 Earlier application is encouraged If an entity applies the IFRS
for a period beginning before 1 January 2006 it shall disclose that fact
Transitional provisions
27 If it is impracticable to apply a particular requirement of paragraph 18 to
comparative information that relates to annual periods beginning before
1 January 2006 an entity shall disclose that fact IAS 8 explains the term
impracticable’
IFRS 6
IFRS FoundationA238Appendix A
Defined terms
This appendix is an integral part of the IFRS
exploration and
evaluation assets
Exploration and evaluation expenditures recognised as assets
in accordance with the entity’s accounting policy
exploration and
evaluation
expenditures
Expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before
the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable
exploration for and
evaluation of mineral
resources
The search for mineral resources including minerals oil natural
gas and similar nonregenerative resources after the entity has
obtained legal rights to explore in a specific area as well as the
determination of the technical feasibility and commercial
viability of extracting the mineral resource
IFRS 6
IFRS Foundation A239Appendix B
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2006 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume
IFRS 6
IFRS FoundationA240IFRS Standard 7
Financial Instruments Disclosures
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 30
Disclosures in the Financial Statements of Banks and Similar Financial Institutions which had
originally been issued by the International Accounting Standards Committee in August
1990
In August 2005 the Board issued IFRS 7 Financial Instruments which replaced IAS 30 and
carried forward the disclosure requirements in IAS 32 Financial Instruments Disclosure and
Presentation IAS 32 was subsequently renamed as IAS 32 Financial Instruments Presentation
IAS 1 Presentation of Financial Statements (as revised in 2007) amended the terminology used
throughout IFRS including IFRS 7 In March 2009 the IASB enhanced the disclosures about
fair value and liquidity risks in IFRS 7
The Board also amended IFRS 7 to reflect that a new financial instruments Standard was
issued—IFRS 9 Financial Instruments which related to the classification of financial assets and
financial liabilities
IFRS 7 was also amended in October 2010 to require entities to supplement disclosures for
all transferred financial assets that are not derecognised where there has been some
continuing involvement in a transferred asset The Board amended IFRS 7 in December
2011 to improve disclosures in netting arrangements associated with financial assets and
financial liabilities
Other Standards have made minor consequential amendments to IFRS 7 They include
Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime Adopters (Amendments to
IFRS 1) (issued January 2010) Improvements to IFRSs (issued May 2010) IFRS 10 Consolidated
Financial Statements (issued May 2011) IFRS 11 Joint Arrangements (issued May 2011) IFRS 13
Fair Value Measurement (issued May 2011) Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) (issued June 2011) Mandatory Effective Date and Transition Disclosures
(Amendments to IFRS 9 (2009) IFRS 9 (2010) and IFRS 7) (issued December 2011) Investment
Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) (issued October 2012) IFRS 9 Financial
Instruments (Hedge Accounting and amendments to IFRS 9 IFRS 7 and IAS 39) (issued
November 2013) Annual Improvements to IFRSs 2012–2014 Cycle (issued September 2014)
Disclosure Initiative (Amendments to IAS 1) (issued December 2014) and IFRS 16 Leases (issued
January 2016)
IFRS 7
IFRS Foundation A241CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 7
FINANCIAL INSTRUMENTS DISCLOSURES
OBJECTIVE 1
SCOPE 3
CLASSES OF FINANCIAL INSTRUMENTS AND LEVEL OF DISCLOSURE 6
SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION
AND PERFORMANCE 7
Statement of financial position 8
Statement of comprehensive income 20
Other disclosures 21
NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS 31
Qualitative disclosures 33
Quantitative disclosures 34
TRANSFERS OF FINANCIAL ASSETS 42A
Transferred financial assets that are not derecognised in their entirety 42D
Transferred financial assets that are derecognised in their entirety 42E
Supplementary information 42H
INITIAL APPLICATION OF IFRS 9 42I
EFFECTIVE DATE AND TRANSITION 43
WITHDRAWAL OF IAS 30 45
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 7 ISSUED IN AUGUST 2005 APPROVAL
BY THE BOARD OF AMENDMENTS TO IFRS 7
Improving Disclosures about Financial Instruments issued in March 2009
Disclosures—Transfers of Financial Assets issued in October 2010
Mandatory Effective Date of IFRS 9 and Transition Disclosures (Amendments
to IFRS 9 (2009) IFRS 9 (2010) and IFRS 7) issued in December 2011
Disclosures—Offsetting Financial Assets and Financial Liabilities
(Amendments to IFRS 7) issued in December 2011
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9
IFRS 7 and IAS 39) issued in November 2013
IFRS 7
IFRS FoundationA242BASIS FOR CONCLUSIONS
APPENDIX
Amendments to Basis for Conclusions on other IFRSs
IMPLEMENTATION GUIDANCE
APPENDIX
Amendments to guidance on other IFRSs
IFRS 7
IFRS Foundation A243International Financial Reporting Standard 7 Financial Instruments Disclosures (IFRS 7) is set
out in paragraphs 1–45 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 7 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 7
IFRS FoundationA244Introduction
Reasons for issuing the IFRS
IN1 In recent years the techniques used by entities for measuring and managing
exposure to risks arising from financial instruments have evolved and new risk
management concepts and approaches have gained acceptance In addition
many public and private sector initiatives have proposed improvements to the
disclosure framework for risks arising from financial instruments
IN2 The International Accounting Standards Board believes that users of financial
statements need information about an entity’s exposure to risks and how those
risks are managed Such information can influence a user’s assessment of the
financial position and financial performance of an entity or of the amount
timing and uncertainty of its future cash flows Greater transparency regarding
those risks allows users to make more informed judgements about risk and
return
IN3 Consequently the Board concluded that there was a need to revise and enhance
the disclosures in IAS 30 Disclosures in the Financial Statements of Banks and Similar
Financial Institutions and IAS 32 Financial Instruments Disclosure and PresentationAs
part of this revision the Board removed duplicative disclosures and simplified
the disclosures about concentrations of risk credit risk liquidity risk and
market risk in IAS 32
Main features of the IFRS
IN4 IFRS 7 applies to all risks arising from all financial instruments except those
instruments listed in paragraph 3 The IFRS applies to all entities including
entities that have few financial instruments (eg a manufacturer whose only
financial instruments are accounts receivable and accounts payable) and those
that have many financial instruments (eg a financial institution most of whose
assets and liabilities are financial instruments) However the extent of
disclosure required depends on the extent of the entity’s use of financial
instruments and of its exposure to risk
IN5 The IFRS requires disclosure of
(a) the significance of financial instruments for an entity’s financial
position and performance These disclosures incorporate many of the
requirements previously in IAS 32
(b) qualitative and quantitative information about exposure to risks arising
from financial instruments including specified minimum disclosures
about credit risk liquidity risk and market risk The qualitative
disclosures describe management’s objectives policies and processes for
managing those risks The quantitative disclosures provide information
about the extent to which the entity is exposed to risk based on
information provided internally to the entity’s key management
IFRS 7
IFRS Foundation A245personnel Together these disclosures provide an overview of the
entity’s use of financial instruments and the exposures to risks they
create
IN5A Amendments to the IFRS issued in March 2009 require enhanced disclosures
about fair value measurements and liquidity risk These have been made to
address application issues and provide useful information to users
IN5B Disclosures—Transfers of Financial Assets (Amendments to IFRS 7) issued in October
2010 amended the required disclosures to help users of financial statements
evaluate the risk exposures relating to transfers of financial assets and the effect
of those risks on an entity’s financial position
IN5C In May 2011 the Board relocated the disclosures about fair value measurements
to IFRS 13 Fair Value Measurement
IN6 The IFRS includes in Appendix B mandatory application guidance that explains
how to apply the requirements in the IFRS The IFRS is accompanied by
nonmandatory Implementation Guidance that describes how an entity might
provide the disclosures required by the IFRS
IN7 The IFRS supersedes IAS 30 and the disclosure requirements of IAS 32 The
presentation requirements of IAS 32 remain unchanged
IN8 The IFRS is effective for annual periods beginning on or after 1 January 2007
Earlier application is encouraged
IN9 Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)
issued in December 2011 amended the required disclosures to include
information that will enable users of an entity’s financial statements to evaluate
the effect or potential effect of netting arrangements including rights of setoff
associated with the entity’s recognised financial assets and recognised financial
liabilities on the entity’s financial position
IFRS 7
IFRS FoundationA246International Financial Reporting Standard 7
Financial Instruments Disclosures
Objective
1 The objective of this IFRS is to require entities to provide disclosures in their
financial statements that enable users to evaluate
(a) the significance of financial instruments for the entity’s financial
position and performance and
(b) the nature and extent of risks arising from financial instruments to
which the entity is exposed during the period and at the end of the
reporting period and how the entity manages those risks
2 The principles in this IFRS complement the principles for recognising
measuring and presenting financial assets and financial liabilities in IAS 32
Financial Instruments Presentation and IFRS 9 Financial Instruments
Scope
3 This IFRS shall be applied by all entities to all types of financial instruments
except
(a) those interests in subsidiaries associates or joint ventures that are
accounted for in accordance with IFRS 10 Consolidated Financial Statements
IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and
Joint Ventures However in some cases IFRS 10 IAS 27 or IAS 28 require or
permit an entity to account for an interest in a subsidiary associate or
joint venture using IFRS 9 in those cases entities shall apply the
requirements of this IFRS and for those measured at fair value the
requirements of IFRS 13 Fair Value Measurement Entities shall also apply
this IFRS to all derivatives linked to interests in subsidiaries associates or
joint ventures unless the derivative meets the definition of an equity
instrument in IAS 32
(b) employers’ rights and obligations arising from employee benefit plans
to which IAS 19 Employee Benefits applies
(c) [deleted]
(d) insurance contracts as defined in IFRS 4 Insurance Contracts However this
IFRS applies to derivatives that are embedded in insurance contracts if
IFRS 9 requires the entity to account for them separately Moreover an
issuer shall apply this IFRS to financial guarantee contracts if the issuer
applies IFRS 9 in recognising and measuring the contracts but shall
apply IFRS 4 if the issuer elects in accordance with paragraph 4(d) of
IFRS 4 to apply IFRS 4 in recognising and measuring them
(e) financial instruments contracts and obligations under sharebased
payment transactions to which IFRS 2 Sharebased Payment applies except
that this IFRS applies to contracts within the scope of IFRS 9
IFRS 7
IFRS Foundation A247(f) instruments that are required to be classified as equity instruments in
accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of
IAS 32
4 This IFRS applies to recognised and unrecognised financial instruments
Recognised financial instruments include financial assets and financial
liabilities that are within the scope of IFRS 9 Unrecognised financial
instruments include some financial instruments that although outside the
scope of IFRS 9 are within the scope of this IFRS
5 This IFRS applies to contracts to buy or sell a nonfinancial item that are within
the scope of IFRS 9
5A The credit risk disclosure requirements in paragraphs 35A–35N apply to those
rights that IFRS 15 Revenue from Contracts with Customers specifies are accounted for
in accordance with IFRS 9 for the purposes of recognising impairment gains or
losses Any reference to financial assets or financial instruments in these
paragraphs shall include those rights unless otherwise specified
Classes of financial instruments and level of disclosure
6 When this IFRS requires disclosures by class of financial instrument an entity
shall group financial instruments into classes that are appropriate to the nature
of the information disclosed and that take into account the characteristics of
those financial instruments An entity shall provide sufficient information to
permit reconciliation to the line items presented in the statement of financial
position
Significance of financial instruments for financial position and
performance
7 An entity shall disclose information that enables users of its financial
statements to evaluate the significance of financial instruments for its
financial position and performance
Statement of financial position
Categories of financial assets and financial liabilities
8 The carrying amounts of each of the following categories as specified in IFRS 9
shall be disclosed either in the statement of financial position or in the notes
(a) financial assets measured at fair value through profit or loss showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 671 of IFRS 9 and (ii) those
mandatorily measured at fair value through profit or loss in accordance
with IFRS 9
(b)–(d) [deleted]
IFRS 7
IFRS FoundationA248(e) financial liabilities at fair value through profit or loss showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 671 of IFRS 9 and (ii) those
that meet the definition of held for trading in IFRS 9
(f) financial assets measured at amortised cost
(g) financial liabilities measured at amortised cost
(h) financial assets measured at fair value through other comprehensive
income showing separately (i) financial assets that are measured at fair
value through other comprehensive income in accordance with
paragraph 412A of IFRS 9 and (ii) investments in equity instruments
designated as such upon initial recognition in accordance with
paragraph 575 of IFRS 9
Financial assets or financial liabilities at fair value through profit
or loss
9 If the entity has designated as measured at fair value through profit or loss a
financial asset (or group of financial assets) that would otherwise be measured at
fair value through other comprehensive income or amortised cost it shall
disclose
(a) the maximum exposure to credit risk (see paragraph 36(a)) of the financial
asset (or group of financial assets) at the end of the reporting period
(b) the amount by which any related credit derivatives or similar
instruments mitigate that maximum exposure to credit risk (see
paragraph 36(b))
(c) the amount of change during the period and cumulatively in the fair
value of the financial asset (or group of financial assets) that is
attributable to changes in the credit risk of the financial asset
determined either
(i) as the amount of change in its fair value that is not attributable
to changes in market conditions that give rise to market riskor
(ii) using an alternative method the entity believes more faithfully
represents the amount of change in its fair value that is
attributable to changes in the credit risk of the asset
Changes in market conditions that give rise to market risk include
changes in an observed (benchmark) interest rate commodity price
foreign exchange rate or index of prices or rates
(d) the amount of the change in the fair value of any related credit
derivatives or similar instruments that has occurred during the period
and cumulatively since the financial asset was designated
10 If the entity has designated a financial liability as at fair value through profit or
loss in accordance with paragraph 422 of IFRS 9 and is required to present the
effects of changes in that liability’s credit risk in other comprehensive income
(see paragraph 577 of IFRS 9) it shall disclose
IFRS 7
IFRS Foundation A249(a) the amount of change cumulatively in the fair value of the financial
liability that is attributable to changes in the credit risk of that liability
(see paragraphs B5713–B5720 of IFRS 9 for guidance on determining
the effects of changes in a liability’s credit risk)
(b) the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to
the holder of the obligation
(c) any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers
(d) if a liability is derecognised during the period the amount (if any)
presented in other comprehensive income that was realised at
derecognition
10A If an entity has designated a financial liability as at fair value through profit or
loss in accordance with paragraph 422 of IFRS 9 and is required to present all
changes in the fair value of that liability (including the effects of changes in the
credit risk of the liability) in profit or loss (see paragraphs 577 and 578 of
IFRS 9) it shall disclose
(a) the amount of change during the period and cumulatively in the fair
value of the financial liability that is attributable to changes in the credit
risk of that liability (see paragraphs B5713–B5720 of IFRS 9 for
guidance on determining the effects of changes in a liability’s credit
risk) and
(b) the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to
the holder of the obligation
11 The entity shall also disclose
(a) a detailed description of the methods used to comply with the
requirements in paragraphs 9(c) 10(a) and 10A(a) and paragraph 577(a)
of IFRS 9 including an explanation of why the method is appropriate
(b) if the entity believes that the disclosure it has given either in the
statement of financial position or in the notes to comply with the
requirements in paragraph 9(c) 10(a) or 10A(a) or paragraph 577(a) of
IFRS 9 does not faithfully represent the change in the fair value of the
financial asset or financial liability attributable to changes in its credit
risk the reasons for reaching this conclusion and the factors it believes
are relevant
(c) a detailed description of the methodology or methodologies used to
determine whether presenting the effects of changes in a liability’s credit
risk in other comprehensive income would create or enlarge an
accounting mismatch in profit or loss (see paragraphs 577 and 578 of
IFRS 9) If an entity is required to present the effects of changes in a
liability’s credit risk in profit or loss (see paragraph 578 of IFRS 9) the
disclosure must include a detailed description of the economic
relationship described in paragraph B576 of IFRS 9
IFRS 7
IFRS FoundationA250Investments in equity instruments designated at fair value
through other comprehensive income
11A If an entity has designated investments in equity instruments to be measured at
fair value through other comprehensive income as permitted by
paragraph 575 of IFRS 9 it shall disclose
(a) which investments in equity instruments have been designated to be
measured at fair value through other comprehensive income
(b) the reasons for using this presentation alternative
(c) the fair value of each such investment at the end of the reporting period
(d) dividends recognised during the period showing separately those
related to investments derecognised during the reporting period and
those related to investments held at the end of the reporting period
(e) any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers
11B If an entity derecognised investments in equity instruments measured at fair
value through other comprehensive income during the reporting period it shall
disclose
(a) the reasons for disposing of the investments
(b) the fair value of the investments at the date of derecognition
(c) the cumulative gain or loss on disposal
Reclassification
12–
12A
[Deleted]
12B An entity shall disclose if in the current or previous reporting periods it has
reclassified any financial assets in accordance with paragraph 441 of IFRS 9
For each such event an entity shall disclose
(a) the date of reclassification
(b) a detailed explanation of the change in business model and a qualitative
description of its effect on the entity’s financial statements
(c) the amount reclassified into and out of each category
12C For each reporting period following reclassification until derecognition an
entity shall disclose for assets reclassified out of the fair value through profit or
loss category so that they are measured at amortised cost or fair value through
other comprehensive income in accordance with paragraph 441 of IFRS 9
(a) the effective interest rate determined on the date of reclassification and
(b) the interest revenue recognised
12D If since its last annual reporting date an entity has reclassified financial assets
out of the fair value through other comprehensive income category so that they
are measured at amortised cost or out of the fair value through profit or loss
category so that they are measured at amortised cost or fair value through other
comprehensive income it shall disclose
IFRS 7
IFRS Foundation A251(a) the fair value of the financial assets at the end of the reporting period
and
(b) the fair value gain or loss that would have been recognised in profit or
loss or other comprehensive income during the reporting period if the
financial assets had not been reclassified
13 [Deleted]
Offsetting financial assets and financial liabilities
13A The disclosures in paragraphs 13B–13E supplement the other disclosure
requirements of this IFRS and are required for all recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32 These
disclosures also apply to recognised financial instruments that are subject to an
enforceable master netting arrangement or similar agreement irrespective of
whether they are set off in accordance with paragraph 42 of IAS 32
13B An entity shall disclose information to enable users of its financial statements to
evaluate the effect or potential effect of netting arrangements on the entity’s
financial position This includes the effect or potential effect of rights of setoff
associated with the entity’s recognised financial assets and recognised financial
liabilities that are within the scope of paragraph 13A
13C To meet the objective in paragraph 13B an entity shall disclose at the end of the
reporting period the following quantitative information separately for
recognised financial assets and recognised financial liabilities that are within
the scope of paragraph 13A
(a) the gross amounts of those recognised financial assets and recognised
financial liabilities
(b) the amounts that are set off in accordance with the criteria in
paragraph 42 of IAS 32 when determining the net amounts presented in
the statement of financial position
(c) the net amounts presented in the statement of financial position
(d) the amounts subject to an enforceable master netting arrangement or
similar agreement that are not otherwise included in paragraph 13C(b)
including
(i) amounts related to recognised financial instruments that do not
meet some or all of the offsetting criteria in paragraph 42 of
IAS 32 and
(ii) amounts related to financial collateral (including cash collateral)
and
(e) the net amount after deducting the amounts in (d) from the amounts in
(c) above
The information required by this paragraph shall be presented in a tabular
format separately for financial assets and financial liabilities unless another
format is more appropriate
IFRS 7
IFRS FoundationA25213D The total amount disclosed in accordance with paragraph 13C(d) for an
instrument shall be limited to the amount in paragraph 13C(c) for that
instrument
13E An entity shall include a description in the disclosures of the rights of setoff
associated with the entity’s recognised financial assets and recognised financial
liabilities subject to enforceable master netting arrangements and similar
agreements that are disclosed in accordance with paragraph 13C(d) including
the nature of those rights
13F If the information required by paragraphs 13B–13E is disclosed in more than
one note to the financial statements an entity shall crossrefer between those
notes
Collateral
14 An entity shall disclose
(a) the carrying amount of financial assets it has pledged as collateral for
liabilities or contingent liabilities including amounts that have been
reclassified in accordance with paragraph 3223(a) of IFRS 9 and
(b) the terms and conditions relating to its pledge
15 When an entity holds collateral (of financial or nonfinancial assets) and is
permitted to sell or repledge the collateral in the absence of default by the
owner of the collateral it shall disclose
(a) the fair value of the collateral held
(b) the fair value of any such collateral sold or repledged and whether the
entity has an obligation to return it and
(c) the terms and conditions associated with its use of the collateral
Allowance account for credit losses
16 [Deleted]
16A The carrying amount of financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A of IFRS 9 is not
reduced by a loss allowance and an entity shall not present the loss allowance
separately in the statement of financial position as a reduction of the carrying
amount of the financial asset However an entity shall disclose the loss
allowance in the notes to the financial statements
Compound financial instruments with multiple embedded
derivatives
17 If an entity has issued an instrument that contains both a liability and an equity
component (see paragraph 28 of IAS 32) and the instrument has multiple
embedded derivatives whose values are interdependent (such as a callable
convertible debt instrument) it shall disclose the existence of those features
IFRS 7
IFRS Foundation A253Defaults and breaches
18 For loans payable recognised at the end of the reporting period an entity shall
disclose
(a) details of any defaults during the period of principal interest sinking
fund or redemption terms of those loans payable
(b) the carrying amount of the loans payable in default at the end of the
reporting period and
(c) whether the default was remedied or the terms of the loans payable
were renegotiated before the financial statements were authorised for
issue
19 If during the period there were breaches of loan agreement terms other than
those described in paragraph 18 an entity shall disclose the same information
as required by paragraph 18 if those breaches permitted the lender to demand
accelerated repayment (unless the breaches were remedied or the terms of the
loan were renegotiated on or before the end of the reporting period)
Statement of comprehensive income
Items of income expense gains or losses
20 An entity shall disclose the following items of income expense gains or losses
either in the statement of comprehensive income or in the notes
(a) net gains or net losses on
(i) financial assets or financial liabilities measured at fair value
through profit or loss showing separately those on financial
assets or financial liabilities designated as such upon initial
recognition or subsequently in accordance with paragraph 671
of IFRS 9 and those on financial assets or financial liabilities that
are mandatorily measured at fair value through profit or loss in
accordance with IFRS 9 (eg financial liabilities that meet the
definition of held for trading in IFRS 9) For financial liabilities
designated as at fair value through profit or loss an entity shall
show separately the amount of gain or loss recognised in other
comprehensive income and the amount recognised in profit or
loss
(ii)–(iv) [deleted]
(v) financial liabilities measured at amortised cost
(vi) financial assets measured at amortised cost
(vii) investments in equity instruments designated at fair value
through other comprehensive income in accordance with
paragraph 575 of IFRS 9
(viii) financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A of
IFRS 9 showing separately the amount of gain or loss recognised
in other comprehensive income during the period and the
IFRS 7
IFRS FoundationA254amount reclassified upon derecognition from accumulated other
comprehensive income to profit or loss for the period
(b) total interest revenue and total interest expense (calculated using the
effective interest method) for financial assets that are measured at
amortised cost or that are measured at fair value through other
comprehensive income in accordance with paragraph 412A of IFRS 9
(showing these amounts separately) or financial liabilities that are not
measured at fair value through profit or loss
(c) fee income and expense (other than amounts included in determining
the effective interest rate) arising from
(i) financial assets and financial liabilities that are not at fair value
through profit or loss and
(ii) trust and other fiduciary activities that result in the holding or
investing of assets on behalf of individuals trusts retirement
benefit plans and other institutions
(d) [deleted]
(e) [deleted]
20A An entity shall disclose an analysis of the gain or loss recognised in the
statement of comprehensive income arising from the derecognition of financial
assets measured at amortised cost showing separately gains and losses arising
from derecognition of those financial assets This disclosure shall include the
reasons for derecognising those financial assets
Other disclosures
Accounting policies
21 In accordance with paragraph 117 of IAS 1 Presentation of Financial Statements (as
revised in 2007) an entity discloses its significant accounting policies
comprising the measurement basis (or bases) used in preparing the financial
statements and the other accounting policies used that are relevant to an
understanding of the financial statements
Hedge accounting
21A An entity shall apply the disclosure requirements in paragraphs 21B–24F for
those risk exposures that an entity hedges and for which it elects to apply hedge
accounting Hedge accounting disclosures shall provide information about
(a) an entity’s risk management strategy and how it is applied to manage
risk
(b) how the entity’s hedging activities may affect the amount timing and
uncertainty of its future cash flows and
(c) the effect that hedge accounting has had on the entity’s statement of
financial position statement of comprehensive income and statement of
changes in equity
IFRS 7
IFRS Foundation A25521B An entity shall present the required disclosures in a single note or separate
section in its financial statements However an entity need not duplicate
information that is already presented elsewhere provided that the information
is incorporated by crossreference from the financial statements to some other
statement such as a management commentary or risk report that is available to
users of the financial statements on the same terms as the financial statements
and at the same time Without the information incorporated by crossreference
the financial statements are incomplete
21C When paragraphs 22A–24F require the entity to separate by risk category the
information disclosed the entity shall determine each risk category on the basis
of the risk exposures an entity decides to hedge and for which hedge accounting
is applied An entity shall determine risk categories consistently for all hedge
accounting disclosures
21D To meet the objectives in paragraph 21A an entity shall (except as otherwise
specified below) determine how much detail to disclose how much emphasis to
place on different aspects of the disclosure requirements the appropriate level
of aggregation or disaggregation and whether users of financial statements
need additional explanations to evaluate the quantitative information disclosed
However an entity shall use the same level of aggregation or disaggregation it
uses for disclosure requirements of related information in this IFRS and IFRS 13
Fair Value Measurement
The risk management strategy
22 [Deleted]
22A An entity shall explain its risk management strategy for each risk category of
risk exposures that it decides to hedge and for which hedge accounting is
applied This explanation should enable users of financial statements to
evaluate (for example)
(a) how each risk arises
(b) how the entity manages each risk this includes whether the entity
hedges an item in its entirety for all risks or hedges a risk component (or
components) of an item and why
(c) the extent of risk exposures that the entity manages
22B To meet the requirements in paragraph 22A the information should include
(but is not limited to) a description of
(a) the hedging instruments that are used (and how they are used) to hedge
risk exposures
(b) how the entity determines the economic relationship between the
hedged item and the hedging instrument for the purpose of assessing
hedge effectiveness and
(c) how the entity establishes the hedge ratio and what the sources of hedge
ineffectiveness are
IFRS 7
IFRS FoundationA25622C When an entity designates a specific risk component as a hedged item (see
paragraph 637 of IFRS 9) it shall provide in addition to the disclosures required
by paragraphs 22A and 22B qualitative or quantitative information about
(a) how the entity determined the risk component that is designated as the
hedged item (including a description of the nature of the relationship
between the risk component and the item as a whole) and
(b) how the risk component relates to the item in its entirety (for example
the designated risk component historically covered on average 80 per
cent of the changes in fair value of the item as a whole)
The amount timing and uncertainty of future cash flows
23 [Deleted]
23A Unless exempted by paragraph 23C an entity shall disclose by risk category
quantitative information to allow users of its financial statements to evaluate
the terms and conditions of hedging instruments and how they affect the
amount timing and uncertainty of future cash flows of the entity
23B To meet the requirement in paragraph 23A an entity shall provide a breakdown
that discloses
(a) a profile of the timing of the nominal amount of the hedging
instrument and
(b) if applicable the average price or rate (for example strike or forward
prices etc) of the hedging instrument
23C In situations in which an entity frequently resets (ie discontinues and restarts)
hedging relationships because both the hedging instrument and the hedged
item frequently change (ie the entity uses a dynamic process in which both the
exposure and the hedging instruments used to manage that exposure do not
remain the same for long—such as in the example in paragraph B6524(b) of
IFRS 9) the entity
(a) is exempt from providing the disclosures required by paragraphs 23A
and 23B
(b) shall disclose
(i) information about what the ultimate risk management strategy
is in relation to those hedging relationships
(ii) a description of how it reflects its risk management strategy by
using hedge accounting and designating those particular
hedging relationships and
(iii) an indication of how frequently the hedging relationships are
discontinued and restarted as part of the entity’s process in
relation to those hedging relationships
23D An entity shall disclose by risk category a description of the sources of hedge
ineffectiveness that are expected to affect the hedging relationship during its
term
IFRS 7
IFRS Foundation A25723E If other sources of hedge ineffectiveness emerge in a hedging relationship an
entity shall disclose those sources by risk category and explain the resulting
hedge ineffectiveness
23F For cash flow hedges an entity shall disclose a description of any forecast
transaction for which hedge accounting had been used in the previous period
but which is no longer expected to occur
The effects of hedge accounting on financial position and performance
24 [Deleted]
24A An entity shall disclose in a tabular format the following amounts related to
items designated as hedging instruments separately by risk category for each
type of hedge (fair value hedge cash flow hedge or hedge of a net investment in
a foreign operation)
(a) the carrying amount of the hedging instruments (financial assets
separately from financial liabilities)
(b) the line item in the statement of financial position that includes the
hedging instrument
(c) the change in fair value of the hedging instrument used as the basis for
recognising hedge ineffectiveness for the period and
(d) the nominal amounts (including quantities such as tonnes or cubic
metres) of the hedging instruments
24B An entity shall disclose in a tabular format the following amounts related to
hedged items separately by risk category for the types of hedges as follows
(a) for fair value hedges
(i) the carrying amount of the hedged item recognised in the
statement of financial position (presenting assets separately from
liabilities)
(ii) the accumulated amount of fair value hedge adjustments on the
hedged item included in the carrying amount of the hedged item
recognised in the statement of financial position (presenting
assets separately from liabilities)
(iii) the line item in the statement of financial position that includes
the hedged item
(iv) the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period and
(v) the accumulated amount of fair value hedge adjustments
remaining in the statement of financial position for any hedged
items that have ceased to be adjusted for hedging gains and
losses in accordance with paragraph 6510 of IFRS 9
(b) for cash flow hedges and hedges of a net investment in a foreign
operation
IFRS 7
IFRS FoundationA258(i) the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period (ie for cash flow
hedges the change in value used to determine the recognised
hedge ineffectiveness in accordance with paragraph 6511(c) of
IFRS 9)
(ii) the balances in the cash flow hedge reserve and the foreign
currency translation reserve for continuing hedges that are
accounted for in accordance with paragraphs 6511 and 6513(a)
of IFRS 9 and
(iii) the balances remaining in the cash flow hedge reserve and the
foreign currency translation reserve from any hedging
relationships for which hedge accounting is no longer applied
24C An entity shall disclose in a tabular format the following amounts separately by
risk category for the types of hedges as follows
(a) for fair value hedges
(i) hedge ineffectiveness—ie the difference between the hedging
gains or losses of the hedging instrument and the hedged
item—recognised in profit or loss (or other comprehensive
income for hedges of an equity instrument for which an entity
has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 575 of
IFRS 9) and
(ii) the line item in the statement of comprehensive income that
includes the recognised hedge ineffectiveness
(b) for cash flow hedges and hedges of a net investment in a foreign
operation
(i) hedging gains or losses of the reporting period that were
recognised in other comprehensive income
(ii) hedge ineffectiveness recognised in profit or loss
(iii) the line item in the statement of comprehensive income that
includes the recognised hedge ineffectiveness
(iv) the amount reclassified from the cash flow hedge reserve or the
foreign currency translation reserve into profit or loss as a
reclassification adjustment (see IAS 1) (differentiating between
amounts for which hedge accounting had previously been used
but for which the hedged future cash flows are no longer
expected to occur and amounts that have been transferred
because the hedged item has affected profit or loss)
(v) the line item in the statement of comprehensive income that
includes the reclassification adjustment (see IAS 1) and
(vi) for hedges of net positions the hedging gains or losses
recognised in a separate line item in the statement of
comprehensive income (see paragraph 664 of IFRS 9)
IFRS 7
IFRS Foundation A25924D When the volume of hedging relationships to which the exemption in
paragraph 23C applies is unrepresentative of normal volumes during the period
(ie the volume at the reporting date does not reflect the volumes during the
period) an entity shall disclose that fact and the reason it believes the volumes
are unrepresentative
24E An entity shall provide a reconciliation of each component of equity and an
analysis of other comprehensive income in accordance with IAS 1 that taken
together
(a) differentiates at a minimum between the amounts that relate to the
disclosures in paragraph 24C(b)(i) and (b)(iv) as well as the amounts
accounted for in accordance with paragraph 6511(d)(i) and (d)(iii) of
IFRS 9
(b) differentiates between the amounts associated with the time value of
options that hedge transaction related hedged items and the amounts
associated with the time value of options that hedge timeperiod related
hedged items when an entity accounts for the time value of an option in
accordance with paragraph 6515 of IFRS 9 and
(c) differentiates between the amounts associated with forward elements of
forward contracts and the foreign currency basis spreads of financial
instruments that hedge transaction related hedged items and the
amounts associated with forward elements of forward contracts and the
foreign currency basis spreads of financial instruments that hedge
timeperiod related hedged items when an entity accounts for those
amounts in accordance with paragraph 6516 of IFRS 9
24F An entity shall disclose the information required in paragraph 24E separately by
risk category This disaggregation by risk may be provided in the notes to the
financial statements
Option to designate a credit exposure as measured at fair value
through profit or loss
24G If an entity designated a financial instrument or a proportion of it as measured
at fair value through profit or loss because it uses a credit derivative to manage
the credit risk of that financial instrument it shall disclose
(a) for credit derivatives that have been used to manage the credit risk of
financial instruments designated as measured at fair value through
profit or loss in accordance with paragraph 671 of IFRS 9 a
reconciliation of each of the nominal amount and the fair value at the
beginning and at the end of the period
(b) the gain or loss recognised in profit or loss on designation of a financial
instrument or a proportion of it as measured at fair value through
profit or loss in accordance with paragraph 671 of IFRS 9 and
(c) on discontinuation of measuring a financial instrument or a proportion
of it at fair value through profit or loss that financial instrument’s fair
value that has become the new carrying amount in accordance with
paragraph 674 of IFRS 9 and the related nominal or principal amount
IFRS 7
IFRS FoundationA260(except for providing comparative information in accordance with IAS 1
an entity does not need to continue this disclosure in subsequent
periods)
Fair value
25 Except as set out in paragraph 29 for each class of financial assets and financial
liabilities (see paragraph 6) an entity shall disclose the fair value of that class of
assets and liabilities in a way that permits it to be compared with its carrying
amount
26 In disclosing fair values an entity shall group financial assets and financial
liabilities into classes but shall offset them only to the extent that their carrying
amounts are offset in the statement of financial position
27–
27B
[Deleted]
28 In some cases an entity does not recognise a gain or loss on initial recognition of
a financial asset or financial liability because the fair value is neither evidenced
by a quoted price in an active market for an identical asset or liability (ie a
Level 1 input) nor based on a valuation technique that uses only data from
observable markets (see paragraph B512A of IFRS 9) In such cases the entity
shall disclose by class of financial asset or financial liability
(a) its accounting policy for recognising in profit or loss the difference
between the fair value at initial recognition and the transaction price to
reflect a change in factors (including time) that market participants
would take into account when pricing the asset or liability (see
paragraph B512A(b) of IFRS 9)
(b) the aggregate difference yet to be recognised in profit or loss at the
beginning and end of the period and a reconciliation of changes in the
balance of this difference
(c) why the entity concluded that the transaction price was not the best
evidence of fair value including a description of the evidence that
supports the fair value
29 Disclosures of fair value are not required
(a) when the carrying amount is a reasonable approximation of fair value
for example for financial instruments such as shortterm trade
receivables and payables
(b) [deleted]
(c) for a contract containing a discretionary participation feature (as
described in IFRS 4) if the fair value of that feature cannot be measured
reliably or
(d) for lease liabilities
30 In the case described in paragraph 29(c) an entity shall disclose information to
help users of the financial statements make their own judgements about the
extent of possible differences between the carrying amount of those contracts
and their fair value including
IFRS 7
IFRS Foundation A261(a) the fact that fair value information has not been disclosed for these
instruments because their fair value cannot be measured reliably
(b) a description of the financial instruments their carrying amount and an
explanation of why fair value cannot be measured reliably
(c) information about the market for the instruments
(d) information about whether and how the entity intends to dispose of the
financial instruments and
(e) if financial instruments whose fair value previously could not be reliably
measured are derecognised that fact their carrying amount at the time
of derecognition and the amount of gain or loss recognised
Nature and extent of risks arising from financial instruments
31 An entity shall disclose information that enables users of its financial
statements to evaluate the nature and extent of risks arising from
financial instruments to which the entity is exposed at the end of the
reporting period
32 The disclosures required by paragraphs 33–42 focus on the risks that arise from
financial instruments and how they have been managed These risks typically
include but are not limited to credit risk liquidity risk and market risk
32A Providing qualitative disclosures in the context of quantitative disclosures
enables users to link related disclosures and hence form an overall picture of the
nature and extent of risks arising from financial instruments The interaction
between qualitative and quantitative disclosures contributes to disclosure of
information in a way that better enables users to evaluate an entity’s exposure to
risks
Qualitative disclosures
33 For each type of risk arising from financial instruments an entity shall disclose
(a) the exposures to risk and how they arise
(b) its objectives policies and processes for managing the risk and the
methods used to measure the risk and
(c) any changes in (a) or (b) from the previous period
Quantitative disclosures
34 For each type of risk arising from financial instruments an entity shall disclose
(a) summary quantitative data about its exposure to that risk at the end of
the reporting period This disclosure shall be based on the information
provided internally to key management personnel of the entity (as
defined in IAS 24 Related Party Disclosures) for example the entity’s board
of directors or chief executive officer
(b) the disclosures required by paragraphs 35A–42 to the extent not
provided in accordance with (a)
IFRS 7
IFRS FoundationA262(c) concentrations of risk if not apparent from the disclosures made in
accordance with (a) and (b)
35 If the quantitative data disclosed as at the end of the reporting period are
unrepresentative of an entity’s exposure to risk during the period an entity
shall provide further information that is representative
Credit risk
Scope and objectives
35A An entity shall apply the disclosure requirements in paragraphs 35F–35N to
financial instruments to which the impairment requirements in IFRS 9 are
applied However
(a) for trade receivables contract assets and lease receivables
paragraph 35J(a) applies to those trade receivables contract assets or
lease receivables on which lifetime expected credit losses are recognised
in accordance with paragraph 5515 of IFRS 9 if those financial assets
are modified while more than 30 days past due and
(b) paragraph 35K(b) does not apply to lease receivables
35B The credit risk disclosures made in accordance with paragraphs 35F–35N shall
enable users of financial statements to understand the effect of credit risk on the
amount timing and uncertainty of future cash flows To achieve this objective
credit risk disclosures shall provide
(a) information about an entity’s credit risk management practices and how
they relate to the recognition and measurement of expected credit losses
including the methods assumptions and information used to measure
expected credit losses
(b) quantitative and qualitative information that allows users of financial
statements to evaluate the amounts in the financial statements arising
from expected credit losses including changes in the amount of
expected credit losses and the reasons for those changes and
(c) information about an entity’s credit risk exposure (ie the credit risk
inherent in an entity’s financial assets and commitments to extend
credit) including significant credit risk concentrations
35C An entity need not duplicate information that is already presented elsewhere
provided that the information is incorporated by crossreference from the
financial statements to other statements such as a management commentary or
risk report that is available to users of the financial statements on the same
terms as the financial statements and at the same time Without the
information incorporated by crossreference the financial statements are
incomplete
35D To meet the objectives in paragraph 35B an entity shall (except as otherwise
specified) consider how much detail to disclose how much emphasis to place on
different aspects of the disclosure requirements the appropriate level of
aggregation or disaggregation and whether users of financial statements need
additional explanations to evaluate the quantitative information disclosed
IFRS 7
IFRS Foundation A26335E If the disclosures provided in accordance with paragraphs 35F–35N are
insufficient to meet the objectives in paragraph 35B an entity shall disclose
additional information that is necessary to meet those objectives
The credit risk management practices
35F An entity shall explain its credit risk management practices and how they relate
to the recognition and measurement of expected credit losses To meet this
objective an entity shall disclose information that enables users of financial
statements to understand and evaluate
(a) how an entity determined whether the credit risk of financial
instruments has increased significantly since initial recognition
including if and how
(i) financial instruments are considered to have low credit risk in
accordance with paragraph 5510 of IFRS 9 including the classes
of financial instruments to which it applies and
(ii) the presumption in paragraph 5511 of IFRS 9 that there have
been significant increases in credit risk since initial recognition
when financial assets are more than 30 days past due has been
rebutted
(b) an entity’s definitions of default including the reasons for selecting
those definitions
(c) how the instruments were grouped if expected credit losses were
measured on a collective basis
(d) how an entity determined that financial assets are creditimpaired
financial assets
(e) an entity’s writeoff policy including the indicators that there is no
reasonable expectation of recovery and information about the policy for
financial assets that are writtenoff but are still subject to enforcement
activity and
(f) how the requirements in paragraph 5512 of IFRS 9 for the modification
of contractual cash flows of financial assets have been applied including
how an entity
(i) determines whether the credit risk on a financial asset that has
been modified while the loss allowance was measured at an
amount equal to lifetime expected credit losses has improved to
the extent that the loss allowance reverts to being measured at an
amount equal to 12month expected credit losses in accordance
with paragraph 555 of IFRS 9 and
(ii) monitors the extent to which the loss allowance on financial
assets meeting the criteria in (i) is subsequently remeasured at an
amount equal to lifetime expected credit losses in accordance
with paragraph 553 of IFRS 9
IFRS 7
IFRS FoundationA26435G An entity shall explain the inputs assumptions and estimation techniques used
to apply the requirements in Section 55 of IFRS 9 For this purpose an entity
shall disclose
(a) the basis of inputs and assumptions and the estimation techniques used
to
(i) measure the 12month and lifetime expected credit losses
(ii) determine whether the credit risk of financial instruments has
increased significantly since initial recognition and
(iii) determine whether a financial asset is a creditimpaired financial
asset
(b) how forwardlooking information has been incorporated into the
determination of expected credit losses including the use of
macroeconomic information and
(c) changes in the estimation techniques or significant assumptions made
during the reporting period and the reasons for those changes
Quantitative and qualitative information about amounts arising from
expected credit losses
35H To explain the changes in the loss allowance and the reasons for those changes
an entity shall provide by class of financial instrument a reconciliation from
the opening balance to the closing balance of the loss allowance in a table
showing separately the changes during the period for
(a) the loss allowance measured at an amount equal to 12month expected
credit losses
(b) the loss allowance measured at an amount equal to lifetime expected
credit losses for
(i) financial instruments for which credit risk has increased
significantly since initial recognition but that are not
creditimpaired financial assets
(ii) financial assets that are creditimpaired at the reporting date (but
that are not purchased or originated creditimpaired) and
(iii) trade receivables contract assets or lease receivables for which
the loss allowances are measured in accordance with
paragraph 5515 of IFRS 9
(c) financial assets that are purchased or originated creditimpaired In
addition to the reconciliation an entity shall disclose the total amount
of undiscounted expected credit losses at initial recognition on financial
assets initially recognised during the reporting period
35I To enable users of financial statements to understand the changes in the loss
allowance disclosed in accordance with paragraph 35H an entity shall provide
an explanation of how significant changes in the gross carrying amount of
financial instruments during the period contributed to changes in the loss
allowance The information shall be provided separately for financial
instruments that represent the loss allowance as listed in paragraph 35H(a)–(c)
IFRS 7
IFRS Foundation A265and shall include relevant qualitative and quantitative information Examples
of changes in the gross carrying amount of financial instruments that
contributed to the changes in the loss allowance may include
(a) changes because of financial instruments originated or acquired during
the reporting period
(b) the modification of contractual cash flows on financial assets that do not
result in a derecognition of those financial assets in accordance with
IFRS 9
(c) changes because of financial instruments that were derecognised
(including those that were writtenoff) during the reporting period and
(d) changes arising from whether the loss allowance is measured at an
amount equal to 12month or lifetime expected credit losses
35J To enable users of financial statements to understand the nature and effect of
modifications of contractual cash flows on financial assets that have not
resulted in derecognition and the effect of such modifications on the
measurement of expected credit losses an entity shall disclose
(a) the amortised cost before the modification and the net modification gain
or loss recognised for financial assets for which the contractual cash
flows have been modified during the reporting period while they had a
loss allowance measured at an amount equal to lifetime expected credit
losses and
(b) the gross carrying amount at the end of the reporting period of financial
assets that have been modified since initial recognition at a time when
the loss allowance was measured at an amount equal to lifetime
expected credit losses and for which the loss allowance has changed
during the reporting period to an amount equal to 12month expected
credit losses
35K To enable users of financial statements to understand the effect of collateral and
other credit enhancements on the amounts arising from expected credit losses
an entity shall disclose by class of financial instrument
(a) the amount that best represents its maximum exposure to credit risk at
the end of the reporting period without taking account of any collateral
held or other credit enhancements (eg netting agreements that do not
qualify for offset in accordance with IAS 32)
(b) a narrative description of collateral held as security and other credit
enhancements including
(i) a description of the nature and quality of the collateral held
(ii) an explanation of any significant changes in the quality of that
collateral or credit enhancements as a result of deterioration or
changes in the collateral policies of the entity during the
reporting period and
(iii) information about financial instruments for which an entity has
not recognised a loss allowance because of the collateral
IFRS 7
IFRS FoundationA266(c) quantitative information about the collateral held as security and other
credit enhancements (for example quantification of the extent to which
collateral and other credit enhancements mitigate credit risk) for
financial assets that are creditimpaired at the reporting date
35L An entity shall disclose the contractual amount outstanding on financial assets
that were written off during the reporting period and are still subject to
enforcement activity
Credit risk exposure
35M To enable users of financial statements to assess an entity’s credit risk exposure
and understand its significant credit risk concentrations an entity shall
disclose by credit risk rating grades the gross carrying amount of financial assets
and the exposure to credit risk on loan commitments and financial guarantee
contracts This information shall be provided separately for financial
instruments
(a) for which the loss allowance is measured at an amount equal to
12month expected credit losses
(b) for which the loss allowance is measured at an amount equal to lifetime
expected credit losses and that are
(i) financial instruments for which credit risk has increased
significantly since initial recognition but that are not
creditimpaired financial assets
(ii) financial assets that are creditimpaired at the reporting date (but
that are not purchased or originated creditimpaired) and
(iii) trade receivables contract assets or lease receivables for which
the loss allowances are measured in accordance with
paragraph 5515 of IFRS 9
(c) that are purchased or originated creditimpaired financial assets
35N For trade receivables contract assets and lease receivables to which an entity
applies paragraph 5515 of IFRS 9 the information provided in accordance with
paragraph 35M may be based on a provision matrix (see paragraph B5535 of
IFRS 9)
36 For all financial instruments within the scope of this IFRS but to which the
impairment requirements in IFRS 9 are not applied an entity shall disclose by
class of financial instrument
(a) the amount that best represents its maximum exposure to credit risk at
the end of the reporting period without taking account of any collateral
held or other credit enhancements (eg netting agreements that do not
quality for offset in accordance with IAS 32) this disclosure is not
required for financial instruments whose carrying amount best
represents the maximum exposure to credit risk
(b) a description of collateral held as security and other credit
enhancements and their financial effect (eg quantification of the extent
to which collateral and other credit enhancements mitigate credit risk)
IFRS 7
IFRS Foundation A267in respect of the amount that best represents the maximum exposure to
credit risk (whether disclosed in accordance with (a) or represented by
the carrying amount of a financial instrument)
(c) [deleted]
(d) [deleted]
37 [Deleted]
Collateral and other credit enhancements obtained
38 When an entity obtains financial or nonfinancial assets during the period by
taking possession of collateral it holds as security or calling on other credit
enhancements (eg guarantees) and such assets meet the recognition criteria in
other IFRSs an entity shall disclose for such assets held at the reporting date
(a) the nature and carrying amount of the assets and
(b) when the assets are not readily convertible into cash its policies for
disposing of such assets or for using them in its operations
Liquidity risk
39 An entity shall disclose
(a) a maturity analysis for nonderivative financial liabilities (including
issued financial guarantee contracts) that shows the remaining
contractual maturities
(b) a maturity analysis for derivative financial liabilities The maturity
analysis shall include the remaining contractual maturities for those
derivative financial liabilities for which contractual maturities are
essential for an understanding of the timing of the cash flows (see
paragraph B11B)
(c) a description of how it manages the liquidity risk inherent in (a) and (b)
Market risk
Sensitivity analysis
40 Unless an entity complies with paragraph 41 it shall disclose
(a) a sensitivity analysis for each type of market risk to which the entity is
exposed at the end of the reporting period showing how profit or loss
and equity would have been affected by changes in the relevant risk
variable that were reasonably possible at that date
(b) the methods and assumptions used in preparing the sensitivity analysis
and
(c) changes from the previous period in the methods and assumptions used
and the reasons for such changes
41 If an entity prepares a sensitivity analysis such as valueatrisk that reflects
interdependencies between risk variables (eg interest rates and exchange rates)
and uses it to manage financial risks it may use that sensitivity analysis in place
of the analysis specified in paragraph 40 The entity shall also disclose
IFRS 7
IFRS FoundationA268(a) an explanation of the method used in preparing such a sensitivity
analysis and of the main parameters and assumptions underlying the
data provided and
(b) an explanation of the objective of the method used and of limitations
that may result in the information not fully reflecting the fair value of
the assets and liabilities involved
Other market risk disclosures
42 When the sensitivity analyses disclosed in accordance with paragraph 40 or 41
are unrepresentative of a risk inherent in a financial instrument (for example
because the yearend exposure does not reflect the exposure during the year) the
entity shall disclose that fact and the reason it believes the sensitivity analyses
are unrepresentative
Transfers of financial assets
42A The disclosure requirements in paragraphs 42B–42H relating to transfers of
financial assets supplement the other disclosure requirements of this IFRS An
entity shall present the disclosures required by paragraphs 42B–42H in a single
note in its financial statements An entity shall provide the required disclosures
for all transferred financial assets that are not derecognised and for any
continuing involvement in a transferred asset existing at the reporting date
irrespective of when the related transfer transaction occurred For the purposes
of applying the disclosure requirements in those paragraphs an entity transfers
all or a part of a financial asset (the transferred financial asset) if and only if it
either
(a) transfers the contractual rights to receive the cash flows of that financial
asset or
(b) retains the contractual rights to receive the cash flows of that financial
asset but assumes a contractual obligation to pay the cash flows to one
or more recipients in an arrangement
42B An entity shall disclose information that enables users of its financial
statements
(a) to understand the relationship between transferred financial assets that
are not derecognised in their entirety and the associated liabilities and
(b) to evaluate the nature of and risks associated with the entity’s
continuing involvement in derecognised financial assets
42C For the purposes of applying the disclosure requirements in paragraphs
42E–42H an entity has continuing involvement in a transferred financial asset
if as part of the transfer the entity retains any of the contractual rights or
obligations inherent in the transferred financial asset or obtains any new
contractual rights or obligations relating to the transferred financial asset For
the purposes of applying the disclosure requirements in paragraphs 42E–42H
the following do not constitute continuing involvement
IFRS 7
IFRS Foundation A269(a) normal representations and warranties relating to fraudulent transfer
and concepts of reasonableness good faith and fair dealings that could
invalidate a transfer as a result of legal action
(b) forward option and other contracts to reacquire the transferred
financial asset for which the contract price (or exercise price) is the fair
value of the transferred financial asset or
(c) an arrangement whereby an entity retains the contractual rights to
receive the cash flows of a financial asset but assumes a contractual
obligation to pay the cash flows to one or more entities and the
conditions in paragraph 325(a)–(c) of IFRS 9 are met
Transferred financial assets that are not derecognised in
their entirety
42D An entity may have transferred financial assets in such a way that part or all of
the transferred financial assets do not qualify for derecognition To meet the
objectives set out in paragraph 42B(a) the entity shall disclose at each reporting
date for each class of transferred financial assets that are not derecognised in
their entirety
(a) the nature of the transferred assets
(b) the nature of the risks and rewards of ownership to which the entity is
exposed
(c) a description of the nature of the relationship between the transferred
assets and the associated liabilities including restrictions arising from
the transfer on the reporting entity’s use of the transferred assets
(d) when the counterparty (counterparties) to the associated liabilities has
(have) recourse only to the transferred assets a schedule that sets out the
fair value of the transferred assets the fair value of the associated
liabilities and the net position (the difference between the fair value of
the transferred assets and the associated liabilities)
(e) when the entity continues to recognise all of the transferred assets the
carrying amounts of the transferred assets and the associated liabilities
(f) when the entity continues to recognise the assets to the extent of its
continuing involvement (see paragraphs 326(c)(ii) and 3216 of IFRS 9)
the total carrying amount of the original assets before the transfer the
carrying amount of the assets that the entity continues to recognise and
the carrying amount of the associated liabilities
Transferred financial assets that are derecognised in
their entirety
42E To meet the objectives set out in paragraph 42B(b) when an entity derecognises
transferred financial assets in their entirety (see paragraph 326(a) and (c)(i) of
IFRS 9) but has continuing involvement in them the entity shall disclose as a
minimum for each type of continuing involvement at each reporting date
IFRS 7
IFRS FoundationA270(a) the carrying amount of the assets and liabilities that are recognised in
the entity’s statement of financial position and represent the entity’s
continuing involvement in the derecognised financial assets and the
line items in which the carrying amount of those assets and liabilities
are recognised
(b) the fair value of the assets and liabilities that represent the entity’s
continuing involvement in the derecognised financial assets
(c) the amount that best represents the entity’s maximum exposure to loss
from its continuing involvement in the derecognised financial assets
and information showing how the maximum exposure to loss is
determined
(d) the undiscounted cash outflows that would or may be required to
repurchase derecognised financial assets (eg the strike price in an option
agreement) or other amounts payable to the transferee in respect of the
transferred assets If the cash outflow is variable then the amount
disclosed should be based on the conditions that exist at each reporting
date
(e) a maturity analysis of the undiscounted cash outflows that would or may
be required to repurchase the derecognised financial assets or other
amounts payable to the transferee in respect of the transferred assets
showing the remaining contractual maturities of the entity’s continuing
involvement
(f) qualitative information that explains and supports the quantitative
disclosures required in (a)–(e)
42F An entity may aggregate the information required by paragraph 42E in respect
of a particular asset if the entity has more than one type of continuing
involvement in that derecognised financial asset and report it under one type of
continuing involvement
42G In addition an entity shall disclose for each type of continuing involvement
(a) the gain or loss recognised at the date of transfer of the assets
(b) income and expenses recognised both in the reporting period and
cumulatively from the entity’s continuing involvement in the
derecognised financial assets (eg fair value changes in derivative
instruments)
(c) if the total amount of proceeds from transfer activity (that qualifies for
derecognition) in a reporting period is not evenly distributed throughout
the reporting period (eg if a substantial proportion of the total amount
of transfer activity takes place in the closing days of a reporting period)
(i) when the greatest transfer activity took place within that
reporting period (eg the last five days before the end of the
reporting period)
(ii) the amount (eg related gains or losses) recognised from transfer
activity in that part of the reporting period and
IFRS 7
IFRS Foundation A271(iii) the total amount of proceeds from transfer activity in that part of
the reporting period
An entity shall provide this information for each period for which a statement of
comprehensive income is presented
Supplementary information
42H An entity shall disclose any additional information that it considers necessary to
meet the disclosure objectives in paragraph 42B
Initial application of IFRS 9
42I In the reporting period that includes the date of initial application of IFRS 9 the
entity shall disclose the following information for each class of financial assets
and financial liabilities as at the date of initial application
(a) the original measurement category and carrying amount determined in
accordance with IAS 39 or in accordance with a previous version of
IFRS 9 (if the entity’s chosen approach to applying IFRS 9 involves more
than one date of initial application for different requirements)
(b) the new measurement category and carrying amount determined in
accordance with IFRS 9
(c) the amount of any financial assets and financial liabilities in the
statement of financial position that were previously designated as
measured at fair value through profit or loss but are no longer so
designated distinguishing between those that IFRS 9 requires an entity
to reclassify and those that an entity elects to reclassify at the date of
initial application
In accordance with paragraph 722 of IFRS 9 depending on the entity’s chosen
approach to applying IFRS 9 the transition can involve more than one date of
initial application Therefore this paragraph may result in disclosure on more
than one date of initial application An entity shall present these quantitative
disclosures in a table unless another format is more appropriate
42J In the reporting period that includes the date of initial application of IFRS 9 an
entity shall disclose qualitative information to enable users to understand
(a) how it applied the classification requirements in IFRS 9 to those
financial assets whose classification has changed as a result of applying
IFRS 9
(b) the reasons for any designation or dedesignation of financial assets or
financial liabilities as measured at fair value through profit or loss at the
date of initial application
In accordance with paragraph 722 of IFRS 9 depending on the entity’s chosen
approach to applying IFRS 9 the transition can involve more than one date of
initial application Therefore this paragraph may result in disclosure on more
than one date of initial application
42K In the reporting period that an entity first applies the classification and
measurement requirements for financial assets in IFRS 9 (ie when the entity
IFRS 7
IFRS FoundationA272transitions from IAS 39 to IFRS 9 for financial assets) it shall present the
disclosures set out in paragraphs 42L–42O of this IFRS as required by
paragraph 7215 of IFRS 9
42L When required by paragraph 42K an entity shall disclose the changes in the
classifications of financial assets and financial liabilities as at the date of initial
application of IFRS 9 showing separately
(a) the changes in the carrying amounts on the basis of their measurement
categories in accordance with IAS 39 (ie not resulting from a change in
measurement attribute on transition to IFRS 9) and
(b) the changes in the carrying amounts arising from a change in
measurement attribute on transition to IFRS 9
The disclosures in this paragraph need not be made after the annual reporting
period in which the entity initially applies the classification and measurement
requirements for financial assets in IFRS 9
42M When required by paragraph 42K an entity shall disclose the following for
financial assets and financial liabilities that have been reclassified so that they
are measured at amortised cost and in the case of financial assets that have
been reclassified out of fair value through profit or loss so that they are
measured at fair value through other comprehensive income as a result of the
transition to IFRS 9
(a) the fair value of the financial assets or financial liabilities at the end of
the reporting period and
(b) the fair value gain or loss that would have been recognised in profit or
loss or other comprehensive income during the reporting period if the
financial assets or financial liabilities had not been reclassified
The disclosures in this paragraph need not be made after the annual reporting
period in which the entity initially applies the classification and measurement
requirements for financial assets in IFRS 9
42N When required by paragraph 42K an entity shall disclose the following for
financial assets and financial liabilities that have been reclassified out of the fair
value through profit or loss category as a result of the transition to IFRS 9
(a) the effective interest rate determined on the date of initial application
and
(b) the interest revenue or expense recognised
If an entity treats the fair value of a financial asset or a financial liability as the
new gross carrying amount at the date of initial application (see
paragraph 7211 of IFRS 9) the disclosures in this paragraph shall be made for
each reporting period until derecognition Otherwise the disclosures in this
paragraph need not be made after the annual reporting period in which the
entity initially applies the classification and measurement requirements for
financial assets in IFRS 9
IFRS 7
IFRS Foundation A27342O When an entity presents the disclosures set out in paragraphs 42K–42N those
disclosures and the disclosures in paragraph 25 of this IFRS must permit
reconciliation between
(a) the measurement categories presented in accordance with IAS 39 and
IFRS 9 and
(b) the class of financial instrument
as at the date of initial application
42P On the date of initial application of Section 55 of IFRS 9 an entity is required to
disclose information that would permit the reconciliation of the ending
impairment allowances in accordance with IAS 39 and the provisions in
accordance with IAS 37 to the opening loss allowances determined in
accordance with IFRS 9 For financial assets this disclosure shall be provided by
the related financial assets’ measurement categories in accordance with IAS 39
and IFRS 9 and shall show separately the effect of the changes in the
measurement category on the loss allowance at that date
42Q In the reporting period that includes the date of initial application of IFRS 9 an
entity is not required to disclose the line item amounts that would have been
reported in accordance with the classification and measurement requirements
(which includes the requirements related to amortised cost measurement of
financial assets and impairment in Sections 54 and 55 of IFRS 9) of
(a) IFRS 9 for prior periods and
(b) IAS 39 for the current period
42R In accordance with paragraph 724 of IFRS 9 if it is impracticable (as defined in
IAS 8) at the date of initial application of IFRS 9 for an entity to assess a modified
time value of money element in accordance with paragraphs B419B–B419D of
IFRS 9 based on the facts and circumstances that existed at the initial
recognition of the financial asset an entity shall assess the contractual cash flow
characteristics of that financial asset based on the facts and circumstances that
existed at the initial recognition of the financial asset without taking into
account the requirements related to the modification of the time value of money
element in paragraphs B419B–B419D of IFRS 9 An entity shall disclose the
carrying amount at the reporting date of the financial assets whose contractual
cash flow characteristics have been assessed based on the facts and
circumstances that existed at the initial recognition of the financial asset
without taking into account the requirements related to the modification of the
time value of money element in paragraphs B419B–B419D of IFRS 9 until those
financial assets are derecognised
42S In accordance with paragraph 725 of IFRS 9 if it is impracticable (as defined in
IAS 8) at the date of initial application for an entity to assess whether the fair
value of a prepayment feature was insignificant in accordance with
paragraphs B4112(c) of IFRS 9 based on the facts and circumstances that existed
at the initial recognition of the financial asset an entity shall assess the
contractual cash flow characteristics of that financial asset based on the facts
and circumstances that existed at the initial recognition of the financial asset
without taking into account the exception for prepayment features in
IFRS 7
IFRS FoundationA274paragraph B4112 of IFRS 9 An entity shall disclose the carrying amount at the
reporting date of the financial assets whose contractual cash flow characteristics
have been assessed based on the facts and circumstances that existed at the
initial recognition of the financial asset without taking into account the
exception for prepayment features in paragraph B4112 of IFRS 9 until those
financial assets are derecognised
Effective date and transition
43 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2007 Earlier application is encouraged If an entity applies this IFRS
for an earlier period it shall disclose that fact
44 If an entity applies this IFRS for annual periods beginning before 1 January 2006
it need not present comparative information for the disclosures required by
paragraphs 31–42 about the nature and extent of risks arising from financial
instruments
44A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraphs 20 21 23(c) and (d) 27(c) and B5 of Appendix B
An entity shall apply those amendments for annual periods beginning on or
after 1 January 2009 If an entity applies IAS 1 (revised 2007) for an earlier
period the amendments shall be applied for that earlier period
44B IFRS 3 (as revised in 2008) deleted paragraph 3(c) An entity shall apply that
amendment for annual periods beginning on or after 1 July 2009 If an entity
applies IFRS 3 (revised 2008) for an earlier period the amendment shall also be
applied for that earlier period However the amendment does not apply to
contingent consideration that arose from a business combination for which the
acquisition date preceded the application of IFRS 3 (revised 2008) Instead an
entity shall account for such consideration in accordance with paragraphs
65A–65E of IFRS 3 (as amended in 2010)
44C An entity shall apply the amendment in paragraph 3 for annual periods
beginning on or after 1 January 2009 If an entity applies Puttable Financial
Instruments and Obligations Arising on Liquidation (Amendments to IAS 32 and IAS 1)
issued in February 2008 for an earlier period the amendment in paragraph 3
shall be applied for that earlier period
44D Paragraph 3(a) was amended by Improvements to IFRSs issued in May 2008 An
entity shall apply that amendment for annual periods beginning on or after
1 January 2009 Earlier application is permitted If an entity applies the
amendment for an earlier period it shall disclose that fact and apply for that
earlier period the amendments to paragraph 1 of IAS 28 paragraph 1 of IAS 31
and paragraph 4 of IAS 32 issued in May 2008 An entity is permitted to apply
the amendment prospectively
44E [Deleted]
44F [Deleted]
44G Improving Disclosures about Financial Instruments (Amendments to IFRS 7) issued in
March 2009 amended paragraphs 27 39 and B11 and added paragraphs 27A
IFRS 7
IFRS Foundation A27527B B10A and B11A–B11F An entity shall apply those amendments for annual
periods beginning on or after 1 January 2009 An entity need not provide the
disclosures required by the amendments for
(a) any annual or interim period including any statement of financial
position presented within an annual comparative period ending before
31 December 2009 or
(b) any statement of financial position as at the beginning of the earliest
comparative period as at a date before 31 December 2009
Earlier application is permitted If an entity applies the amendments for an
earlier period it shall disclose that fact1
44H–
44J
[Deleted]
44K Paragraph 44B was amended by Improvements to IFRSs issued in May 2010 An
entity shall apply that amendment for annual periods beginning on or after
1 July 2010 Earlier application is permitted
44L Improvements to IFRSs issued in May 2010 added paragraph 32A and amended
paragraphs 34 and 36–38 An entity shall apply those amendments for annual
periods beginning on or after 1 January 2011 Earlier application is permitted
If an entity applies the amendments for an earlier period it shall disclose that
fact
44M Disclosures—Transfers of Financial Assets (Amendments to IFRS 7) issued in October
2010 deleted paragraph 13 and added paragraphs 42A–42H and B29–B39 An
entity shall apply those amendments for annual periods beginning on or after
1 July 2011 Earlier application is permitted If an entity applies the
amendments from an earlier date it shall disclose that fact An entity need not
provide the disclosures required by those amendments for any period presented
that begins before the date of initial application of the amendments
44N [Deleted]
44O IFRS 10 and IFRS 11 Joint Arrangements issued in May 2011 amended
paragraph 3 An entity shall apply that amendment when it applies IFRS 10 and
IFRS 11
44P IFRS 13 issued in May 2011 amended paragraphs 3 28 and 29 and Appendix A
and deleted paragraphs 27–27B An entity shall apply those amendments when
it applies IFRS 13
44Q Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) issued in
June 2011 amended paragraph 27B An entity shall apply that amendment
when it applies IAS 1 as amended in June 2011
44R Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)
issued in December 2011 added paragraphs 13A–13F and B40–B53 An entity
1 Paragraph 44G was amended as a consequence of Limited Exemption from Comparative IFRS 7 Disclosures
for Firsttime Adopters (Amendment to IFRS 1) issued in January 2010 The Board amended
paragraph 44G to clarify its conclusions and intended transition for Improving Disclosures about
Financial Instruments (Amendments to IFRS 7)
IFRS 7
IFRS FoundationA276shall apply those amendments for annual periods beginning on or after
1 January 2013 An entity shall provide the disclosures required by those
amendments retrospectively
44S–
44W
[Deleted]
44X Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraph 3 An entity shall apply that amendment for annual
periods beginning on or after 1 January 2014 Earlier application of Investment
Entities is permitted If an entity applies that amendment earlier it shall also
apply all amendments included in Investment Entities at the same time
44Y [Deleted]
44Z IFRS 9 as issued in July 2014 amended paragraphs 2–5 8–11 14 20 28–30 36
42C–42E Appendix A and paragraphs B1 B5 B9 B10 B22 and B27 deleted
paragraphs 12 12A 16 22–24 37 44E 44F 44H–44J 44N 44S–44W 44Y B4
and Appendix D and added paragraphs 5A 10A 11A 11B 12B–12D 16A 20A
21A–21D 22A–22C 23A–23F 24A–24G 35A–35N 42I–42S 44ZA and B8A–B8J
An entity shall apply those amendments when it applies IFRS 9 Those
amendments need not be applied to comparative information provided for
periods before the date of initial application of IFRS 9
44ZA In accordance with paragraph 712 of IFRS 9 for annual reporting periods prior
to 1 January 2018 an entity may elect to early apply only the requirements for
the presentation of gains and losses on financial liabilities designated as at fair
value through profit or loss in paragraphs 571(c) 577–579 7214 and
B575–B5720 of IFRS 9 without applying the other requirements in IFRS 9 If an
entity elects to apply only those paragraphs of IFRS 9 it shall disclose that fact
and provide on an ongoing basis the related disclosures set out in paragraphs
10–11 of this IFRS (as amended by IFRS 9 (2010))
44AA Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014 amended
paragraphs 44R and B30 and added paragraph B30A An entity shall apply those
amendments retrospectively in accordance with IAS 8 Accounting Policies Changes
in Accounting Estimates and Errors for annual periods beginning on or after
1 January 2016 except that an entity need not apply the amendments to
paragraphs B30 and B30A for any period presented that begins before the annual
period for which the entity first applies those amendments Earlier application
of the amendments to paragraphs 44R B30 and B30A is permitted If an entity
applies those amendments for an earlier period it shall disclose that fact
44BB Disclosure Initiative (Amendments to IAS 1) issued in December 2014 amended
paragraphs 21 and B5 An entity shall apply those amendments for annual
periods beginning on or after 1 January 2016 Earlier application of those
amendments is permitted
44CC IFRS 16 Leases issued in January 2016 amended paragraphs 29 and B11D An
entity shall apply those amendments when it applies IFRS 16
IFRS 7
IFRS Foundation A277Withdrawal of IAS 30
45 This IFRS supersedes IAS 30 Disclosures in the Financial Statements of Banks and Similar
Financial Institutions
IFRS 7
IFRS FoundationA278Appendix A
Defined terms
This appendix is an integral part of the IFRS
credit risk The risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an
obligation
credit risk rating
grades
Rating of credit risk based on the risk of a default occurring on
the financial instrument
currency risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange
rates
interest rate risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market interest
rates
liquidity risk The risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset
loans payable Loans payable are financial liabilities other than shortterm
trade payables on normal credit terms
market risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices
Market risk comprises three types of risk currency risk
interest rate risk and other price risk
other price risk The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices
(other than those arising from interest rate risk or currency
risk) whether those changes are caused by factors specific to the
individual financial instrument or its issuer or by factors
affecting all similar financial instruments traded in the market
The following terms are defined in paragraph 11 of IAS 32 paragraph 9 of IAS 39
Appendix A of IFRS 9 or Appendix A of IFRS 13 and are used in this IFRS with the meaning
specified in IAS 32 IAS 39 IFRS 9 and IFRS 13
● amortised cost of a financial asset or financial liability
● contract asset
● creditimpaired financial assets
● derecognition
● derivative
● dividends
● effective interest method
● equity instrument
● expected credit losses
IFRS 7
IFRS Foundation A279● fair value
● financial asset
● financial guarantee contract
● financial instrument
● financial liability
● financial liability at fair value through profit or loss
● forecast transaction
● gross carrying amount of a financial asset
● hedging instrument
● held for trading
● impairment gains or losses
● loss allowance
● past due
● purchased or originated creditimpaired financial assets
● reclassification date
● regular way purchase or sale
IFRS 7
IFRS FoundationA280Appendix B
Application guidance
This appendix is an integral part of the IFRS
Classes of financial instruments and level of disclosure
(paragraph 6)
B1 Paragraph 6 requires an entity to group financial instruments into classes that
are appropriate to the nature of the information disclosed and that take into
account the characteristics of those financial instruments The classes described
in paragraph 6 are determined by the entity and are thus distinct from the
categories of financial instruments specified in IFRS 9 (which determine how
financial instruments are measured and where changes in fair value are
recognised)
B2 In determining classes of financial instrument an entity shall at a minimum
(a) distinguish instruments measured at amortised cost from those
measured at fair value
(b) treat as a separate class or classes those financial instruments outside the
scope of this IFRS
B3 An entity decides in the light of its circumstances how much detail it provides
to satisfy the requirements of this IFRS how much emphasis it places on
different aspects of the requirements and how it aggregates information to
display the overall picture without combining information with different
characteristics It is necessary to strike a balance between overburdening
financial statements with excessive detail that may not assist users of financial
statements and obscuring important information as a result of too much
aggregation For example an entity shall not obscure important information by
including it among a large amount of insignificant detail Similarly an entity
shall not disclose information that is so aggregated that it obscures important
differences between individual transactions or associated risks
B4 [Deleted]
Other disclosure – accounting policies (paragraph 21)
B5 Paragraph 21 requires disclosure of the measurement basis (or bases) used in
preparing the financial statements and the other accounting policies used that
are relevant to an understanding of the financial statements For financial
instruments such disclosure may include
(a) for financial liabilities designated as at fair value through profit or loss
(i) the nature of the financial liabilities the entity has designated as
at fair value through profit or loss
(ii) the criteria for so designating such financial liabilities on initial
recognition and
(iii) how the entity has satisfied the conditions in paragraph 422 of
IFRS 9 for such designation
IFRS 7
IFRS Foundation A281(aa) for financial assets designated as measured at fair value through profit
or loss
(i) the nature of the financial assets the entity has designated as
measured at fair value through profit or loss and
(ii) how the entity has satisfied the criteria in paragraph 415 of
IFRS 9 for such designation
(b) [deleted]
(c) whether regular way purchases and sales of financial assets are
accounted for at trade date or at settlement date (see paragraph 312 of
IFRS 9)
(d) [deleted]
(e) how net gains or net losses on each category of financial instrument are
determined (see paragraph 20(a)) for example whether the net gains or
net losses on items at fair value through profit or loss include interest or
dividend income
(f) [deleted]
(g) [deleted]
Paragraph 122 of IAS 1 (as revised in 2007) also requires entities to disclose
along with its significant accounting policies or other notes the judgements
apart from those involving estimations that management has made in the
process of applying the entity’s accounting policies and that have the most
significant effect on the amounts recognised in the financial statements
Nature and extent of risks arising from financial instruments
(paragraphs 31–42)
B6 The disclosures required by paragraphs 31–42 shall be either given in the
financial statements or incorporated by crossreference from the financial
statements to some other statement such as a management commentary or risk
report that is available to users of the financial statements on the same terms as
the financial statements and at the same time Without the information
incorporated by crossreference the financial statements are incomplete
Quantitative disclosures (paragraph 34)
B7 Paragraph 34(a) requires disclosures of summary quantitative data about an
entity’s exposure to risks based on the information provided internally to key
management personnel of the entity When an entity uses several methods to
manage a risk exposure the entity shall disclose information using the method
or methods that provide the most relevant and reliable information IAS 8
Accounting Policies Changes in Accounting Estimates and Errors discusses relevance and
reliability
B8 Paragraph 34(c) requires disclosures about concentrations of risk
Concentrations of risk arise from financial instruments that have similar
characteristics and are affected similarly by changes in economic or other
IFRS 7
IFRS FoundationA282conditions The identification of concentrations of risk requires judgement
taking into account the circumstances of the entity Disclosure of
concentrations of risk shall include
(a) a description of how management determines concentrations
(b) a description of the shared characteristic that identifies each
concentration (eg counterparty geographical area currency or market)
and
(c) the amount of the risk exposure associated with all financial
instruments sharing that characteristic
Credit risk management practices (paragraphs 35F–35G)
B8A Paragraph 35F(b) requires the disclosure of information about how an entity has
defined default for different financial instruments and the reasons for selecting
those definitions In accordance with paragraph 559 of IFRS 9 the
determination of whether lifetime expected credit losses should be recognised is
based on the increase in the risk of a default occurring since initial recognition
Information about an entity’s definitions of default that will assist users of
financial statements in understanding how an entity has applied the expected
credit loss requirements in IFRS 9 may include
(a) the qualitative and quantitative factors considered in defining default
(b) whether different definitions have been applied to different types of
financial instruments and
(c) assumptions about the cure rate (ie the number of financial assets that
return to a performing status) after a default occurred on the financial
asset
B8B To assist users of financial statements in evaluating an entity’s restructuring and
modification policies paragraph 35F(f)(ii) requires the disclosure of information
about how an entity monitors the extent to which the loss allowance on
financial assets previously disclosed in accordance with paragraph 35F(f)(i) are
subsequently measured at an amount equal to lifetime expected credit losses in
accordance with paragraph 553 of IFRS 9 Quantitative information that will
assist users in understanding the subsequent increase in credit risk of modified
financial assets may include information about modified financial assets
meeting the criteria in paragraph 35F(f)(i) for which the loss allowance has
reverted to being measured at an amount equal to lifetime expected credit losses
(ie a deterioration rate)
B8C Paragraph 35G(a) requires the disclosure of information about the basis of
inputs and assumptions and the estimation techniques used to apply the
impairment requirements in IFRS 9 An entity’s assumptions and inputs used to
measure expected credit losses or determine the extent of increases in credit risk
since initial recognition may include information obtained from internal
historical information or rating reports and assumptions about the expected life
of financial instruments and the timing of the sale of collateral
IFRS 7
IFRS Foundation A283Changes in the loss allowance (paragraph 35H)
B8D In accordance with paragraph 35H an entity is required to explain the reasons
for the changes in the loss allowance during the period In addition to the
reconciliation from the opening balance to the closing balance of the loss
allowance it may be necessary to provide a narrative explanation of the changes
This narrative explanation may include an analysis of the reasons for changes in
the loss allowance during the period including
(a) the portfolio composition
(b) the volume of financial instruments purchased or originated and
(c) the severity of the expected credit losses
B8E For loan commitments and financial guarantee contracts the loss allowance is
recognised as a provision An entity should disclose information about the
changes in the loss allowance for financial assets separately from those for loan
commitments and financial guarantee contracts However if a financial
instrument includes both a loan (ie financial asset) and an undrawn
commitment (ie loan commitment) component and the entity cannot separately
identify the expected credit losses on the loan commitment component from
those on the financial asset component the expected credit losses on the loan
commitment should be recognised together with the loss allowance for the
financial asset To the extent that the combined expected credit losses exceed
the gross carrying amount of the financial asset the expected credit losses
should be recognised as a provision
Collateral (paragraph 35K)
B8F Paragraph 35K requires the disclosure of information that will enable users of
financial statements to understand the effect of collateral and other credit
enhancements on the amount of expected credit losses An entity is neither
required to disclose information about the fair value of collateral and other
credit enhancements nor is it required to quantify the exact value of the
collateral that was included in the calculation of expected credit losses (ie the
loss given default)
B8G A narrative description of collateral and its effect on amounts of expected credit
losses might include information about
(a) the main types of collateral held as security and other credit
enhancements (examples of the latter being guarantees credit
derivatives and netting agreements that do not qualify for offset in
accordance with IAS 32)
(b) the volume of collateral held and other credit enhancements and its
significance in terms of the loss allowance
(c) the policies and processes for valuing and managing collateral and other
credit enhancements
(d) the main types of counterparties to collateral and other credit
enhancements and their creditworthiness and
IFRS 7
IFRS FoundationA284(e) information about risk concentrations within the collateral and other
credit enhancements
Credit risk exposure (paragraphs 35M–35N)
B8H Paragraph 35M requires the disclosure of information about an entity’s credit
risk exposure and significant concentrations of credit risk at the reporting date
A concentration of credit risk exists when a number of counterparties are
located in a geographical region or are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions An entity should provide information that enables users of financial
statements to understand whether there are groups or portfolios of financial
instruments with particular features that could affect a large portion of that
group of financial instruments such as concentration to particular risks This
could include for example loantovalue groupings geographical industry or
issuertype concentrations
B8I The number of credit risk rating grades used to disclose the information in
accordance with paragraph 35M shall be consistent with the number that the
entity reports to key management personnel for credit risk management
purposes If past due information is the only borrowerspecific information
available and an entity uses past due information to assess whether credit risk
has increased significantly since initial recognition in accordance with
paragraph 5511 of IFRS 9 an entity shall provide an analysis by past due status
for those financial assets
B8J When an entity has measured expected credit losses on a collective basis the
entity may not be able to allocate the gross carrying amount of individual
financial assets or the exposure to credit risk on loan commitments and
financial guarantee contracts to the credit risk rating grades for which lifetime
expected credit losses are recognised In that case an entity should apply the
requirement in paragraph 35M to those financial instruments that can be
directly allocated to a credit risk rating grade and disclose separately the gross
carrying amount of financial instruments for which lifetime expected credit
losses have been measured on a collective basis
Maximum credit risk exposure (paragraph 36(a))
B9 Paragraphs 35K(a) and 36(a) require disclosure of the amount that best
represents the entity’s maximum exposure to credit risk For a financial asset
this is typically the gross carrying amount net of
(a) any amounts offset in accordance with IAS 32 and
(b) any loss allowance recognised in accordance with IFRS 9
B10 Activities that give rise to credit risk and the associated maximum exposure to
credit risk include but are not limited to
(a) granting loans to customers and placing deposits with other entities In
these cases the maximum exposure to credit risk is the carrying amount
of the related financial assets
IFRS 7
IFRS Foundation A285(b) entering into derivative contracts eg foreign exchange contracts
interest rate swaps and credit derivatives When the resulting asset is
measured at fair value the maximum exposure to credit risk at the end
of the reporting period will equal the carrying amount
(c) granting financial guarantees In this case the maximum exposure to
credit risk is the maximum amount the entity could have to pay if the
guarantee is called on which may be significantly greater than the
amount recognised as a liability
(d) making a loan commitment that is irrevocable over the life of the facility
or is revocable only in response to a material adverse change If the
issuer cannot settle the loan commitment net in cash or another
financial instrument the maximum credit exposure is the full amount
of the commitment This is because it is uncertain whether the amount
of any undrawn portion may be drawn upon in the future This may be
significantly greater than the amount recognised as a liability
Quantitative liquidity risk disclosures (paragraphs 34(a)
and 39(a) and (b))
B10A In accordance with paragraph 34(a) an entity discloses summary quantitative
data about its exposure to liquidity risk on the basis of the information provided
internally to key management personnel An entity shall explain how those
data are determined If the outflows of cash (or another financial asset) included
in those data could either
(a) occur significantly earlier than indicated in the data or
(b) be for significantly different amounts from those indicated in the data
(eg for a derivative that is included in the data on a net settlement basis
but for which the counterparty has the option to require gross
settlement)
the entity shall state that fact and provide quantitative information that enables
users of its financial statements to evaluate the extent of this risk unless that
information is included in the contractual maturity analyses required by
paragraph 39(a) or (b)
B11 In preparing the maturity analyses required by paragraph 39(a) and (b) an entity
uses its judgement to determine an appropriate number of time bands For
example an entity might determine that the following time bands are
appropriate
(a) not later than one month
(b) later than one month and not later than three months
(c) later than three months and not later than one year and
(d) later than one year and not later than five years
B11A In complying with paragraph 39(a) and (b) an entity shall not separate an
embedded derivative from a hybrid (combined) financial instrument For such
an instrument an entity shall apply paragraph 39(a)
IFRS 7
IFRS FoundationA286B11B Paragraph 39(b) requires an entity to disclose a quantitative maturity analysis
for derivative financial liabilities that shows remaining contractual maturities if
the contractual maturities are essential for an understanding of the timing of
the cash flows For example this would be the case for
(a) an interest rate swap with a remaining maturity of five years in a cash
flow hedge of a variable rate financial asset or liability
(b) all loan commitments
B11C Paragraph 39(a) and (b) requires an entity to disclose maturity analyses for
financial liabilities that show the remaining contractual maturities for some
financial liabilities In this disclosure
(a) when a counterparty has a choice of when an amount is paid the
liability is allocated to the earliest period in which the entity can be
required to pay For example financial liabilities that an entity can be
required to repay on demand (eg demand deposits) are included in the
earliest time band
(b) when an entity is committed to make amounts available in instalments
each instalment is allocated to the earliest period in which the entity can
be required to pay For example an undrawn loan commitment is
included in the time band containing the earliest date it can be drawn
down
(c) for issued financial guarantee contracts the maximum amount of the
guarantee is allocated to the earliest period in which the guarantee
could be called
B11D The contractual amounts disclosed in the maturity analyses as required by
paragraph 39(a) and (b) are the contractual undiscounted cash flows for
example
(a) gross lease liabilities (before deducting finance charges)
(b) prices specified in forward agreements to purchase financial assets for
cash
(c) net amounts for payfloatingreceivefixed interest rate swaps for which
net cash flows are exchanged
(d) contractual amounts to be exchanged in a derivative financial
instrument (eg a currency swap) for which gross cash flows are
exchanged and
(e) gross loan commitments
Such undiscounted cash flows differ from the amount included in the statement
of financial position because the amount in that statement is based on
discounted cash flows When the amount payable is not fixed the amount
disclosed is determined by reference to the conditions existing at the end of the
reporting period For example when the amount payable varies with changes in
an index the amount disclosed may be based on the level of the index at the end
of the period
IFRS 7
IFRS Foundation A287B11E Paragraph 39(c) requires an entity to describe how it manages the liquidity risk
inherent in the items disclosed in the quantitative disclosures required in
paragraph 39(a) and (b) An entity shall disclose a maturity analysis of financial
assets it holds for managing liquidity risk (eg financial assets that are readily
saleable or expected to generate cash inflows to meet cash outflows on financial
liabilities) if that information is necessary to enable users of its financial
statements to evaluate the nature and extent of liquidity risk
B11F Other factors that an entity might consider in providing the disclosure required
in paragraph 39(c) include but are not limited to whether the entity
(a) has committed borrowing facilities (eg commercial paper facilities) or
other lines of credit (eg standby credit facilities) that it can access to
meet liquidity needs
(b) holds deposits at central banks to meet liquidity needs
(c) has very diverse funding sources
(d) has significant concentrations of liquidity risk in either its assets or its
funding sources
(e) has internal control processes and contingency plans for managing
liquidity risk
(f) has instruments that include accelerated repayment terms (eg on the
downgrade of the entity’s credit rating)
(g) has instruments that could require the posting of collateral (eg margin
calls for derivatives)
(h) has instruments that allow the entity to choose whether it settles its
financial liabilities by delivering cash (or another financial asset) or by
delivering its own shares or
(i) has instruments that are subject to master netting agreements
B12–
B16
[Deleted]
Market risk – sensitivity analysis (paragraphs 40 and 41)
B17 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to
which the entity is exposed In accordance with paragraph B3 an entity decides
how it aggregates information to display the overall picture without combining
information with different characteristics about exposures to risks from
significantly different economic environments For example
(a) an entity that trades financial instruments might disclose this
information separately for financial instruments held for trading and
those not held for trading
(b) an entity would not aggregate its exposure to market risks from areas of
hyperinflation with its exposure to the same market risks from areas of
very low inflation
If an entity has exposure to only one type of market risk in only one economic
environment it would not show disaggregated information
IFRS 7
IFRS FoundationA288B18 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or
loss and equity of reasonably possible changes in the relevant risk variable
(eg prevailing market interest rates currency rates equity prices or commodity
prices) For this purpose
(a) entities are not required to determine what the profit or loss for the
period would have been if relevant risk variables had been different
Instead entities disclose the effect on profit or loss and equity at the end
of the reporting period assuming that a reasonably possible change in
the relevant risk variable had occurred at the end of the reporting period
and had been applied to the risk exposures in existence at that date For
example if an entity has a floating rate liability at the end of the year
the entity would disclose the effect on profit or loss (ie interest expense)
for the current year if interest rates had varied by reasonably possible
amounts
(b) entities are not required to disclose the effect on profit or loss and equity
for each change within a range of reasonably possible changes of the
relevant risk variable Disclosure of the effects of the changes at the
limits of the reasonably possible range would be sufficient
B19 In determining what a reasonably possible change in the relevant risk variable
is an entity should consider
(a) the economic environments in which it operates A reasonably possible
change should not include remote or worst case’ scenarios or stress
tests’ Moreover if the rate of change in the underlying risk variable is
stable the entity need not alter the chosen reasonably possible change in
the risk variable For example assume that interest rates are 5 per cent
and an entity determines that a fluctuation in interest rates of ±50 basis
points is reasonably possible It would disclose the effect on profit or loss
and equity if interest rates were to change to 45 per cent or 55 per cent
In the next period interest rates have increased to 55 per cent The
entity continues to believe that interest rates may fluctuate by ±50 basis
points (ie that the rate of change in interest rates is stable) The entity
would disclose the effect on profit or loss and equity if interest rates were
to change to 5 per cent or 6 per cent The entity would not be required to
revise its assessment that interest rates might reasonably fluctuate by
±50 basis points unless there is evidence that interest rates have become
significantly more volatile
(b) the time frame over which it is making the assessment The sensitivity
analysis shall show the effects of changes that are considered to be
reasonably possible over the period until the entity will next present
these disclosures which is usually its next annual reporting period
B20 Paragraph 41 permits an entity to use a sensitivity analysis that reflects
interdependencies between risk variables such as a valueatrisk methodology if
it uses this analysis to manage its exposure to financial risks This applies even if
such a methodology measures only the potential for loss and does not measure
the potential for gain Such an entity might comply with paragraph 41(a) by
disclosing the type of valueatrisk model used (eg whether the model relies on
Monte Carlo simulations) an explanation about how the model works and the
IFRS 7
IFRS Foundation A289main assumptions (eg the holding period and confidence level) Entities might
also disclose the historical observation period and weightings applied to
observations within that period an explanation of how options are dealt with in
the calculations and which volatilities and correlations (or alternatively Monte
Carlo probability distribution simulations) are used
B21 An entity shall provide sensitivity analyses for the whole of its business but may
provide different types of sensitivity analysis for different classes of financial
instruments
Interest rate risk
B22 Interest rate risk arises on interestbearing financial instruments recognised in the
statement of financial position (eg debt instruments acquired or issued) and on
some financial instruments not recognised in the statement of financial position
(eg some loan commitments)
Currency risk
B23 Currency risk (or foreign exchange risk) arises on financial instruments that are
denominated in a foreign currency ie in a currency other than the functional
currency in which they are measured For the purpose of this IFRS currency risk
does not arise from financial instruments that are nonmonetary items or from
financial instruments denominated in the functional currency
B24 A sensitivity analysis is disclosed for each currency to which an entity has
significant exposure
Other price risk
B25 Other price risk arises on financial instruments because of changes in for
example commodity prices or equity prices To comply with paragraph 40 an
entity might disclose the effect of a decrease in a specified stock market index
commodity price or other risk variable For example if an entity gives residual
value guarantees that are financial instruments the entity discloses an increase
or decrease in the value of the assets to which the guarantee applies
B26 Two examples of financial instruments that give rise to equity price risk are (a) a
holding of equities in another entity and (b) an investment in a trust that in turn
holds investments in equity instruments Other examples include forward
contracts and options to buy or sell specified quantities of an equity instrument
and swaps that are indexed to equity prices The fair values of such financial
instruments are affected by changes in the market price of the underlying equity
instruments
B27 In accordance with paragraph 40(a) the sensitivity of profit or loss (that arises
for example from instruments measured at fair value through profit or loss) is
disclosed separately from the sensitivity of other comprehensive income (that
arises for example from investments in equity instruments whose changes in
fair value are presented in other comprehensive income)
B28 Financial instruments that an entity classifies as equity instruments are not
remeasured Neither profit or loss nor equity will be affected by the equity price
risk of those instruments Accordingly no sensitivity analysis is required
IFRS 7
IFRS FoundationA290Derecognition (paragraphs 42C–42H)
Continuing involvement (paragraph 42C)
B29 The assessment of continuing involvement in a transferred financial asset for
the purposes of the disclosure requirements in paragraphs 42E–42H is made at
the level of the reporting entity For example if a subsidiary transfers to an
unrelated third party a financial asset in which the parent of the subsidiary has
continuing involvement the subsidiary does not include the parent’s
involvement in the assessment of whether it has continuing involvement in the
transferred asset in its separate or individual financial statements (ie when the
subsidiary is the reporting entity) However a parent would include its
continuing involvement (or that of another member of the group) in a financial
asset transferred by its subsidiary in determining whether it has continuing
involvement in the transferred asset in its consolidated financial statements
(ie when the reporting entity is the group)
B30 An entity does not have a continuing involvement in a transferred financial
asset if as part of the transfer it neither retains any of the contractual rights or
obligations inherent in the transferred financial asset nor acquires any new
contractual rights or obligations relating to the transferred financial asset An
entity does not have continuing involvement in a transferred financial asset if it
has neither an interest in the future performance of the transferred financial
asset nor a responsibility under any circumstances to make payments in respect
of the transferred financial asset in the future The term payment’ in this
context does not include cash flows of the transferred financial asset that an
entity collects and is required to remit to the transferee
B30A When an entity transfers a financial asset the entity may retain the right to
service that financial asset for a fee that is included in for example a servicing
contract The entity assesses the servicing contract in accordance with the
guidance in paragraphs 42C and B30 to decide whether the entity has
continuing involvement as a result of the servicing contract for the purposes of
the disclosure requirements For example a servicer will have continuing
involvement in the transferred financial asset for the purposes of the disclosure
requirements if the servicing fee is dependent on the amount or timing of the
cash flows collected from the transferred financial asset Similarly a servicer
has continuing involvement for the purposes of the disclosure requirements if a
fixed fee would not be paid in full because of nonperformance of the transferred
financial asset In these examples the servicer has an interest in the future
performance of the transferred financial asset This assessment is independent
of whether the fee to be received is expected to compensate the entity
adequately for performing the servicing
B31 Continuing involvement in a transferred financial asset may result from
contractual provisions in the transfer agreement or in a separate agreement
with the transferee or a third party entered into in connection with the transfer
IFRS 7
IFRS Foundation A291Transferred financial assets that are not derecognised in
their entirety (paragraph 42D)
B32 Paragraph 42D requires disclosures when part or all of the transferred financial
assets do not qualify for derecognition Those disclosures are required at each
reporting date at which the entity continues to recognise the transferred
financial assets regardless of when the transfers occurred
Types of continuing involvement (paragraphs 42E–42H)
B33 Paragraphs 42E–42H require qualitative and quantitative disclosures for each
type of continuing involvement in derecognised financial assets An entity shall
aggregate its continuing involvement into types that are representative of the
entity’s exposure to risks For example an entity may aggregate its continuing
involvement by type of financial instrument (eg guarantees or call options) or by
type of transfer (eg factoring of receivables securitisations and securities
lending)
Maturity analysis for undiscounted cash outflows to
repurchase transferred assets (paragraph 42E(e))
B34 Paragraph 42E(e) requires an entity to disclose a maturity analysis of the
undiscounted cash outflows to repurchase derecognised financial assets or other
amounts payable to the transferee in respect of the derecognised financial
assets showing the remaining contractual maturities of the entity’s continuing
involvement This analysis distinguishes cash flows that are required to be paid
(eg forward contracts) cash flows that the entity may be required to pay
(eg written put options) and cash flows that the entity might choose to pay
(eg purchased call options)
B35 An entity shall use its judgement to determine an appropriate number of time
bands in preparing the maturity analysis required by paragraph 42E(e) For
example an entity might determine that the following maturity time bands are
appropriate
(a) not later than one month
(b) later than one month and not later than three months
(c) later than three months and not later than six months
(d) later than six months and not later than one year
(e) later than one year and not later than three years
(f) later than three years and not later than five years and
(g) more than five years
B36 If there is a range of possible maturities the cash flows are included on the basis
of the earliest date on which the entity can be required or is permitted to pay
Qualitative information (paragraph 42E(f))
B37 The qualitative information required by paragraph 42E(f) includes a description
of the derecognised financial assets and the nature and purpose of the
IFRS 7
IFRS FoundationA292continuing involvement retained after transferring those assets It also includes
a description of the risks to which an entity is exposed including
(a) a description of how the entity manages the risk inherent in its
continuing involvement in the derecognised financial assets
(b) whether the entity is required to bear losses before other parties and the
ranking and amounts of losses borne by parties whose interests rank
lower than the entity’s interest in the asset (ie its continuing
involvement in the asset)
(c) a description of any triggers associated with obligations to provide
financial support or to repurchase a transferred financial asset
Gain or loss on derecognition (paragraph 42G(a))
B38 Paragraph 42G(a) requires an entity to disclose the gain or loss on derecognition
relating to financial assets in which the entity has continuing involvement The
entity shall disclose if a gain or loss on derecognition arose because the fair
values of the components of the previously recognised asset (ie the interest in
the asset derecognised and the interest retained by the entity) were different
from the fair value of the previously recognised asset as a whole In that
situation the entity shall also disclose whether the fair value measurements
included significant inputs that were not based on observable market data as
described in paragraph 27A
Supplementary information (paragraph 42H)
B39 The disclosures required in paragraphs 42D–42G may not be sufficient to meet
the disclosure objectives in paragraph 42B If this is the case the entity shall
disclose whatever additional information is necessary to meet the disclosure
objectives The entity shall decide in the light of its circumstances how much
additional information it needs to provide to satisfy the information needs of
users and how much emphasis it places on different aspects of the additional
information It is necessary to strike a balance between burdening financial
statements with excessive detail that may not assist users of financial statements
and obscuring information as a result of too much aggregation
Offsetting financial assets and financial liabilities
(paragraphs 13A–13F)
Scope (paragraph 13A)
B40 The disclosures in paragraphs 13B–13E are required for all recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32 In
addition financial instruments are within the scope of the disclosure
requirements in paragraphs 13B–13E if they are subject to an enforceable master
netting arrangement or similar agreement that covers similar financial
instruments and transactions irrespective of whether the financial instruments
are set off in accordance with paragraph 42 of IAS 32
B41 The similar agreements referred to in paragraphs 13A and B40 include
derivative clearing agreements global master repurchase agreements global
master securities lending agreements and any related rights to financial
IFRS 7
IFRS Foundation A293collateral The similar financial instruments and transactions referred to in
paragraph B40 include derivatives sale and repurchase agreements reverse sale
and repurchase agreements securities borrowing and securities lending
agreements Examples of financial instruments that are not within the scope of
paragraph 13A are loans and customer deposits at the same institution (unless
they are set off in the statement of financial position) and financial instruments
that are subject only to a collateral agreement
Disclosure of quantitative information for recognised financial
assets and recognised financial liabilities within the scope of
paragraph 13A (paragraph 13C)
B42 Financial instruments disclosed in accordance with paragraph 13C may be
subject to different measurement requirements (for example a payable related
to a repurchase agreement may be measured at amortised cost while a
derivative will be measured at fair value) An entity shall include instruments at
their recognised amounts and describe any resulting measurement differences
in the related disclosures
Disclosure of the gross amounts of recognised financial assets
and recognised financial liabilities within the scope of
paragraph 13A (paragraph 13C(a))
B43 The amounts required by paragraph 13C(a) relate to recognised financial
instruments that are set off in accordance with paragraph 42 of IAS 32 The
amounts required by paragraph 13C(a) also relate to recognised financial
instruments that are subject to an enforceable master netting arrangement or
similar agreement irrespective of whether they meet the offsetting criteria
However the disclosures required by paragraph 13C(a) do not relate to any
amounts recognised as a result of collateral agreements that do not meet the
offsetting criteria in paragraph 42 of IAS 32 Instead such amounts are required
to be disclosed in accordance with paragraph 13C(d)
Disclosure of the amounts that are set off in accordance with the
criteria in paragraph 42 of IAS 32 (paragraph 13C(b))
B44 Paragraph 13C(b) requires that entities disclose the amounts set off in
accordance with paragraph 42 of IAS 32 when determining the net amounts
presented in the statement of financial position The amounts of both the
recognised financial assets and the recognised financial liabilities that are
subject to setoff under the same arrangement will be disclosed in both the
financial asset and financial liability disclosures However the amounts
disclosed (in for example a table) are limited to the amounts that are subject to
setoff For example an entity may have a recognised derivative asset and a
recognised derivative liability that meet the offsetting criteria in paragraph 42
of IAS 32 If the gross amount of the derivative asset is larger than the gross
amount of the derivative liability the financial asset disclosure table will
include the entire amount of the derivative asset (in accordance with
paragraph 13C(a)) and the entire amount of the derivative liability (in
accordance with paragraph 13C(b)) However while the financial liability
disclosure table will include the entire amount of the derivative liability (in
IFRS 7
IFRS FoundationA294accordance with paragraph 13C(a)) it will only include the amount of the
derivative asset (in accordance with paragraph 13C(b)) that is equal to the
amount of the derivative liability
Disclosure of the net amounts presented in the statement of
financial position (paragraph 13C(c))
B45 If an entity has instruments that meet the scope of these disclosures (as specified
in paragraph 13A) but that do not meet the offsetting criteria in paragraph 42
of IAS 32 the amounts required to be disclosed by paragraph 13C(c) would equal
the amounts required to be disclosed by paragraph 13C(a)
B46 The amounts required to be disclosed by paragraph 13C(c) must be reconciled to
the individual line item amounts presented in the statement of financial
position For example if an entity determines that the aggregation or
disaggregation of individual financial statement line item amounts provides
more relevant information it must reconcile the aggregated or disaggregated
amounts disclosed in paragraph 13C(c) back to the individual line item amounts
presented in the statement of financial position
Disclosure of the amounts subject to an enforceable master
netting arrangement or similar agreement that are not otherwise
included in paragraph 13C(b) (paragraph 13C(d))
B47 Paragraph 13C(d) requires that entities disclose amounts that are subject to an
enforceable master netting arrangement or similar agreement that are not
otherwise included in paragraph 13C(b) Paragraph 13C(d)(i) refers to amounts
related to recognised financial instruments that do not meet some or all of the
offsetting criteria in paragraph 42 of IAS 32 (for example current rights of setoff
that do not meet the criterion in paragraph 42(b) of IAS 32 or conditional rights
of setoff that are enforceable and exercisable only in the event of default or
only in the event of insolvency or bankruptcy of any of the counterparties)
B48 Paragraph 13C(d)(ii) refers to amounts related to financial collateral including
cash collateral both received and pledged An entity shall disclose the fair value
of those financial instruments that have been pledged or received as collateral
The amounts disclosed in accordance with paragraph 13C(d)(ii) should relate to
the actual collateral received or pledged and not to any resulting payables or
receivables recognised to return or receive back such collateral
Limits on the amounts disclosed in paragraph 13C(d)
(paragraph 13D)
B49 When disclosing amounts in accordance with paragraph 13C(d) an entity must
take into account the effects of overcollateralisation by financial instrument To
do so the entity must first deduct the amounts disclosed in accordance with
paragraph 13C(d)(i) from the amount disclosed in accordance with
paragraph 13C(c) The entity shall then limit the amounts disclosed in
accordance with paragraph 13C(d)(ii) to the remaining amount in
paragraph 13C(c) for the related financial instrument However if rights to
collateral can be enforced across financial instruments such rights can be
included in the disclosure provided in accordance with paragraph 13D
IFRS 7
IFRS Foundation A295Description of the rights of setoff subject to enforceable master
netting arrangements and similar agreements (paragraph 13E)
B50 An entity shall describe the types of rights of setoff and similar arrangements
disclosed in accordance with paragraph 13C(d) including the nature of those
rights For example an entity shall describe its conditional rights For
instruments subject to rights of setoff that are not contingent on a future event
but that do not meet the remaining criteria in paragraph 42 of IAS 32 the entity
shall describe the reason(s) why the criteria are not met For any financial
collateral received or pledged the entity shall describe the terms of the
collateral agreement (for example when the collateral is restricted)
Disclosure by type of financial instrument or by counterparty
B51 The quantitative disclosures required by paragraph 13C(a)–(e) may be grouped by
type of financial instrument or transaction (for example derivatives repurchase
and reverse repurchase agreements or securities borrowing and securities
lending agreements)
B52 Alternatively an entity may group the quantitative disclosures required by
paragraph 13C(a)–(c) by type of financial instrument and the quantitative
disclosures required by paragraph 13C(c)–(e) by counterparty If an entity
provides the required information by counterparty the entity is not required to
identify the counterparties by name However designation of counterparties
(Counterparty A Counterparty B Counterparty C etc) shall remain consistent
from year to year for the years presented to maintain comparability Qualitative
disclosures shall be considered so that further information can be given about
the types of counterparties When disclosure of the amounts in paragraph
13C(c)–(e) is provided by counterparty amounts that are individually significant
in terms of total counterparty amounts shall be separately disclosed and the
remaining individually insignificant counterparty amounts shall be aggregated
into one line item
Other
B53 The specific disclosures required by paragraphs 13C–13E are minimum
requirements To meet the objective in paragraph 13B an entity may need to
supplement them with additional (qualitative) disclosures depending on the
terms of the enforceable master netting arrangements and related agreements
including the nature of the rights of setoff and their effect or potential effect on
the entity’s financial position
IFRS 7
IFRS FoundationA296Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2007 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period
*****
The amendments contained in this appendix when this IFRS was issued in 2005 have been incorporated
into the text of the relevant IFRSs included in this volume
IFRS 7
IFRS Foundation A297IFRS Standard 8
Operating Segments
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 14
Segment Reporting which had originally been issued by the International Accounting
Standards Committee in August 1997 IAS 14 Segment Reporting replaced IAS 14 Reporting
Financial Information by Segment issued in August 1981
In November 2006 the Board issued IFRS 8 Operating Segments to replace IAS 14 IAS 1
Presentation of Financial Statements (as revised in 2007) amended the terminology used
throughout the Standards including IFRS 8
Other Standards have made minor consequential amendments to IFRS 8 They include
IAS 19 Employee Benefits (issued June 2011) and Annual Improvements to IFRSs 2010–2012 Cycle
(issued December 2013)
IFRS 8
IFRS Foundation A299CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 8
OPERATING SEGMENTS
CORE PRINCIPLE 1
SCOPE 2
OPERATING SEGMENTS 5
REPORTABLE SEGMENTS 11
Aggregation criteria 12
Quantitative thresholds 13
DISCLOSURE 20
General information 22
Information about profit or loss assets and liabilities 23
MEASUREMENT 25
Reconciliations 28
Restatement of previously reported information 29
ENTITYWIDE DISCLOSURES 31
Information about products and services 32
Information about geographical areas 33
Information about major customers 34
TRANSITION AND EFFECTIVE DATE 35
WITHDRAWAL OF IAS 14 37
APPENDICES
A Defined term
B Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 8 ISSUED IN NOVEMBER 2006
BASIS FOR CONCLUSIONS
APPENDICES
A Background information and basis for conclusions of the US Financial
Accounting Standards Board on SFAS 131
B Amendments to the Basis for Conclusions on other IFRSs
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE
APPENDIX
Amendments to other Implementation Guidance
IFRS 8
IFRS FoundationA300International Financial Reporting Standard 8 Operating Segments (IFRS 8) is set out in
paragraphs 1–37 and Appendices A and B All the paragraphs have equal authority
Paragraphs in bold type state the main principles Definitions of terms are given in the
Glossary for International Financial Reporting Standards IFRS 8 should be read in the
context of its core principle and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 8
IFRS Foundation A301Introduction
Reasons for issuing the IFRS
IN1 International Financial Reporting Standard 8 Operating Segments sets out
requirements for disclosure of information about an entity’s operating segments
and also about the entity’s products and services the geographical areas in
which it operates and its major customers
IN2 Achieving convergence of accounting standards around the world is one of the
prime objectives of the International Accounting Standards Board In pursuit of
that objective the Board and the Financial Accounting Standards Board (FASB)
in the United States have undertaken a joint shortterm project with the
objective of reducing differences between International Financial Reporting
Standards (IFRSs) and US generally accepted accounting principles (US GAAP)
that are capable of resolution in a relatively short time and can be addressed
outside major projects One aspect of that project involves the two boards
considering each other’s recent standards with a view to adopting high quality
financial reporting solutions The IFRS arises from the IASB’s consideration of
FASB Statement No 131 Disclosures about Segments of an Enterprise and Related
Information (SFAS 131) issued in 1997 compared with IAS 14 Segment Reporting
which was issued in substantially its present form by the IASB’s predecessor
body the International Accounting Standards Committee in 1997
IN3 The IFRS achieves convergence with the requirements of SFAS 131 except for
minor differences listed in paragraph BC60 of the Basis for Conclusions The
wording of the IFRS is the same as that of SFAS 131 except for changes necessary
to make the terminology consistent with that in other IFRSs
Main features of the IFRS
IN4 The IFRS specifies how an entity should report information about its operating
segments in annual financial statements and as a consequential amendment to
IAS 34 Interim Financial Reporting requires an entity to report selected
information about its operating segments in interim financial reports It also
sets out requirements for related disclosures about products and services
geographical areas and major customers
IN5 The IFRS requires an entity to report financial and descriptive information about
its reportable segments Reportable segments are operating segments or
aggregations of operating segments that meet specified criteria Operating
segments are components of an entity about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance Generally financial information is required to be reported on the
same basis as is used internally for evaluating operating segment performance
and deciding how to allocate resources to operating segments
IN6 The IFRS requires an entity to report a measure of operating segment profit or
loss and of segment assets It also requires an entity to report a measure of
IFRS 8
IFRS FoundationA302segment liabilities and particular income and expense items if such measures
are regularly provided to the chief operating decision maker It requires
reconciliations of total reportable segment revenues total profit or loss total
assets liabilities and other amounts disclosed for reportable segments to
corresponding amounts in the entity’s financial statements
IN7 The IFRS requires an entity to report information about the revenues derived
from its products or services (or groups of similar products and services) about
the countries in which it earns revenues and holds assets and about major
customers regardless of whether that information is used by management in
making operating decisions However the IFRS does not require an entity to
report information that is not prepared for internal use if the necessary
information is not available and the cost to develop it would be excessive
IN8 The IFRS also requires an entity to give descriptive information about the way
the operating segments were determined the products and services provided by
the segments differences between the measurements used in reporting segment
information and those used in the entity’s financial statements and changes in
the measurement of segment amounts from period to period
IN9 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2009 Earlier application is permitted If an entity applies this IFRS
for an earlier period it shall disclose that fact
Changes from previous requirements
IN10 The IFRS replaces IAS 14 Segment Reporting The main changes from IAS 14 are
described below
Identification of segments
IN11 The requirements of the IFRS are based on the information about the
components of the entity that management uses to make decisions about
operating matters The IFRS requires identification of operating segments on
the basis of internal reports that are regularly reviewed by the entity’s chief
operating decision maker in order to allocate resources to the segment and
assess its performance IAS 14 required identification of two sets of
segments—one based on related products and services and the other on
geographical areas IAS 14 regarded one set as primary segments and the other
as secondary segments
IN12 A component of an entity that sells primarily or exclusively to other operating
segments of the entity is included in the IFRS’s definition of an operating
segment if the entity is managed that way IAS 14 limited reportable segments
to those that earn a majority of their revenue from sales to external customers
and therefore did not require the different stages of vertically integrated
operations to be identified as separate segments
Measurement of segment information
IN13 The IFRS requires the amount reported for each operating segment item to be
the measure reported to the chief operating decision maker for the purposes of
allocating resources to the segment and assessing its performance IAS 14
IFRS 8
IFRS Foundation A303required segment information to be prepared in conformity with the accounting
policies adopted for preparing and presenting the financial statements of the
consolidated group or entity
IN14 IAS 14 defined segment revenue segment expense segment result segment
assets and segment liabilities The IFRS does not define these terms but requires
an explanation of how segment profit or loss segment assets and segment
liabilities are measured for each reportable segment
Disclosure
IN15 The IFRS requires an entity to disclose the following information
(a) factors used to identify the entity’s operating segments including the
basis of organisation (for example whether management organises the
entity around differences in products and services geographical areas
regulatory environments or a combination of factors and whether
segments have been aggregated) and
(b) types of products and services from which each reportable segment
derives its revenues
IN16 IAS 14 required the entity to disclose specified items of information about its
primary segments The IFRS requires an entity to disclose specified amounts
about each reportable segment if the specified amounts are included in the
measure of segment profit or loss and are reviewed by or otherwise regularly
provided to the chief operating decision maker
IN17 The IFRS requires an entity to report interest revenue separately from interest
expense for each reportable segment unless a majority of the segment’s revenues
are from interest and the chief operating decision maker relies primarily on net
interest revenue to assess the performance of the segment and to make decisions
about resources to be allocated to the segment IAS 14 did not require disclosure
of interest income and expense
IN18 The IFRS requires an entity including an entity with a single reportable
segment to disclose information for the entity as a whole about its products and
services geographical areas and major customers This requirement applies
regardless of the entity’s organisation if the information is not included as part
of the disclosures about segments IAS 14 required the disclosure of secondary
segment information for either industry or geographical segments to
supplement the information given for the primary segments
IFRS 8
IFRS FoundationA304International Financial Reporting Standard 8
Operating Segments
Core principle
1 An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates
Scope
2 This IFRS shall apply to
(a) the separate or individual financial statements of an entity
(i) whose debt or equity instruments are traded in a public market
(a domestic or foreign stock exchange or an overthecounter
market including local and regional markets) or
(ii) that files or is in the process of filing its financial statements
with a securities commission or other regulatory organisation for
the purpose of issuing any class of instruments in a public
market and
(b) the consolidated financial statements of a group with a parent
(i) whose debt or equity instruments are traded in a public market
(a domestic or foreign stock exchange or an overthecounter
market including local and regional markets) or
(ii) that files or is in the process of filing the consolidated financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments
in a public market
3 If an entity that is not required to apply this IFRS chooses to disclose
information about segments that does not comply with this IFRS it shall not
describe the information as segment information
4 If a financial report contains both the consolidated financial statements of a
parent that is within the scope of this IFRS as well as the parent’s separate
financial statements segment information is required only in the consolidated
financial statements
Operating segments
5 An operating segment is a component of an entity
(a) that engages in business activities from which it may earn revenues and
incur expenses (including revenues and expenses relating to transactions
with other components of the same entity)
IFRS 8
IFRS Foundation A305(b) whose operating results are regularly reviewed by the entity’s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance and
(c) for which discrete financial information is available
An operating segment may engage in business activities for which it has yet to
earn revenues for example startup operations may be operating segments
before earning revenues
6 Not every part of an entity is necessarily an operating segment or part of an
operating segment For example a corporate headquarters or some functional
departments may not earn revenues or may earn revenues that are only
incidental to the activities of the entity and would not be operating segments
For the purposes of this IFRS an entity’s postemployment benefit plans are not
operating segments
7 The term chief operating decision maker’ identifies a function not necessarily a
manager with a specific title That function is to allocate resources to and assess
the performance of the operating segments of an entity Often the chief
operating decision maker of an entity is its chief executive officer or chief
operating officer but for example it may be a group of executive directors or
others
8 For many entities the three characteristics of operating segments described in
paragraph 5 clearly identify its operating segments However an entity may
produce reports in which its business activities are presented in a variety of
ways If the chief operating decision maker uses more than one set of segment
information other factors may identify a single set of components as
constituting an entity’s operating segments including the nature of the
business activities of each component the existence of managers responsible for
them and information presented to the board of directors
9 Generally an operating segment has a segment manager who is directly
accountable to and maintains regular contact with the chief operating decision
maker to discuss operating activities financial results forecasts or plans for the
segment The term segment manager’ identifies a function not necessarily a
manager with a specific title The chief operating decision maker also may be
the segment manager for some operating segments A single manager may be
the segment manager for more than one operating segment If the
characteristics in paragraph 5 apply to more than one set of components of an
organisation but there is only one set for which segment managers are held
responsible that set of components constitutes the operating segments
10 The characteristics in paragraph 5 may apply to two or more overlapping sets of
components for which managers are held responsible That structure is
sometimes referred to as a matrix form of organisation For example in some
entities some managers are responsible for different product and service lines
worldwide whereas other managers are responsible for specific geographical
areas The chief operating decision maker regularly reviews the operating
results of both sets of components and financial information is available for
both In that situation the entity shall determine which set of components
constitutes the operating segments by reference to the core principle
IFRS 8
IFRS FoundationA306Reportable segments
11 An entity shall report separately information about each operating segment
that
(a) has been identified in accordance with paragraphs 5–10 or results from
aggregating two or more of those segments in accordance with
paragraph 12 and
(b) exceeds the quantitative thresholds in paragraph 13
Paragraphs 14–19 specify other situations in which separate information about
an operating segment shall be reported
Aggregation criteria
12 Operating segments often exhibit similar longterm financial performance if
they have similar economic characteristics For example similar longterm
average gross margins for two operating segments would be expected if their
economic characteristics were similar Two or more operating segments may be
aggregated into a single operating segment if aggregation is consistent with the
core principle of this IFRS the segments have similar economic characteristics
and the segments are similar in each of the following respects
(a) the nature of the products and services
(b) the nature of the production processes
(c) the type or class of customer for their products and services
(d) the methods used to distribute their products or provide their services
and
(e) if applicable the nature of the regulatory environment for example
banking insurance or public utilities
Quantitative thresholds
13 An entity shall report separately information about an operating segment that
meets any of the following quantitative thresholds
(a) Its reported revenue including both sales to external customers and
intersegment sales or transfers is 10 per cent or more of the combined
revenue internal and external of all operating segments
(b) The absolute amount of its reported profit or loss is 10 per cent or more
of the greater in absolute amount of (i) the combined reported profit of
all operating segments that did not report a loss and (ii) the combined
reported loss of all operating segments that reported a loss
(c) Its assets are 10 per cent or more of the combined assets of all operating
segments
Operating segments that do not meet any of the quantitative thresholds may be
considered reportable and separately disclosed if management believes that
information about the segment would be useful to users of the financial
statements
IFRS 8
IFRS Foundation A30714 An entity may combine information about operating segments that do not meet
the quantitative thresholds with information about other operating segments
that do not meet the quantitative thresholds to produce a reportable segment
only if the operating segments have similar economic characteristics and share a
majority of the aggregation criteria listed in paragraph 12
15 If the total external revenue reported by operating segments constitutes less
than 75 per cent of the entity’s revenue additional operating segments shall be
identified as reportable segments (even if they do not meet the criteria in
paragraph 13) until at least 75 per cent of the entity’s revenue is included in
reportable segments
16 Information about other business activities and operating segments that are not
reportable shall be combined and disclosed in an all other segments’ category
separately from other reconciling items in the reconciliations required by
paragraph 28 The sources of the revenue included in the all other segments’
category shall be described
17 If management judges that an operating segment identified as a reportable
segment in the immediately preceding period is of continuing significance
information about that segment shall continue to be reported separately in the
current period even if it no longer meets the criteria for reportability in
paragraph 13
18 If an operating segment is identified as a reportable segment in the current
period in accordance with the quantitative thresholds segment data for a prior
period presented for comparative purposes shall be restated to reflect the newly
reportable segment as a separate segment even if that segment did not satisfy
the criteria for reportability in paragraph 13 in the prior period unless the
necessary information is not available and the cost to develop it would be
excessive
19 There may be a practical limit to the number of reportable segments that an
entity separately discloses beyond which segment information may become too
detailed Although no precise limit has been determined as the number of
segments that are reportable in accordance with paragraphs 13–18 increases
above ten the entity should consider whether a practical limit has been reached
Disclosure
20 An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates
21 To give effect to the principle in paragraph 20 an entity shall disclose the
following for each period for which a statement of comprehensive income is
presented
(a) general information as described in paragraph 22
IFRS 8
IFRS FoundationA308(b) information about reported segment profit or loss including specified
revenues and expenses included in reported segment profit or loss
segment assets segment liabilities and the basis of measurement as
described in paragraphs 23–27 and
(c) reconciliations of the totals of segment revenues reported segment
profit or loss segment assets segment liabilities and other material
segment items to corresponding entity amounts as described in
paragraph 28
Reconciliations of the amounts in the statement of financial position for
reportable segments to the amounts in the entity’s statement of financial
position are required for each date at which a statement of financial position is
presented Information for prior periods shall be restated as described in
paragraphs 29 and 30
General information
22 An entity shall disclose the following general information
(a) factors used to identify the entity’s reportable segments including the
basis of organisation (for example whether management has chosen to
organise the entity around differences in products and services
geographical areas regulatory environments or a combination of factors
and whether operating segments have been aggregated)
(aa) the judgements made by management in applying the aggregation
criteria in paragraph 12 This includes a brief description of the
operating segments that have been aggregated in this way and the
economic indicators that have been assessed in determining that the
aggregated operating segments share similar economic characteristics
and
(b) types of products and services from which each reportable segment
derives its revenues
Information about profit or loss assets and liabilities
23 An entity shall report a measure of profit or loss for each reportable segment
An entity shall report a measure of total assets and liabilities for each reportable
segment if such amounts are regularly provided to the chief operating decision
maker An entity shall also disclose the following about each reportable
segment if the specified amounts are included in the measure of segment profit
or loss reviewed by the chief operating decision maker or are otherwise
regularly provided to the chief operating decision maker even if not included in
that measure of segment profit or loss
(a) revenues from external customers
(b) revenues from transactions with other operating segments of the same
entity
(c) interest revenue
(d) interest expense
(e) depreciation and amortisation
IFRS 8
IFRS Foundation A309(f) material items of income and expense disclosed in accordance with
paragraph 97 of IAS 1 Presentation of Financial Statements (as revised in
2007)
(g) the entity’s interest in the profit or loss of associates and joint ventures
accounted for by the equity method
(h) income tax expense or income and
(i) material noncash items other than depreciation and amortisation
An entity shall report interest revenue separately from interest expense for each
reportable segment unless a majority of the segment’s revenues are from
interest and the chief operating decision maker relies primarily on net interest
revenue to assess the performance of the segment and make decisions about
resources to be allocated to the segment In that situation an entity may report
that segment’s interest revenue net of its interest expense and disclose that it
has done so
24 An entity shall disclose the following about each reportable segment if the
specified amounts are included in the measure of segment assets reviewed by
the chief operating decision maker or are otherwise regularly provided to the
chief operating decision maker even if not included in the measure of segment
assets
(a) the amount of investment in associates and joint ventures accounted for
by the equity method and
(b) the amounts of additions to noncurrent assets1 other than financial
instruments deferred tax assets net defined benefit assets (see IAS 19
Employee Benefits) and rights arising under insurance contracts
Measurement
25 The amount of each segment item reported shall be the measure reported to the
chief operating decision maker for the purposes of making decisions about
allocating resources to the segment and assessing its performance Adjustments
and eliminations made in preparing an entity’s financial statements and
allocations of revenues expenses and gains or losses shall be included in
determining reported segment profit or loss only if they are included in the
measure of the segment’s profit or loss that is used by the chief operating
decision maker Similarly only those assets and liabilities that are included in
the measures of the segment’s assets and segment’s liabilities that are used by
the chief operating decision maker shall be reported for that segment If
amounts are allocated to reported segment profit or loss assets or liabilities
those amounts shall be allocated on a reasonable basis
26 If the chief operating decision maker uses only one measure of an operating
segment’s profit or loss the segment’s assets or the segment’s liabilities in
assessing segment performance and deciding how to allocate resources segment
profit or loss assets and liabilities shall be reported at those measures If the
1 For assets classified according to a liquidity presentation noncurrent assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period
IFRS 8
IFRS FoundationA310chief operating decision maker uses more than one measure of an operating
segment’s profit or loss the segment’s assets or the segment’s liabilities the
reported measures shall be those that management believes are determined in
accordance with the measurement principles most consistent with those used in
measuring the corresponding amounts in the entity’s financial statements
27 An entity shall provide an explanation of the measurements of segment profit or
loss segment assets and segment liabilities for each reportable segment At a
minimum an entity shall disclose the following
(a) the basis of accounting for any transactions between reportable
segments
(b) the nature of any differences between the measurements of the
reportable segments’ profits or losses and the entity’s profit or loss before
income tax expense or income and discontinued operations (if not
apparent from the reconciliations described in paragraph 28) Those
differences could include accounting policies and policies for allocation
of centrally incurred costs that are necessary for an understanding of the
reported segment information
(c) the nature of any differences between the measurements of the
reportable segments’ assets and the entity’s assets (if not apparent from
the reconciliations described in paragraph 28) Those differences could
include accounting policies and policies for allocation of jointly used
assets that are necessary for an understanding of the reported segment
information
(d) the nature of any differences between the measurements of the
reportable segments’ liabilities and the entity’s liabilities (if not apparent
from the reconciliations described in paragraph 28) Those differences
could include accounting policies and policies for allocation of jointly
utilised liabilities that are necessary for an understanding of the
reported segment information
(e) the nature of any changes from prior periods in the measurement
methods used to determine reported segment profit or loss and the
effect if any of those changes on the measure of segment profit or loss
(f) the nature and effect of any asymmetrical allocations to reportable
segments For example an entity might allocate depreciation expense to
a segment without allocating the related depreciable assets to that
segment
Reconciliations
28 An entity shall provide reconciliations of all of the following
(a) the total of the reportable segments’ revenues to the entity’s revenue
(b) the total of the reportable segments’ measures of profit or loss to the
entity’s profit or loss before tax expense (tax income) and discontinued
operations However if an entity allocates to reportable segments items
IFRS 8
IFRS Foundation A311such as tax expense (tax income) the entity may reconcile the total of the
segments’ measures of profit or loss to the entity’s profit or loss after
those items
(c) the total of the reportable segments’ assets to the entity’s assets if the
segment assets are reported in accordance with paragraph 23
(d) the total of the reportable segments’ liabilities to the entity’s liabilities if
segment liabilities are reported in accordance with paragraph 23
(e) the total of the reportable segments’ amounts for every other material
item of information disclosed to the corresponding amount for the
entity
All material reconciling items shall be separately identified and described For
example the amount of each material adjustment needed to reconcile
reportable segment profit or loss to the entity’s profit or loss arising from
different accounting policies shall be separately identified and described
Restatement of previously reported information
29 If an entity changes the structure of its internal organisation in a manner that
causes the composition of its reportable segments to change the corresponding
information for earlier periods including interim periods shall be restated
unless the information is not available and the cost to develop it would be
excessive The determination of whether the information is not available and
the cost to develop it would be excessive shall be made for each individual item
of disclosure Following a change in the composition of its reportable segments
an entity shall disclose whether it has restated the corresponding items of
segment information for earlier periods
30 If an entity has changed the structure of its internal organisation in a manner
that causes the composition of its reportable segments to change and if segment
information for earlier periods including interim periods is not restated to
reflect the change the entity shall disclose in the year in which the change
occurs segment information for the current period on both the old basis and the
new basis of segmentation unless the necessary information is not available and
the cost to develop it would be excessive
Entitywide disclosures
31 Paragraphs 32–34 apply to all entities subject to this IFRS including those
entities that have a single reportable segment Some entities’ business activities
are not organised on the basis of differences in related products and services or
differences in geographical areas of operations Such an entity’s reportable
segments may report revenues from a broad range of essentially different
products and services or more than one of its reportable segments may provide
essentially the same products and services Similarly an entity’s reportable
segments may hold assets in different geographical areas and report revenues
from customers in different geographical areas or more than one of its
reportable segments may operate in the same geographical area Information
required by paragraphs 32–34 shall be provided only if it is not provided as part
of the reportable segment information required by this IFRS
IFRS 8
IFRS FoundationA312Information about products and services
32 An entity shall report the revenues from external customers for each product
and service or each group of similar products and services unless the necessary
information is not available and the cost to develop it would be excessive in
which case that fact shall be disclosed The amounts of revenues reported shall
be based on the financial information used to produce the entity’s financial
statements
Information about geographical areas
33 An entity shall report the following geographical information unless the
necessary information is not available and the cost to develop it would be
excessive
(a) revenues from external customers (i) attributed to the entity’s country of
domicile and (ii) attributed to all foreign countries in total from which
the entity derives revenues If revenues from external customers
attributed to an individual foreign country are material those revenues
shall be disclosed separately An entity shall disclose the basis for
attributing revenues from external customers to individual countries
(b) noncurrent assets2 other than financial instruments deferred tax assets
postemployment benefit assets and rights arising under insurance
contracts (i) located in the entity’s country of domicile and (ii) located in
all foreign countries in total in which the entity holds assets If assets in
an individual foreign country are material those assets shall be disclosed
separately
The amounts reported shall be based on the financial information that is used to
produce the entity’s financial statements If the necessary information is not
available and the cost to develop it would be excessive that fact shall be
disclosed An entity may provide in addition to the information required by
this paragraph subtotals of geographical information about groups of countries
Information about major customers
34 An entity shall provide information about the extent of its reliance on its major
customers If revenues from transactions with a single external customer
amount to 10 per cent or more of an entity’s revenues the entity shall disclose
that fact the total amount of revenues from each such customer and the
identity of the segment or segments reporting the revenues The entity need not
disclose the identity of a major customer or the amount of revenues that each
segment reports from that customer For the purposes of this IFRS a group of
entities known to a reporting entity to be under common control shall be
considered a single customer However judgement is required to assess whether
a government (including government agencies and similar bodies whether local
national or international) and entities known to the reporting entity to be under
2 For assets classified according to a liquidity presentation noncurrent assets are assets that include
amounts expected to be recovered more than twelve months after the reporting period
IFRS 8
IFRS Foundation A313the control of that government are considered a single customer In assessing
this the reporting entity shall consider the extent of economic integration
between those entities
Transition and effective date
35 An entity shall apply this IFRS in its annual financial statements for periods
beginning on or after 1 January 2009 Earlier application is permitted If an
entity applies this IFRS in its financial statements for a period before 1 January
2009 it shall disclose that fact
35A Paragraph 23 was amended by Improvements to IFRSs issued in April 2009 An
entity shall apply that amendment for annual periods beginning on or after
1 January 2010 Earlier application is permitted If an entity applies the
amendment for an earlier period it shall disclose that fact
36 Segment information for prior years that is reported as comparative information
for the initial year of application (including application of the amendment to
paragraph 23 made in April 2009) shall be restated to conform to the
requirements of this IFRS unless the necessary information is not available and
the cost to develop it would be excessive
36A IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs In
addition it amended paragraph 23(f) An entity shall apply those amendments
for annual periods beginning on or after 1 January 2009 If an entity applies
IAS 1 (revised 2007) for an earlier period the amendments shall be applied for
that earlier period
36B IAS 24 Related Party Disclosures (as revised in 2009) amended paragraph 34 for
annual periods beginning on or after 1 January 2011 If an entity applies IAS 24
(revised 2009) for an earlier period it shall apply the amendment to
paragraph 34 for that earlier period
36C Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 22 and 28 An entity shall apply those amendments for annual
periods beginning on or after 1 July 2014 Earlier application is permitted If an
entity applies those amendments for an earlier period it shall disclose that fact
Withdrawal of IAS 14
37 This IFRS supersedes IAS 14 Segment Reporting
IFRS 8
IFRS FoundationA314Appendix A
Defined term
This appendix is an integral part of the IFRS
operating segment An operating segment is a component of an entity
(a) that engages in business activities from which it may earn
revenues and incur expenses (including revenues and
expenses relating to transactions with other components
of the same entity)
(b) whose operating results are regularly reviewed by the
entity’s chief operating decision maker to make decisions
about resources to be allocated to the segment and assess
its performance and
(c) for which discrete financial information is available
IFRS 8
IFRS Foundation A315Appendix B
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2009 If an entity applies this IFRS for an earlier period these amendments shall be
applied for that earlier period In the amended paragraphs new text is underlined and deleted text
is struck through
*****
The amendments contained in this appendix when this IFRS was issued in 2006 have been incorporated
into the text of the relevant IFRSs in this volume
IFRS 8
IFRS FoundationA316IFRS Standard 9
Financial Instruments
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 39
Financial Instruments Recognition and Measurement which had originally been issued by the
International Accounting Standards Committee in March 1999
The Board had always intended that IFRS 9 Financial Instruments would replace IAS 39 in its
entirety However in response to requests from interested parties that the accounting for
financial instruments should be improved quickly the Board divided its project to replace
IAS 39 into three main phases As the Board completed each phase it issued chapters in
IFRS 9 that replaced the corresponding requirements in IAS 39
In November 2009 the Board issued the chapters of IFRS 9 relating to the classification and
measurement of financial assets In October 2010 the Board added the requirements related
to the classification and measurement of financial liabilities to IFRS 9 This includes
requirements on embedded derivatives and how to account for changes in own credit risk
on financial liabilities designated under the fair value option
In October 2010 the Board also decided to carry forward unchanged from IAS 39 the
requirements related to the derecognition of financial assets and financial liabilities
Because of these changes in October 2010 the Board restructured IFRS 9 and its Basis for
Conclusions In December 2011 the Board deferred the mandatory effective date of IFRS 9
In November 2013 the Board added a Hedge Accounting chapter
In July 2014 the Board issued the completed version of IFRS 9 The Board made limited
amendments to the classification and measurement requirements for financial assets by
addressing a narrow range of application questions and by introducing a fair value through
other comprehensive income’ measurement category for particular simple debt
instruments The Board also added the impairment requirements relating to the
accounting for an entity’s expected credit losses on its financial assets and commitments to
extend credit A new mandatory effective date was also set
Other Standards have made minor consequential amendments to IFRS 9 They include
Severe Hyperinflation and Removal of Fixed Dates for Firsttime Adopters (Amendments to IFRS 1)
(issued December 2010) IFRS 10 Consolidated Financial Statements (issued May 2011) IFRS 11
Joint Arrangements (issued May 2011) IFRS 13 Fair Value Measurement (issued May 2011) IAS 19
Employee Benefits (issued June 2011) Annual Improvements to IFRSs 2010–2012 Cycle (issued
December 2013) IFRS 15 Revenue from Contracts with Customers (issued May 2014) and IFRS 16
Leases (issued January 2016)
IFRS 9
IFRS Foundation A317CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 9
FINANCIAL INSTRUMENTS
CHAPTERS
1 OBJECTIVE 11
2 SCOPE 21
3 RECOGNITION AND DERECOGNITION 311
31 Initial recognition 311
32 Derecognition of financial assets 321
33 Derecognition of financial liabilities 331
4 CLASSIFICATION 411
41 Classification of financial assets 411
42 Classification of financial liabilities 421
43 Embedded derivatives 431
44 Reclassification 441
5 MEASUREMENT 511
51 Initial measurement 511
52 Subsequent measurement of financial assets 521
53 Subsequent measurement of financial liabilities 531
54 Amortised cost measurement 541
55 Impairment 551
56 Reclassification of financial assets 561
57 Gains and losses 571
6 HEDGE ACCOUNTING 611
61 Objective and scope of hedge accounting 611
62 Hedging instruments 621
63 Hedged items 631
64 Qualifying criteria for hedge accounting 641
65 Accounting for qualifying hedging relationships 651
66 Hedges of a group of items 661
67 Option to designate a credit exposure as measured at fair value through
profit or loss 671
7 EFFECTIVE DATE AND TRANSITION 711
71 Effective date 711
72 Transition 721
73 Withdrawal of IFRIC 9 IFRS 9 (2009) IFRS 9 (2010) and IFRS 9 (2013) 731
IFRS 9
IFRS FoundationA318APPENDICES
A Defined terms
B Application guidance
C Amendments to other Standards
APPROVAL BY THE BOARD OF IFRS 9 ISSUED IN NOVEMBER 2009
APPROVAL BY THE BOARD OF THE REQUIREMENTS ADDED TO IFRS 9 IN
OCTOBER 2010
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 9
MANDATORY EFFECTIVE DATE IFRS 9 AND TRANSITION DISCLOSURES
(AMENDMENTS TO IFRS 9 (2009) IFRS 9 (2010) AND IFRS 7) ISSUED IN
DECEMBER 2011
IFRS 9 FINANCIAL INSTRUMENTS (HEDGE ACCOUNTING AND
AMENDMENTS TO IFRS 9 IFRS 7 AND IAS 39) ISSUED IN NOVEMBER 2013
APPROVAL BY THE BOARD OF IFRS 9 FINANCIAL INSTRUMENTS ISSUED IN
JULY 2014
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
APPENDICES
A Previous dissenting opinions
B Amendments to the Basis for Conclusions on other Standards
ILLUSTRATIVE EXAMPLES
GUIDANCE ON IMPLEMENTING IFRS 9 FINANCIAL INSTRUMENTS
APPENDIX
Amendments to the guidance on other Standards
IFRS 9
IFRS Foundation A319International Financial Reporting Standard 9 Financial Instruments (IFRS 9) is set out in
paragraphs 11–732 and Appendices A–C All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the IFRS Definitions of other terms are given in the
Glossary for International Financial Reporting Standards IFRS 9 should be read in the
context of its objective and the Basis for Conclusions the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance
IFRS 9
IFRS FoundationA320Introduction
Reasons for issuing IFRS 9
IN1 IFRS 9 Financial Instruments sets out the requirements for recognising and
measuring financial assets financial liabilities and some contracts to buy or sell
nonfinancial items This Standard replaces IAS 39 Financial Instruments
Recognition and Measurement
IN2 Many users of financial statements and other interested parties told the
International Accounting Standards Board (IASB) that the requirements in
IAS 39 were difficult to understand apply and interpret They urged the IASB to
develop a new Standard for the financial reporting of financial instruments that
was principlebased and less complex Although the IASB amended IAS 39
several times to clarify requirements add guidance and eliminate internal
inconsistencies it had not previously undertaken a fundamental
reconsideration of the reporting for financial instruments
IN3 In 2005 the IASB and the US national standardsetter the Financial Accounting
Standards Board (FASB) began working towards a longterm objective of
improving and simplifying the reporting for financial instruments This work
resulted in the publication of the Discussion Paper Reducing Complexity in
Reporting Financial Instruments in March 2008 Focusing on the measurement of
financial instruments and hedge accounting the Discussion Paper identified
several possible approaches for improving and simplifying the accounting for
financial instruments The responses to the Discussion Paper indicated support
for a significant change in the requirements for reporting financial instruments
In November 2008 the IASB added this project to its active agenda
IN4 In April 2009 in response to the feedback received on its work responding to the
global financial crisis and following the conclusions of the G20 leaders and the
recommendations of international bodies such as the Financial Stability Board
the IASB announced an accelerated timetable for replacing IAS 39
The IASB’s approach to replacing IAS 39
IN5 The IASB had always intended that IFRS 9 would replace IAS 39 in its entirety
However in response to requests from interested parties that the accounting for
financial instruments be improved quickly the IASB divided its project to
replace IAS 39 into three main phases As the IASB completed each phase it
created chapters in IFRS 9 that replaced the corresponding requirements in
IAS 39
IN6 The three main phases of the IASB’s project to replace IAS 39 were
(a) Phase 1 classification and measurement of financial assets and
financial liabilities In November 2009 the IASB issued the chapters of
IFRS 9 relating to the classification and measurement of financial assets
Those chapters require financial assets to be classified on the basis of the
business model within which they are held and their contractual cash
IFRS 9
IFRS Foundation A321flow characteristics In October 2010 the IASB added to IFRS 9 the
requirements related to the classification and measurement of financial
liabilities Those additional requirements are described further in
paragraph IN7 In July 2014 the IASB made limited amendments to the
classification and measurement requirements in IFRS 9 for financial
assets Those amendments are described further in paragraph IN8
(b) Phase 2 impairment methodology In July 2014 the IASB added to
IFRS 9 the impairment requirements related to the accounting for
expected credit losses on an entity’s financial assets and commitments to
extend credit Those requirements are described further in
paragraph IN9
(c) Phase 3 hedge accounting In November 2013 the IASB added to
IFRS 9 the requirements related to hedge accounting Those additional
requirements are described further in paragraph IN10
Classification and measurement
IN7 In November 2009 the IASB issued the chapters of IFRS 9 relating to the
classification and measurement of financial assets Financial assets are classified
on the basis of the business model within which they are held and their
contractual cash flow characteristics In October 2010 the IASB added to IFRS 9
the requirements for the classification and measurement of financial liabilities
Most of those requirements were carried forward unchanged from IAS 39
However the requirements related to the fair value option for financial
liabilities were changed to address own credit risk Those improvements
respond to consistent feedback from users of financial statements and others
that the effects of changes in a liability’s credit risk ought not to affect profit or
loss unless the liability is held for trading In November 2013 the IASB amended
IFRS 9 to permit entities to early apply those requirements without applying the
other requirements of IFRS 9 at the same time
IN8 In July 2014 the IASB made limited amendments to the requirements in IFRS 9
for the classification and measurement of financial assets Those amendments
addressed a narrow range of application questions and introduced a fair value
through other comprehensive income’ measurement category for particular
simple debt instruments The introduction of that third measurement category
responded to feedback from interested parties including many insurance
companies that this is the most relevant measurement basis for financial assets
that are held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets
Impairment methodology
IN9 Also in July 2014 the IASB added to IFRS 9 the impairment requirements relating
to the accounting for an entity’s expected credit losses on its financial assets and
commitments to extend credit Those requirements eliminate the threshold
that was in IAS 39 for the recognition of credit losses Under the impairment
approach in IFRS 9 it is no longer necessary for a credit event to have occurred
before credit losses are recognised Instead an entity always accounts for
expected credit losses and changes in those expected credit losses The amount
of expected credit losses is updated at each reporting date to reflect changes in
IFRS 9
IFRS FoundationA322credit risk since initial recognition and consequently more timely information
is provided about expected credit losses
Hedge accounting
IN10 In November 2013 the IASB added to IFRS 9 the requirements related to hedge
accounting These requirements align hedge accounting more closely with risk
management establish a more principlebased approach to hedge accounting
and address inconsistencies and weaknesses in the hedge accounting model in
IAS 39 In its discussion of these general hedge accounting requirements the
IASB did not address specific accounting for open portfolios or macro hedging
Instead the IASB is discussing proposals for those items as part of its current
active agenda and in April 2014 published a Discussion Paper Accounting for
Dynamic Risk Management a Portfolio Revaluation Approach to Macro Hedging
Consequently the exception in IAS 39 for a fair value hedge of an interest rate
exposure of a portfolio of financial assets or financial liabilities continues to
apply The IASB also provided entities with an accounting policy choice between
applying the hedge accounting requirements of IFRS 9 or continuing to apply
the existing hedge accounting requirements in IAS 39 for all hedge accounting
because it had not yet completed its project on the accounting for macro
hedging
Other requirements
IN11 In addition to the three phases described above in March 2009 the IASB
published the Exposure Draft Derecognition (Proposed amendments to IAS 39 and
IFRS 7) However in June 2010 the IASB revised its strategy and work plan and
decided to retain the existing requirements in IAS 39 for the derecognition of
financial assets and financial liabilities but to finalise improved disclosure
requirements Those new disclosure requirements were issued in October 2010
as an amendment to IFRS 7 Financial Instruments Disclosures and had an effective
date of 1 July 2011 In October 2010 the requirements in IAS 39 for the
derecognition of financial assets and financial liabilities were carried forward
unchanged to IFRS 9
IN12 As a result of the added requirements described in paragraphs IN7 and IN11
IFRS 9 and its Basis for Conclusions (as issued in 2009) were restructured in 2010
Many paragraphs were renumbered and some were resequenced New
paragraphs were added to accommodate the guidance that was carried forward
unchanged from IAS 39 In addition new sections were added to IFRS 9
Otherwise the restructuring did not change the requirements in IFRS 9 (2009)
In addition the Basis for Conclusions on IFRS 9 was expanded in 2010 to include
material from the Basis for Conclusions on IAS 39 that discusses guidance that
was carried forward without being reconsidered Minor editorial changes were
made to that material
IN13 In 2014 as a result of the added requirements described in paragraph IN9
additional minor structural changes were made to the application guidance on
Chapter 5 (Measurement) of IFRS 9 Specifically the paragraphs related to the
measurement of investments in equity instruments and contracts on those
investments were renumbered as paragraphs B523–B526 These requirements
IFRS 9
IFRS Foundation A323were not otherwise changed This renumbering made it possible to add the
requirements for amortised cost and impairment as Sections 54 and 55
IFRS 9
IFRS FoundationA324International Financial Reporting Standard 9
Financial Instruments
Chapter 1 Objective
11 The objective of this Standard is to establish principles for the financial
reporting of financial assets and financial liabilities that will present relevant and
useful information to users of financial statements for their assessment of the
amounts timing and uncertainty of an entity’s future cash flows
Chapter 2 Scope
21 This Standard shall be applied by all entities to all types of financial
instruments except
(a) those interests in subsidiaries associates and joint ventures that
are accounted for in accordance with IFRS 10 Consolidated
Financial Statements IAS 27 Separate Financial Statements or
IAS 28 Investments in Associates and Joint Ventures However in
some cases IFRS 10 IAS 27 or IAS 28 require or permit an entity to
account for an interest in a subsidiary associate or joint venture
in accordance with some or all of the requirements of this
Standard Entities shall also apply this Standard to derivatives on
an interest in a subsidiary associate or joint venture unless the
derivative meets the definition of an equity instrument of the
entity in IAS 32 Financial Instruments Presentation
(b) rights and obligations under leases to which IFRS 16 Leases
applies However
(i) finance lease receivables (ie net investments in finance
leases) and operating lease receivables recognised by a
lessor are subject to the derecognition and impairment
requirements of this Standard
(ii) lease liabilities recognised by a lessee are subject to the
derecognition requirements in paragraph 331 of this
Standard and
(iii) derivatives that are embedded in leases are subject to the
embedded derivatives requirements of this Standard
(c) employers’ rights and obligations under employee benefit plans
to which IAS 19 Employee Benefits applies
(d) financial instruments issued by the entity that meet the definition
of an equity instrument in IAS 32 (including options and warrants)
or that are required to be classified as an equity instrument in
accordance with paragraphs 16A and 16B or paragraphs 16C
and 16D of IAS 32 However the holder of such equity instruments
shall apply this Standard to those instruments unless they meet
the exception in (a)
IFRS 9
IFRS Foundation A325(e) rights and obligations arising under (i) an insurance contract as
defined in IFRS 4 Insurance Contracts other than an issuer’s rights
and obligations arising under an insurance contract that meets
the definition of a financial guarantee contract or (ii) a contract
that is within the scope of IFRS 4 because it contains a
discretionary participation feature However this Standard
applies to a derivative that is embedded in a contract within the
scope of IFRS 4 if the derivative is not itself a contract within the
scope of IFRS 4 Moreover if an issuer of financial guarantee
contracts has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting that is
applicable to insurance contracts the issuer may elect to apply
either this Standard or IFRS 4 to such financial guarantee
contracts (see paragraphs B25–B26) The issuer may make that
election contract by contract but the election for each contract is
irrevocable
(f) any forward contract between an acquirer and a selling
shareholder to buy or sell an acquiree that will result in a business
combination within the scope of IFRS 3 Business Combinations at
a future acquisition date The term of the forward contract should
not exceed a reasonable period normally necessary to obtain any
required approvals and to complete the transaction
(g) loan commitments other than those loan commitments described
in paragraph 23 However an issuer of loan commitments shall
apply the impairment requirements of this Standard to loan
commitments that are not otherwise within the scope of this
Standard Also all loan commitments are subject to the
derecognition requirements of this Standard
(h) financial instruments contracts and obligations under
sharebased payment transactions to which IFRS 2 Sharebased
Payment applies except for contracts within the scope of
paragraphs 24–27 of this Standard to which this Standard applies
(i) rights to payments to reimburse the entity for expenditure that it
is required to make to settle a liability that it recognises as a
provision in accordance with IAS 37 Provisions Contingent
Liabilities and Contingent Assets or for which in an earlier
period it recognised a provision in accordance with IAS 37
(j) rights and obligations within the scope of IFRS 15 Revenue from
Contracts with Customers that are financial instruments except
for those that IFRS 15 specifies are accounted for in accordance
with this Standard
22 The impairment requirements of this Standard shall be applied to those
rights that IFRS 15 specifies are accounted for in accordance with this
Standard for the purposes of recognising impairment gains or losses
23 The following loan commitments are within the scope of this Standard
IFRS 9
IFRS FoundationA326(a) loan commitments that the entity designates as financial
liabilities at fair value through profit or loss (see paragraph 422)
An entity that has a past practice of selling the assets resulting
from its loan commitments shortly after origination shall apply
this Standard to all its loan commitments in the same class
(b) loan commitments that can be settled net in cash or by delivering
or issuing another financial instrument These loan commitments
are derivatives A loan commitment is not regarded as settled net
merely because the loan is paid out in instalments (for example a
mortgage construction loan that is paid out in instalments in line
with the progress of construction)
(c) commitments to provide a loan at a belowmarket interest rate
(see paragraph 421(d))
24 This Standard shall be applied to those contracts to buy or sell a
nonfinancial item that can be settled net in cash or another financial
instrument or by exchanging financial instruments as if the contracts
were financial instruments with the exception of contracts that were
entered into and continue to be held for the purpose of the receipt or
delivery of a nonfinancial item in accordance with the entity’s expected
purchase sale or usage requirements However this Standard shall be
applied to those contracts that an entity designates as measured at fair
value through profit or loss in accordance with paragraph 25
25 A contract to buy or sell a nonfinancial item that can be settled net in
cash or another financial instrument or by exchanging financial
instruments as if the contract was a financial instrument may be
irrevocably designated as measured at fair value through profit or loss
even if it was entered into for the purpose of the receipt or delivery of a
nonfinancial item in accordance with the entity’s expected purchase sale
or usage requirements This designation is available only at inception of
the contract and only if it eliminates or significantly reduces a
recognition inconsistency (sometimes referred to as an accounting
mismatch’) that would otherwise arise from not recognising that contract
because it is excluded from the scope of this Standard (see paragraph 24)
26 There are various ways in which a contract to buy or sell a nonfinancial item
can be settled net in cash or another financial instrument or by exchanging
financial instruments These include
(a) when the terms of the contract permit either party to settle it net in cash
or another financial instrument or by exchanging financial instruments
(b) when the ability to settle net in cash or another financial instrument or
by exchanging financial instruments is not explicit in the terms of the
contract but the entity has a practice of settling similar contracts net in
cash or another financial instrument or by exchanging financial
instruments (whether with the counterparty by entering into offsetting
contracts or by selling the contract before its exercise or lapse)
IFRS 9
IFRS Foundation A327(c) when for similar contracts the entity has a practice of taking delivery of
the underlying and selling it within a short period after delivery for the
purpose of generating a profit from shortterm fluctuations in price or
dealer’s margin and
(d) when the nonfinancial item that is the subject of the contract is readily
convertible to cash
A contract to which (b) or (c) applies is not entered into for the purpose of the
receipt or delivery of the nonfinancial item in accordance with the entity’s
expected purchase sale or usage requirements and accordingly is within the
scope of this Standard Other contracts to which paragraph 24 applies are
evaluated to determine whether they were entered into and continue to be held
for the purpose of the receipt or delivery of the nonfinancial item in accordance
with the entity’s expected purchase sale or usage requirements and
accordingly whether they are within the scope of this Standard
27 A written option to buy or sell a nonfinancial item that can be settled net in
cash or another financial instrument or by exchanging financial instruments
in accordance with paragraph 26(a) or 26(d) is within the scope of this
Standard Such a contract cannot be entered into for the purpose of the receipt
or delivery of the nonfinancial item in accordance with the entity’s expected
purchase sale or usage requirements
Chapter 3 Recognition and derecognition
31 Initial recognition
311 An entity shall recognise a financial asset or a financial liability in its
statement of financial position when and only when the entity becomes
party to the contractual provisions of the instrument (see
paragraphs B311 and B312) When an entity first recognises a financial
asset it shall classify it in accordance with paragraphs 411–415 and
measure it in accordance with paragraphs 511–513 When an entity first
recognises a financial liability it shall classify it in accordance with
paragraphs 421 and 422 and measure it in accordance with
paragraph 511
Regular way purchase or sale of financial assets
312 A regular way purchase or sale of financial assets shall be recognised and
derecognised as applicable using trade date accounting or settlement
date accounting (see paragraphs B313–B316)
32 Derecognition of financial assets
321 In consolidated financial statements paragraphs 322–329 B311 B312 and
B321–B3217 are applied at a consolidated level Hence an entity first
consolidates all subsidiaries in accordance with IFRS 10 and then applies those
paragraphs to the resulting group
322 Before evaluating whether and to what extent derecognition is
appropriate under paragraphs 323–329 an entity determines whether
IFRS 9
IFRS FoundationA328those paragraphs should be applied to a part of a financial asset (or a part
of a group of similar financial assets) or a financial asset (or a group of
similar financial assets) in its entirety as follows
(a) Paragraphs 323–329 are applied to a part of a financial asset (or a
part of a group of similar financial assets) if and only if the part
being considered for derecognition meets one of the following
three conditions
(i) The part comprises only specifically identified cash flows
from a financial asset (or a group of similar financial
assets) For example when an entity enters into an interest
rate strip whereby the counterparty obtains the right to the
interest cash flows but not the principal cash flows from a
debt instrument paragraphs 323–329 are applied to the
interest cash flows
(ii) The part comprises only a fully proportionate (pro rata)
share of the cash flows from a financial asset (or a group of
similar financial assets) For example when an entity
enters into an arrangement whereby the counterparty
obtains the rights to a 90 per cent share of all cash flows of a
debt instrument paragraphs 323–329 are applied to
90 per cent of those cash flows If there is more than one
counterparty each counterparty is not required to have a
proportionate share of the cash flows provided that the
transferring entity has a fully proportionate share
(iii) The part comprises only a fully proportionate (pro rata)
share of specifically identified cash flows from a financial
asset (or a group of similar financial assets) For example
when an entity enters into an arrangement whereby the
counterparty obtains the rights to a 90 per cent share of
interest cash flows from a financial asset paragraphs
323–329 are applied to 90 per cent of those interest cash
flows If there is more than one counterparty each
counterparty is not required to have a proportionate share
of the specifically identified cash flows provided that the
transferring entity has a fully proportionate share
(b) In all other cases paragraphs 323–329 are applied to the
financial asset in its entirety (or to the group of similar financial
assets in their entirety) For example when an entity transfers
(i) the rights to the first or the last 90 per cent of cash collections
from a financial asset (or a group of financial assets) or (ii) the
rights to 90 per cent of the cash flows from a group of receivables
but provides a guarantee to compensate the buyer for any credit
losses up to 8 per cent of the principal amount of the receivables
paragraphs 323–329 are applied to the financial asset (or a group
of similar financial assets) in its entirety
In paragraphs 323–3212 the term financial asset’ refers to either a part
of a financial asset (or a part of a group of similar financial assets) as
IFRS 9
IFRS Foundation A329identified in (a) above or otherwise a financial asset (or a group of
similar financial assets) in its entirety
323 An entity shall derecognise a financial asset when and only when
(a) the contractual rights to the cash flows from the financial asset
expire or
(b) it transfers the financial asset as set out in paragraphs 324 and
325 and the transfer qualifies for derecognition in accordance
with paragraph 326
(See paragraph 312 for regular way sales of financial assets)
324 An entity transfers a financial asset if and only if it either
(a) transfers the contractual rights to receive the cash flows of the
financial asset or
(b) retains the contractual rights to receive the cash flows of the
financial asset but assumes a contractual obligation to pay the
cash flows to one or more recipients in an arrangement that meets
the conditions in paragraph 325
325 When an entity retains the contractual rights to receive the cash flows of
a financial asset (the original asset’) but assumes a contractual
obligation to pay those cash flows to one or more entities (the eventual
recipients’) the entity treats the transaction as a transfer of a financial
asset if and only if all of the following three conditions are met
(a) The entity has no obligation to pay amounts to the eventual
recipients unless it collects equivalent amounts from the original
asset Shortterm advances by the entity with the right of full
recovery of the amount lent plus accrued interest at market rates
do not violate this condition
(b) The entity is prohibited by the terms of the transfer contract from
selling or pledging the original asset other than as security to the
eventual recipients for the obligation to pay them cash flows
(c) The entity has an obligation to remit any cash flows it collects on
behalf of the eventual recipients without material delay In
addition the entity is not entitled to reinvest such cash flows
except for investments in cash or cash equivalents (as defined in
IAS 7 Statement of Cash Flows) during the short settlement period
from the collection date to the date of required remittance to the
eventual recipients and interest earned on such investments is
passed to the eventual recipients
326 When an entity transfers a financial asset (see paragraph 324) it shall
evaluate the extent to which it retains the risks and rewards of ownership
of the financial asset In this case
IFRS 9
IFRS FoundationA330(a) if the entity transfers substantially all the risks and rewards of
ownership of the financial asset the entity shall derecognise the
financial asset and recognise separately as assets or liabilities any
rights and obligations created or retained in the transfer
(b) if the entity retains substantially all the risks and rewards of
ownership of the financial asset the entity shall continue to
recognise the financial asset
(c) if the entity neither transfers nor retains substantially all the risks
and rewards of ownership of the financial asset the entity shall
determine whether it has retained control of the financial asset
In this case
(i) if the entity has not retained control it shall derecognise
the financial asset and recognise separately as assets or
liabilities any rights and obligations created or retained in
the transfer
(ii) if the entity has retained control it shall continue to
recognise the financial asset to the extent of its continuing
involvement in the financial asset (see paragraph 3216)
327 The transfer of risks and rewards (see paragraph 326) is evaluated by comparing
the entity’s exposure before and after the transfer with the variability in the
amounts and timing of the net cash flows of the transferred asset An entity has
retained substantially all the risks and rewards of ownership of a financial asset
if its exposure to the variability in the present value of the future net cash flows
from the financial asset does not change significantly as a result of the transfer
(eg because the entity has sold a financial asset subject to an agreement to buy it
back at a fixed price or the sale price plus a lender’s return) An entity has
transferred substantially all the risks and rewards of ownership of a financial
asset if its exposure to such variability is no longer significant in relation to the
total variability in the present value of the future net cash flows associated with
the financial asset (eg because the entity has sold a financial asset subject only to
an option to buy it back at its fair value at the time of repurchase or has
transferred a fully proportionate share of the cash flows from a larger financial
asset in an arrangement such as a loan subparticipation that meets the
conditions in paragraph 325)
328 Often it will be obvious whether the entity has transferred or retained
substantially all risks and rewards of ownership and there will be no need to
perform any computations In other cases it will be necessary to compute and
compare the entity’s exposure to the variability in the present value of the
future net cash flows before and after the transfer The computation and
comparison are made using as the discount rate an appropriate current market
interest rate All reasonably possible variability in net cash flows is considered
with greater weight being given to those outcomes that are more likely to occur
329 Whether the entity has retained control (see paragraph 326(c)) of the
transferred asset depends on the transferee’s ability to sell the asset If the
transferee has the practical ability to sell the asset in its entirety to an unrelated
third party and is able to exercise that ability unilaterally and without needing
IFRS 9
IFRS Foundation A331to impose additional restrictions on the transfer the entity has not retained
control In all other cases the entity has retained control
Transfers that qualify for derecognition
3210 If an entity transfers a financial asset in a transfer that qualifies for
derecognition in its entirety and retains the right to service the financial
asset for a fee it shall recognise either a servicing asset or a servicing
liability for that servicing contract If the fee to be received is not
expected to compensate the entity adequately for performing the
servicing a servicing liability for the servicing obligation shall be
recognised at its fair value If the fee to be received is expected to be more
than adequate compensation for the servicing a servicing asset shall be
recognised for the servicing right at an amount determined on the basis
of an allocation of the carrying amount of the larger financial asset in
accordance with paragraph 3213
3211 If as a result of a transfer a financial asset is derecognised in its entirety
but the transfer results in the entity obtaining a new financial asset or
assuming a new financial liability or a servicing liability the entity shall
recognise the new financial asset financial liability or servicing liability
at fair value
3212 On derecognition of a financial asset in its entirety the difference
between
(a) the carrying amount (measured at the date of derecognition) and
(b) the consideration received (including any new asset obtained less
any new liability assumed)
shall be recognised in profit or loss
3213 If the transferred asset is part of a larger financial asset (eg when an
entity transfers interest cash flows that are part of a debt instrument see
paragraph 322(a)) and the part transferred qualifies for derecognition in
its entirety the previous carrying amount of the larger financial asset
shall be allocated between the part that continues to be recognised and
the part that is derecognised on the basis of the relative fair values of
those parts on the date of the transfer For this purpose a retained
servicing asset shall be treated as a part that continues to be recognised
The difference between
(a) the carrying amount (measured at the date of derecognition)
allocated to the part derecognised and
(b) the consideration received for the part derecognised (including
any new asset obtained less any new liability assumed)
shall be recognised in profit or loss
3214 When an entity allocates the previous carrying amount of a larger financial asset
between the part that continues to be recognised and the part that is
derecognised the fair value of the part that continues to be recognised needs to
be measured When the entity has a history of selling parts similar to the part
that continues to be recognised or other market transactions exist for such
IFRS 9
IFRS FoundationA332parts recent prices of actual transactions provide the best estimate of its fair
value When there are no price quotes or recent market transactions to support
the fair value of the part that continues to be recognised the best estimate of the
fair value is the difference between the fair value of the larger financial asset as
a whole and the consideration received from the transferee for the part that is
derecognised
Transfers that do not qualify for derecognition
3215 If a transfer does not result in derecognition because the entity has
retained substantially all the risks and rewards of ownership of the
transferred asset the entity shall continue to recognise the transferred
asset in its entirety and shall recognise a financial liability for the
consideration received In subsequent periods the entity shall recognise
any income on the transferred asset and any expense incurred on the
financial liability
Continuing involvement in transferred assets
3216 If an entity neither transfers nor retains substantially all the risks and
rewards of ownership of a transferred asset and retains control of the
transferred asset the entity continues to recognise the transferred asset
to the extent of its continuing involvement The extent of the entity’s
continuing involvement in the transferred asset is the extent to which it
is exposed to changes in the value of the transferred asset For example
(a) When the entity’s continuing involvement takes the form of
guaranteeing the transferred asset the extent of the entity’s
continuing involvement is the lower of (i) the amount of the asset
and (ii) the maximum amount of the consideration received that
the entity could be required to repay (the guarantee amount’)
(b) When the entity’s continuing involvement takes the form of a
written or purchased option (or both) on the transferred asset the
extent of the entity’s continuing involvement is the amount of the
transferred asset that the entity may repurchase However in the
case of a written put option on an asset that is measured at fair
value the extent of the entity’s continuing involvement is limited
to the lower of the fair value of the transferred asset and the
option exercise price (see paragraph B3213)
(c) When the entity’s continuing involvement takes the form of a
cashsettled option or similar provision on the transferred asset
the extent of the entity’s continuing involvement is measured in
the same way as that which results from noncash settled options
as set out in (b) above
3217 When an entity continues to recognise an asset to the extent of its
continuing involvement the entity also recognises an associated liability
Despite the other measurement requirements in this Standard the
transferred asset and the associated liability are measured on a basis that
reflects the rights and obligations that the entity has retained The
IFRS 9
IFRS Foundation A333associated liability is measured in such a way that the net carrying
amount of the transferred asset and the associated liability is
(a) the amortised cost of the rights and obligations retained by the
entity if the transferred asset is measured at amortised cost or
(b) equal to the fair value of the rights and obligations retained by the
entity when measured on a standalone basis if the transferred
asset is measured at fair value
3218 The entity shall continue to recognise any income arising on the
transferred asset to the extent of its continuing involvement and shall
recognise any expense incurred on the associated liability
3219 For the purpose of subsequent measurement recognised changes in the
fair value of the transferred asset and the associated liability are
accounted for consistently with each other in accordance
with paragraph 571 and shall not be offset
3220 If an entity’s continuing involvement is in only a part of a financial asset
(eg when an entity retains an option to repurchase part of a transferred
asset or retains a residual interest that does not result in the retention of
substantially all the risks and rewards of ownership and the entity retains
control) the entity allocates the previous carrying amount of the
financial asset between the part it continues to recognise under
continuing involvement and the part it no longer recognises on the basis
of the relative fair values of those parts on the date of the transfer For
this purpose the requirements of paragraph 3214 apply The difference
between
(a) the carrying amount (measured at the date of derecognition)
allocated to the part that is no longer recognised and
(b) the consideration received for the part no longer recognised
shall be recognised in profit or loss
3221 If the transferred asset is measured at amortised cost the option in this
Standard to designate a financial liability as at fair value through profit or loss is
not applicable to the associated liability
All transfers
3222 If a transferred asset continues to be recognised the asset and the
associated liability shall not be offset Similarly the entity shall not
offset any income arising from the transferred asset with any expense
incurred on the associated liability (see paragraph 42 of IAS 32)
3223 If a transferor provides noncash collateral (such as debt or equity
instruments) to the transferee the accounting for the collateral by the
transferor and the transferee depends on whether the transferee has the
right to sell or repledge the collateral and on whether the transferor has
defaulted The transferor and transferee shall account for the collateral
as follows
IFRS 9
IFRS FoundationA334(a) If the transferee has the right by contract or custom to sell or
repledge the collateral then the transferor shall reclassify that
asset in its statement of financial position (eg as a loaned asset
pledged equity instruments or repurchase receivable) separately
from other assets
(b) If the transferee sells collateral pledged to it it shall recognise the
proceeds from the sale and a liability measured at fair value for its
obligation to return the collateral
(c) If the transferor defaults under the terms of the contract and is no
longer entitled to redeem the collateral it shall derecognise the
collateral and the transferee shall recognise the collateral as its
asset initially measured at fair value or if it has already sold the
collateral derecognise its obligation to return the collateral
(d) Except as provided in (c) the transferor shall continue to carry the
collateral as its asset and the transferee shall not recognise the
collateral as an asset
33 Derecognition of financial liabilities
331 An entity shall remove a financial liability (or a part of a financial
liability) from its statement of financial position when and only when it
is extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires
332 An exchange between an existing borrower and lender of debt
instruments with substantially different terms shall be accounted for as
an extinguishment of the original financial liability and the recognition
of a new financial liability Similarly a substantial modification of the
terms of an existing financial liability or a part of it (whether or not
attributable to the financial difficulty of the debtor) shall be accounted
for as an extinguishment of the original financial liability and the
recognition of a new financial liability
333 The difference between the carrying amount of a financial liability (or
part of a financial liability) extinguished or transferred to another party
and the consideration paid including any noncash assets transferred or
liabilities assumed shall be recognised in profit or loss
334 If an entity repurchases a part of a financial liability the entity shall allocate the
previous carrying amount of the financial liability between the part that
continues to be recognised and the part that is derecognised based on the
relative fair values of those parts on the date of the repurchase The difference
between (a) the carrying amount allocated to the part derecognised and (b) the
consideration paid including any noncash assets transferred or liabilities
assumed for the part derecognised shall be recognised in profit or loss
IFRS 9
IFRS Foundation A335Chapter 4 Classification
41 Classification of financial assets
411 Unless paragraph 415 applies an entity shall classify financial assets as
subsequently measured at amortised cost fair value through other
comprehensive income or fair value through profit or loss on the basis of
both
(a) the entity’s business model for managing the financial assets and
(b) the contractual cash flow characteristics of the financial asset
412 A financial asset shall be measured at amortised cost if both of the
following conditions are met
(a) the financial asset is held within a business model whose objective
is to hold financial assets in order to collect contractual cash flows
and
(b) the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding
Paragraphs B411–B4126 provide guidance on how to apply these
conditions
412A A financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met
(a) the financial asset is held within a business model whose objective
is achieved by both collecting contractual cash flows and selling
financial assets and
(b) the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding
Paragraphs B411–B4126 provide guidance on how to apply these
conditions
413 For the purpose of applying paragraphs 412(b) and 412A(b)
(a) principal is the fair value of the financial asset at initial
recognition Paragraph B417B provides additional guidance on
the meaning of principal
(b) interest consists of consideration for the time value of money for
the credit risk associated with the principal amount outstanding
during a particular period of time and for other basic lending
risks and costs as well as a profit margin Paragraphs B417A
and B419A–B419E provide additional guidance on the meaning
of interest including the meaning of the time value of money
414 A financial asset shall be measured at fair value through profit or loss
unless it is measured at amortised cost in accordance with
paragraph 412 or at fair value through other comprehensive income in
IFRS 9
IFRS FoundationA336accordance with paragraph 412A However an entity may make an
irrevocable election at initial recognition for particular investments in
equity instruments that would otherwise be measured at fair value
through profit or loss to present subsequent changes in fair value in
other comprehensive income (see paragraphs 575–576)
Option to designate a financial asset at fair value
through profit or loss
415 Despite paragraphs 411–414 an entity may at initial recognition
irrevocably designate a financial asset as measured at fair value through
profit or loss if doing so eliminates or significantly reduces a
measurement or recognition inconsistency (sometimes referred to as an
accounting mismatch’) that would otherwise arise from measuring assets
or liabilities or recognising the gains and losses on them on different
bases (see paragraphs B4129–B4132)
42 Classification of financial liabilities
421 An entity shall classify all financial liabilities as subsequently measured
at amortised cost except for
(a) financial liabilities at fair value through profit or loss Such
liabilities including derivatives that are liabilities shall be
subsequently measured at fair value
(b) financial liabilities that arise when a transfer of a financial asset
does not qualify for derecognition or when the continuing
involvement approach applies Paragraphs 3215 and 3217 apply
to the measurement of such financial liabilities
(c) financial guarantee contracts After initial recognition an issuer
of such a contract shall (unless paragraph 421(a) or (b) applies)
subsequently measure it at the higher of
(i) the amount of the loss allowance determined in accordance
with Section 55 and
(ii) the amount initially recognised (see paragraph 511) less
when appropriate the cumulative amount of income
recognised in accordance with the principles of IFRS 15
(d) commitments to provide a loan at a belowmarket interest rate
An issuer of such a commitment shall (unless paragraph 421(a)
applies) subsequently measure it at the higher of
(i) the amount of the loss allowance determined in accordance
with Section 55 and
(ii) the amount initially recognised (see paragraph 511) less
when appropriate the cumulative amount of income
recognised in accordance with the principles of IFRS 15
IFRS 9
IFRS Foundation A337(e) contingent consideration recognised by an acquirer in a business
combination to which IFRS 3 applies Such contingent
consideration shall subsequently be measured at fair value with
changes recognised in profit or loss
Option to designate a financial liability at fair value
through profit or loss
422 An entity may at initial recognition irrevocably designate a financial
liability as measured at fair value through profit or loss when permitted
by paragraph 435 or when doing so results in more relevant
information because either
(a) it eliminates or significantly reduces a measurement or
recognition inconsistency (sometimes referred to as an
accounting mismatch’) that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them on
different bases (see paragraphs B4129–B4132) or
(b) a group of financial liabilities or financial assets and financial
liabilities is managed and its performance is evaluated on a fair
value basis in accordance with a documented risk management or
investment strategy and information about the group is provided
internally on that basis to the entity’s key management personnel
(as defined in IAS 24 Related Party Disclosures) for example the
entity’s board of directors and chief executive officer (see
paragraphs B4133–B4136)
43 Embedded derivatives
431 An embedded derivative is a component of a hybrid contract that also includes a
nonderivative host—with the effect that some of the cash flows of the combined
instrument vary in a way similar to a standalone derivative An embedded
derivative causes some or all of the cash flows that otherwise would be required
by the contract to be modified according to a specified interest rate financial
instrument price commodity price foreign exchange rate index of prices or
rates credit rating or credit index or other variable provided in the case of a
nonfinancial variable that the variable is not specific to a party to the contract
A derivative that is attached to a financial instrument but is contractually
transferable independently of that instrument or has a different counterparty
is not an embedded derivative but a separate financial instrument
Hybrid contracts with financial asset hosts
432 If a hybrid contract contains a host that is an asset within the scope of
this Standard an entity shall apply the requirements in
paragraphs 411–415 to the entire hybrid contract
Other hybrid contracts
433 If a hybrid contract contains a host that is not an asset within the scope of
this Standard an embedded derivative shall be separated from the host
and accounted for as a derivative under this Standard if and only if
IFRS 9
IFRS FoundationA338(a) the economic characteristics and risks of the embedded derivative
are not closely related to the economic characteristics and risks of
the host (see paragraphs B435 and B438)
(b) a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative and
(c) the hybrid contract is not measured at fair value with changes in
fair value recognised in profit or loss (ie a derivative that is
embedded in a financial liability at fair value through profit or
loss is not separated)
434 If an embedded derivative is separated the host contract shall be
accounted for in accordance with the appropriate Standards This
Standard does not address whether an embedded derivative shall be
presented separately in the statement of financial position
435 Despite paragraphs 433 and 434 if a contract contains one or more
embedded derivatives and the host is not an asset within the scope of this
Standard an entity may designate the entire hybrid contract as at fair
value through profit or loss unless
(a) the embedded derivative(s) do(es) not significantly modify the cash
flows that otherwise would be required by the contract or
(b) it is clear with little or no analysis when a similar hybrid
instrument is first considered that separation of the embedded
derivative(s) is prohibited such as a prepayment option embedded
in a loan that permits the holder to prepay the loan for
approximately its amortised cost
436 If an entity is required by this Standard to separate an embedded
derivative from its host but is unable to measure the embedded
derivative separately either at acquisition or at the end of a subsequent
financial reporting period it shall designate the entire hybrid contract as
at fair value through profit or loss
437 If an entity is unable to measure reliably the fair value of an embedded
derivative on the basis of its terms and conditions the fair value of the
embedded derivative is the difference between the fair value of the hybrid
contract and the fair value of the host If the entity is unable to measure the fair
value of the embedded derivative using this method paragraph 436 applies and
the hybrid contract is designated as at fair value through profit or loss
44 Reclassification
441 When and only when an entity changes its business model for managing
financial assets it shall reclassify all affected financial assets in
accordance with paragraphs 411–414 See paragraphs 561–567
B441–B443 and B561–B562 for additional guidance on reclassifying
financial assets
442 An entity shall not reclassify any financial liability
IFRS 9
IFRS Foundation A339443 The following changes in circumstances are not reclassifications for the
purposes of paragraphs 441–442
(a) an item that was previously a designated and effective hedging
instrument in a cash flow hedge or net investment hedge no longer
qualifies as such
(b) an item becomes a designated and effective hedging instrument in a cash
flow hedge or net investment hedge and
(c) changes in measurement in accordance with Section 67
Chapter 5 Measurement
51 Initial measurement
511 Except for trade receivables within the scope of paragraph 513 at initial
recognition an entity shall measure a financial asset or financial liability
at its fair value plus or minus in the case of a financial asset or financial
liability not at fair value through profit or loss transaction costs that are
directly attributable to the acquisition or issue of the financial asset or
financial liability
511A However if the fair value of the financial asset or financial liability at
initial recognition differs from the transaction price an entity shall
apply paragraph B512A
512 When an entity uses settlement date accounting for an asset that is subsequently
measured at amortised cost the asset is recognised initially at its fair value on
the trade date (see paragraphs B313–B316)
513 Despite the requirement in paragraph 511 at initial recognition an entity
shall measure trade receivables at their transaction price (as defined in IFRS 15)
if the trade receivables do not contain a significant financing component in
accordance with IFRS 15 (or when the entity applies the practical expedient in
accordance with paragraph 63 of IFRS 15)
52 Subsequent measurement of financial assets
521 After initial recognition an entity shall measure a financial asset in
accordance with paragraphs 411–415 at
(a) amortised cost
(b) fair value through other comprehensive income or
(c) fair value through profit or loss
522 An entity shall apply the impairment requirements in Section 55 to
financial assets that are measured at amortised cost in accordance with
paragraph 412 and to financial assets that are measured at fair value
through other comprehensive income in accordance with
paragraph 412A
523 An entity shall apply the hedge accounting requirements in
paragraphs 658–6514 (and if applicable paragraphs 89–94 of IAS 39
IFRS 9
IFRS FoundationA340Financial Instruments Recognition and Measurement for the fair value
hedge accounting for a portfolio hedge of interest rate risk) to a financial
asset that is designated as a hedged item1
53 Subsequent measurement of financial liabilities
531 After initial recognition an entity shall measure a financial liability in
accordance with paragraphs 421–422
532 An entity shall apply the hedge accounting requirements in
paragraphs 658–6514 (and if applicable paragraphs 89–94 of IAS 39 for
the fair value hedge accounting for a portfolio hedge of interest rate risk)
to a financial liability that is designated as a hedged item
54 Amortised cost measurement
Financial assets
Effective interest method
541 Interest revenue shall be calculated by using the effective interest method
(see Appendix A and paragraphs B541–B547) This shall be calculated by
applying the effective interest rate to the gross carrying amount of a
financial asset except for
(a) purchased or originated creditimpaired financial assets For
those financial assets the entity shall apply the creditadjusted
effective interest rate to the amortised cost of the financial asset
from initial recognition
(b) financial assets that are not purchased or originated
creditimpaired financial assets but subsequently have become
creditimpaired financial assets For those financial assets the
entity shall apply the effective interest rate to the amortised cost
of the financial asset in subsequent reporting periods
542 An entity that in a reporting period calculates interest revenue by applying the
effective interest method to the amortised cost of a financial asset in accordance
with paragraph 541(b) shall in subsequent reporting periods calculate the
interest revenue by applying the effective interest rate to the gross carrying
amount if the credit risk on the financial instrument improves so that the
financial asset is no longer creditimpaired and the improvement can be related
objectively to an event occurring after the requirements in paragraph 541(b)
were applied (such as an improvement in the borrower’s credit rating)
1 In accordance with paragraph 7221 an entity may choose as its accounting policy to continue to
apply the hedge accounting requirements in IAS 39 instead of the requirements in Chapter 6 of this
Standard If an entity has made this election the references in this Standard to particular hedge
accounting requirements in Chapter 6 are not relevant Instead the entity applies the relevant
hedge accounting requirements in IAS 39
IFRS 9
IFRS Foundation A341Modification of contractual cash flows
543 When the contractual cash flows of a financial asset are renegotiated or
otherwise modified and the renegotiation or modification does not result in the
derecognition of that financial asset in accordance with this Standard an entity
shall recalculate the gross carrying amount of the financial asset and shall
recognise a modification gain or loss in profit or loss The gross carrying amount of
the financial asset shall be recalculated as the present value of the renegotiated
or modified contractual cash flows that are discounted at the financial asset’s
original effective interest rate (or creditadjusted effective interest rate for
purchased or originated creditimpaired financial assets) or when applicable
the revised effective interest rate calculated in accordance with
paragraph 6510 Any costs or fees incurred adjust the carrying amount of the
modified financial asset and are amortised over the remaining term of the
modified financial asset
Writeoff
544 An entity shall directly reduce the gross carrying amount of a financial
asset when the entity has no reasonable expectations of recovering a
financial asset in its entirety or a portion thereof A writeoff constitutes
a derecognition event (see paragraph B3216(r))
55 Impairment
Recognition of expected credit losses
General approach
551 An entity shall recognise a loss allowance for expected credit losses on a
financial asset that is measured in accordance with paragraphs 412 or
412A a lease receivable a contract asset or a loan commitment and a
financial guarantee contract to which the impairment requirements
apply in accordance with paragraphs 21(g) 421(c) or 421(d)
552 An entity shall apply the impairment requirements for the recognition and
measurement of a loss allowance for financial assets that are measured at fair
value through other comprehensive income in accordance with
paragraph 412A However the loss allowance shall be recognised in other
comprehensive income and shall not reduce the carrying amount of the
financial asset in the statement of financial position
553 Subject to paragraphs 5513–5516 at each reporting date an entity shall
measure the loss allowance for a financial instrument at an amount
equal to the lifetime expected credit losses if the credit risk on that
financial instrument has increased significantly since initial recognition
554 The objective of the impairment requirements is to recognise lifetime expected
credit losses for all financial instruments for which there have been significant
increases in credit risk since initial recognition — whether assessed on an
individual or collective basis — considering all reasonable and supportable
information including that which is forwardlooking
IFRS 9
IFRS FoundationA342555 Subject to paragraphs 5513–5516 if at the reporting date the credit risk
on a financial instrument has not increased significantly since initial
recognition an entity shall measure the loss allowance for that financial
instrument at an amount equal to 12month expected credit losses
556 For loan commitments and financial guarantee contracts the date that the
entity becomes a party to the irrevocable commitment shall be considered to be
the date of initial recognition for the purposes of applying the impairment
requirements
557 If an entity has measured the loss allowance for a financial instrument at an
amount equal to lifetime expected credit losses in the previous reporting period
but determines at the current reporting date that paragraph 553 is no longer
met the entity shall measure the loss allowance at an amount equal to
12month expected credit losses at the current reporting date
558 An entity shall recognise in profit or loss as an impairment gain or loss the
amount of expected credit losses (or reversal) that is required to adjust the loss
allowance at the reporting date to the amount that is required to be recognised
in accordance with this Standard
Determining significant increases in credit risk
559 At each reporting date an entity shall assess whether the credit risk on a
financial instrument has increased significantly since initial recognition When
making the assessment an entity shall use the change in the risk of a default
occurring over the expected life of the financial instrument instead of the
change in the amount of expected credit losses To make that assessment an
entity shall compare the risk of a default occurring on the financial instrument
as at the reporting date with the risk of a default occurring on the financial
instrument as at the date of initial recognition and consider reasonable and
supportable information that is available without undue cost or effort that is
indicative of significant increases in credit risk since initial recognition
5510 An entity may assume that the credit risk on a financial instrument has not
increased significantly since initial recognition if the financial instrument is
determined to have low credit risk at the reporting date (see
paragraphs B5522‒B5524)
5511 If reasonable and supportable forwardlooking information is available without
undue cost or effort an entity cannot rely solely on past due information when
determining whether credit risk has increased significantly since initial
recognition However when information that is more forwardlooking than past
due status (either on an individual or a collective basis) is not available without
undue cost or effort an entity may use past due information to determine
whether there have been significant increases in credit risk since initial
recognition Regardless of the way in which an entity assesses significant
increases in credit risk there is a rebuttable presumption that the credit risk on
a financial asset has increased significantly since initial recognition when
contractual payments are more than 30 days past due An entity can rebut this
presumption if the entity has reasonable and supportable information that is
available without undue cost or effort that demonstrates that the credit risk has
not increased significantly since initial recognition even though the contractual
IFRS 9
IFRS Foundation A343payments are more than 30 days past due When an entity determines that
there have been significant increases in credit risk before contractual payments
are more than 30 days past due the rebuttable presumption does not apply
Modified financial assets
5512 If the contractual cash flows on a financial asset have been renegotiated or
modified and the financial asset was not derecognised an entity shall assess
whether there has been a significant increase in the credit risk of the financial
instrument in accordance with paragraph 553 by comparing
(a) the risk of a default occurring at the reporting date (based on the
modified contractual terms) and
(b) the risk of a default occurring at initial recognition (based on the
original unmodified contractual terms)
Purchased or originated creditimpaired financial assets
5513 Despite paragraphs 553 and 555 at the reporting date an entity shall
only recognise the cumulative changes in lifetime expected credit losses
since initial recognition as a loss allowance for purchased or originated
creditimpaired financial assets
5514 At each reporting date an entity shall recognise in profit or loss the amount of
the change in lifetime expected credit losses as an impairment gain or loss An
entity shall recognise favourable changes in lifetime expected credit losses as an
impairment gain even if the lifetime expected credit losses are less than the
amount of expected credit losses that were included in the estimated cash flows
on initial recognition
Simplified approach for trade receivables contract
assets and lease receivables
5515 Despite paragraphs 553 and 555 an entity shall always measure the loss
allowance at an amount equal to lifetime expected credit losses for
(a) trade receivables or contract assets that result from transactions
that are within the scope of IFRS 15 and that
(i) do not contain a significant financing component in
accordance with IFRS 15 (or when the entity applies the
practical expedient in accordance with paragraph 63 of
IFRS 15) or
(ii) contain a significant financing component in accordance
with IFRS 15 if the entity chooses as its accounting policy to
measure the loss allowance at an amount equal to lifetime
expected credit losses That accounting policy shall be
applied to all such trade receivables or contract assets but
may be applied separately to trade receivables and contract
assets
(b) lease receivables that result from transactions that are within the
scope of IFRS 16 if the entity chooses as its accounting policy to
measure the loss allowance at an amount equal to lifetime
IFRS 9
IFRS FoundationA344expected credit losses That accounting policy shall be applied to
all lease receivables but may be applied separately to finance and
operating lease receivables
5516 An entity may select its accounting policy for trade receivables lease receivables
and contract assets independently of each other
Measurement of expected credit losses
5517 An entity shall measure expected credit losses of a financial instrument
in a way that reflects
(a) an unbiased and probabilityweighted amount that is determined
by evaluating a range of possible outcomes
(b) the time value of money and
(c) reasonable and supportable information that is available without
undue cost or effort at the reporting date about past events
current conditions and forecasts of future economic conditions
5518 When measuring expected credit losses an entity need not necessarily identify
every possible scenario However it shall consider the risk or probability that a
credit loss occurs by reflecting the possibility that a credit loss occurs and the
possibility that no credit loss occurs even if the possibility of a credit loss
occurring is very low
5519 The maximum period to consider when measuring expected credit losses is the
maximum contractual period (including extension options) over which the
entity is exposed to credit risk and not a longer period even if that longer period
is consistent with business practice
5520 However some financial instruments include both a loan and an undrawn
commitment component and the entity’s contractual ability to demand
repayment and cancel the undrawn commitment does not limit the entity’s
exposure to credit losses to the contractual notice period For such financial
instruments and only those financial instruments the entity shall measure
expected credit losses over the period that the entity is exposed to credit risk and
expected credit losses would not be mitigated by credit risk management
actions even if that period extends beyond the maximum contractual period
56 Reclassification of financial assets
561 If an entity reclassifies financial assets in accordance with
paragraph 441 it shall apply the reclassification prospectively from the
reclassification date The entity shall not restate any previously
recognised gains losses (including impairment gains or losses) or
interest Paragraphs 562–567 set out the requirements for
reclassifications
562 If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through profit or loss
measurement category its fair value is measured at the reclassification
IFRS 9
IFRS Foundation A345date Any gain or loss arising from a difference between the previous
amortised cost of the financial asset and fair value is recognised in profit
or loss
563 If an entity reclassifies a financial asset out of the fair value through
profit or loss measurement category and into the amortised cost
measurement category its fair value at the reclassification date becomes
its new gross carrying amount (See paragraph B562 for guidance on
determining an effective interest rate and a loss allowance at the
reclassification date)
564 If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through other
comprehensive income measurement category its fair value is measured
at the reclassification date Any gain or loss arising from a difference
between the previous amortised cost of the financial asset and fair value
is recognised in other comprehensive income The effective interest rate
and the measurement of expected credit losses are not adjusted as a
result of the reclassification (See paragraph B561)
565 If an entity reclassifies a financial asset out of the fair value through
other comprehensive income measurement category and into the
amortised cost measurement category the financial asset is reclassified
at its fair value at the reclassification date However the cumulative gain
or loss previously recognised in other comprehensive income is removed
from equity and adjusted against the fair value of the financial asset at
the reclassification date As a result the financial asset is measured at
the reclassification date as if it had always been measured at amortised
cost This adjustment affects other comprehensive income but does not
affect profit or loss and therefore is not a reclassification adjustment (see
IAS 1 Presentation of Financial Statements) The effective interest rate
and the measurement of expected credit losses are not adjusted as a
result of the reclassification (See paragraph B561)
566 If an entity reclassifies a financial asset out of the fair value through
profit or loss measurement category and into the fair value through other
comprehensive income measurement category the financial asset
continues to be measured at fair value (See paragraph B562 for
guidance on determining an effective interest rate and a loss allowance at
the reclassification date)
567 If an entity reclassifies a financial asset out of the fair value through
other comprehensive income measurement category and into the fair
value through profit or loss measurement category the financial asset
continues to be measured at fair value The cumulative gain or loss
previously recognised in other comprehensive income is reclassified from
equity to profit or loss as a reclassification adjustment (see IAS 1) at the
reclassification date
IFRS 9
IFRS FoundationA34657 Gains and losses
571 A gain or loss on a financial asset or financial liability that is measured at
fair value shall be recognised in profit or loss unless
(a) it is part of a hedging relationship (see paragraphs 658–6514 and
if applicable paragraphs 89–94 of IAS 39 for the fair value hedge
accounting for a portfolio hedge of interest rate risk)
(b) it is an investment in an equity instrument and the entity has
elected to present gains and losses on that investment in other
comprehensive income in accordance with paragraph 575
(c) it is a financial liability designated as at fair value through profit
or loss and the entity is required to present the effects of changes
in the liability’s credit risk in other comprehensive income in
accordance with paragraph 577 or
(d) it is a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 412A and
the entity is required to recognise some changes in fair value in
other comprehensive income in accordance with paragraph 5710
571A Dividends are recognised in profit or loss only when
(a) the entity’s right to receive payment of the dividend is established
(b) it is probable that the economic benefits associated with the dividend
will flow to the entity and
(c) the amount of the dividend can be measured reliably
572 A gain or loss on a financial asset that is measured at amortised cost and
is not part of a hedging relationship (see paragraphs 658–6514 and if
applicable paragraphs 89–94 of IAS 39 for the fair value hedge accounting
for a portfolio hedge of interest rate risk) shall be recognised in profit or
loss when the financial asset is derecognised reclassified in accordance
with paragraph 562 through the amortisation process or in order to
recognise impairment gains or losses An entity shall apply
paragraphs 562 and 564 if it reclassifies financial assets out of the
amortised cost measurement category A gain or loss on a financial
liability that is measured at amortised cost and is not part of a hedging
relationship (see paragraphs 658–6514 and if applicable paragraphs
89–94 of IAS 39 for the fair value hedge accounting for a portfolio hedge of
interest rate risk) shall be recognised in profit or loss when the financial
liability is derecognised and through the amortisation process (See
paragraph B572 for guidance on foreign exchange gains or losses)
573 A gain or loss on financial assets or financial liabilities that are hedged
items in a hedging relationship shall be recognised in accordance with
paragraphs 658–6514 and if applicable paragraphs 89–94 of IAS 39 for
the fair value hedge accounting for a portfolio hedge of interest rate risk
574 If an entity recognises financial assets using settlement date accounting
(see paragraphs 312 B313 and B316) any change in the fair value of the
IFRS 9
IFRS Foundation A347asset to be received during the period between the trade date and the
settlement date is not recognised for assets measured at amortised cost
For assets measured at fair value however the change in fair value shall
be recognised in profit or loss or in other comprehensive income as
appropriate in accordance with paragraph 571 The trade date shall be
considered the date of initial recognition for the purposes of applying the
impairment requirements
Investments in equity instruments
575 At initial recognition an entity may make an irrevocable election to
present in other comprehensive income subsequent changes in the fair
value of an investment in an equity instrument within the scope of this
Standard that is neither held for trading nor contingent consideration
recognised by an acquirer in a business combination to which IFRS 3
applies (See paragraph B573 for guidance on foreign exchange gains or
losses)
576 If an entity makes the election in paragraph 575 it shall recognise in profit or
loss dividends from that investment in accordance with paragraph 571A
Liabilities designated as at fair value through profit or
loss
577 An entity shall present a gain or loss on a financial liability that is
designated as at fair value through profit or loss in accordance with
paragraph 422 or paragraph 435 as follows
(a) The amount of change in the fair value of the financial liability
that is attributable to changes in the credit risk of that liability
shall be presented in other comprehensive income (see
paragraphs B5713–B5720) and
(b) the remaining amount of change in the fair value of the liability
shall be presented in profit or loss
unless the treatment of the effects of changes in the liability’s credit risk
described in (a) would create or enlarge an accounting mismatch in profit
or loss (in which case paragraph 578 applies) Paragraphs B575–B577
and B5710–B5712 provide guidance on determining whether an
accounting mismatch would be created or enlarged
578 If the requirements in paragraph 577 would create or enlarge an
accounting mismatch in profit or loss an entity shall present all gains or
losses on that liability (including the effects of changes in the credit risk
of that liability) in profit or loss
579 Despite the requirements in paragraphs 577 and 578 an entity shall present
in profit or loss all gains and losses on loan commitments and financial
guarantee contracts that are designated as at fair value through profit or loss
IFRS 9
IFRS FoundationA348Assets measured at fair value through other
comprehensive income
5710 A gain or loss on a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 412A shall be
recognised in other comprehensive income except for impairment gains
or losses (see Section 55) and foreign exchange gains and losses (see
paragraphs B572–B572A) until the financial asset is derecognised or
reclassified When the financial asset is derecognised the cumulative
gain or loss previously recognised in other comprehensive income is
reclassified from equity to profit or loss as a reclassification adjustment
(see IAS 1) If the financial asset is reclassified out of the fair value
through other comprehensive income measurement category the entity
shall account for the cumulative gain or loss that was previously
recognised in other comprehensive income in accordance with
paragraphs 565 and 567 Interest calculated using the effective interest
method is recognised in profit or loss
5711 As described in paragraph 5710 if a financial asset is measured at fair
value through other comprehensive income in accordance with
paragraph 412A the amounts that are recognised in profit or loss are the
same as the amounts that would have been recognised in profit or loss if
the financial asset had been measured at amortised cost
Chapter 6 Hedge accounting
61 Objective and scope of hedge accounting
611 The objective of hedge accounting is to represent in the financial statements
the effect of an entity’s risk management activities that use financial
instruments to manage exposures arising from particular risks that could affect
profit or loss (or other comprehensive income in the case of investments in
equity instruments for which an entity has elected to present changes in fair
value in other comprehensive income in accordance with paragraph 575) This
approach aims to convey the context of hedging instruments for which hedge
accounting is applied in order to allow insight into their purpose and effect
612 An entity may choose to designate a hedging relationship between a hedging
instrument and a hedged item in accordance with paragraphs 621–637 and
B621–B6325 For hedging relationships that meet the qualifying criteria an
entity shall account for the gain or loss on the hedging instrument and the
hedged item in accordance with paragraphs 651–6514 and B651–B6528
When the hedged item is a group of items an entity shall comply with the
additional requirements in paragraphs 661–666 and B661–B6616
613 For a fair value hedge of the interest rate exposure of a portfolio of financial
assets or financial liabilities (and only for such a hedge) an entity may apply the
hedge accounting requirements in IAS 39 instead of those in this Standard In
that case the entity must also apply the specific requirements for the fair value
hedge accounting for a portfolio hedge of interest rate risk and designate as the
hedged item a portion that is a currency amount (see paragraphs 81A 89A and
AG114–AG132 of IAS 39)
IFRS 9
IFRS Foundation A34962 Hedging instruments
Qualifying instruments
621 A derivative measured at fair value through profit or loss may be
designated as a hedging instrument except for some written options (see
paragraph B624)
622 A nonderivative financial asset or a nonderivative financial liability
measured at fair value through profit or loss may be designated as a
hedging instrument unless it is a financial liability designated as at fair
value through profit or loss for which the amount of its change in fair
value that is attributable to changes in the credit risk of that liability is
presented in other comprehensive income in accordance with
paragraph 577 For a hedge of foreign currency risk the foreign
currency risk component of a nonderivative financial asset or a
nonderivative financial liability may be designated as a hedging
instrument provided that it is not an investment in an equity instrument
for which an entity has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 575
623 For hedge accounting purposes only contracts with a party external to
the reporting entity (ie external to the group or individual entity that is
being reported on) can be designated as hedging instruments
Designation of hedging instruments
624 A qualifying instrument must be designated in its entirety as a hedging
instrument The only exceptions permitted are
(a) separating the intrinsic value and time value of an option contract and
designating as the hedging instrument only the change in intrinsic value
of an option and not the change in its time value (see paragraphs 6515
and B6529–B6533)
(b) separating the forward element and the spot element of a forward
contract and designating as the hedging instrument only the change in
the value of the spot element of a forward contract and not the forward
element similarly the foreign currency basis spread may be separated
and excluded from the designation of a financial instrument as the
hedging instrument (see paragraphs 6516 and B6534–B6539) and
(c) a proportion of the entire hedging instrument such as 50 per cent of the
nominal amount may be designated as the hedging instrument in a
hedging relationship However a hedging instrument may not be
designated for a part of its change in fair value that results from only a
portion of the time period during which the hedging instrument
remains outstanding
625 An entity may view in combination and jointly designate as the hedging
instrument any combination of the following (including those circumstances in
which the risk or risks arising from some hedging instruments offset those
arising from others)
IFRS 9
IFRS FoundationA350(a) derivatives or a proportion of them and
(b) nonderivatives or a proportion of them
626 However a derivative instrument that combines a written option and a
purchased option (for example an interest rate collar) does not qualify as a
hedging instrument if it is in effect a net written option at the date of
designation (unless it qualifies in accordance with paragraph B624) Similarly
two or more instruments (or proportions of them) may be jointly designated as
the hedging instrument only if in combination they are not in effect a net
written option at the date of designation (unless it qualifies in accordance with
paragraph B624)
63 Hedged items
Qualifying items
631 A hedged item can be a recognised asset or liability an unrecognised firm
commitmentaforecast transaction or a net investment in a foreign
operation The hedged item can be
(a) a single item or
(b) a group of items (subject to paragraphs 661–666 and
B661–B6616)
A hedged item can also be a component of such an item or group of items
(see paragraphs 637 and B637–B6325)
632 The hedged item must be reliably measurable
633 If a hedged item is a forecast transaction (or a component thereof) that
transaction must be highly probable
634 An aggregated exposure that is a combination of an exposure that could
qualify as a hedged item in accordance with paragraph 631 and a
derivative may be designated as a hedged item (see paragraphs
B633–B634) This includes a forecast transaction of an aggregated
exposure (ie uncommitted but anticipated future transactions that would
give rise to an exposure and a derivative) if that aggregated exposure is
highly probable and once it has occurred and is therefore no longer
forecast is eligible as a hedged item
635 For hedge accounting purposes only assets liabilities firm commitments
or highly probable forecast transactions with a party external to the
reporting entity can be designated as hedged items Hedge accounting
can be applied to transactions between entities in the same group only in
the individual or separate financial statements of those entities and not
in the consolidated financial statements of the group except for the
consolidated financial statements of an investment entity as defined in
IFRS 10 where transactions between an investment entity and its
subsidiaries measured at fair value through profit or loss will not be
eliminated in the consolidated financial statements
IFRS 9
IFRS Foundation A351636 However as an exception to paragraph 635 the foreign currency risk of an
intragroup monetary item (for example a payablereceivable between two
subsidiaries) may qualify as a hedged item in the consolidated financial
statements if it results in an exposure to foreign exchange rate gains or losses
that are not fully eliminated on consolidation in accordance with IAS 21 The
Effects of Changes in Foreign Exchange Rates In accordance with IAS 21 foreign
exchange rate gains and losses on intragroup monetary items are not fully
eliminated on consolidation when the intragroup monetary item is transacted
between two group entities that have different functional currencies In
addition the foreign currency risk of a highly probable forecast intragroup
transaction may qualify as a hedged item in consolidated financial statements
provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign
currency risk will affect consolidated profit or loss
Designation of hedged items
637 An entity may designate an item in its entirety or a component of an item as the
hedged item in a hedging relationship An entire item comprises all changes in
the cash flows or fair value of an item A component comprises less than the
entire fair value change or cash flow variability of an item In that case an
entity may designate only the following types of components (including
combinations) as hedged items
(a) only changes in the cash flows or fair value of an item attributable to a
specific risk or risks (risk component) provided that based on an
assessment within the context of the particular market structure the
risk component is separately identifiable and reliably measurable (see
paragraphs B638–B6315) Risk components include a designation of
only changes in the cash flows or the fair value of a hedged item above or
below a specified price or other variable (a onesided risk)
(b) one or more selected contractual cash flows
(c) components of a nominal amount ie a specified part of the amount of an
item (see paragraphs B6316–B6320)
64 Qualifying criteria for hedge accounting
641 A hedging relationship qualifies for hedge accounting only if all of the
following criteria are met
(a) the hedging relationship consists only of eligible hedging
instruments and eligible hedged items
(b) at the inception of the hedging relationship there is formal
designation and documentation of the hedging relationship and
the entity’s risk management objective and strategy for
undertaking the hedge That documentation shall include
identification of the hedging instrument the hedged item the
nature of the risk being hedged and how the entity will assess
whether the hedging relationship meets the hedge effectiveness
IFRS 9
IFRS FoundationA352requirements (including its analysis of the sources of hedge
ineffectiveness and how it determines the hedge ratio)
(c) the hedging relationship meets all of the following hedge
effectiveness requirements
(i) there is an economic relationship between the hedged item
and the hedging instrument (see paragraphs B644–B646)
(ii) the effect of credit risk does not dominate the value
changes that result from that economic relationship (see
paragraphs B647–B648) and
(iii) the hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that the
entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that
quantity of hedged item However that designation shall
not reflect an imbalance between the weightings of the
hedged item and the hedging instrument that would create
hedge ineffectiveness (irrespective of whether recognised or
not) that could result in an accounting outcome that would
be inconsistent with the purpose of hedge accounting (see
paragraphs B649–B6411)
65 Accounting for qualifying hedging relationships
651 An entity applies hedge accounting to hedging relationships that meet
the qualifying criteria in paragraph 641 (which include the entity’s
decision to designate the hedging relationship)
652 There are three types of hedging relationships
(a) fair value hedge a hedge of the exposure to changes in fair value of
a recognised asset or liability or an unrecognised firm
commitment or a component of any such item that is attributable
to a particular risk and could affect profit or loss
(b) cash flow hedge a hedge of the exposure to variability in cash
flows that is attributable to a particular risk associated with all or
a component of a recognised asset or liability (such as all or some
future interest payments on variablerate debt) or a highly
probable forecast transaction and could affect profit or loss
(c) hedge of a net investment in a foreign operation as defined in
IAS 21
653 If the hedged item is an equity instrument for which an entity has elected to
present changes in fair value in other comprehensive income in accordance with
paragraph 575 the hedged exposure referred to in paragraph 652(a) must be
one that could affect other comprehensive income In that case and only in that
case the recognised hedge ineffectiveness is presented in other comprehensive
income
IFRS 9
IFRS Foundation A353654 A hedge of the foreign currency risk of a firm commitment may be accounted for
as a fair value hedge or a cash flow hedge
655 If a hedging relationship ceases to meet the hedge effectiveness
requirement relating to the hedge ratio (see paragraph 641(c)(iii)) but the
risk management objective for that designated hedging relationship
remains the same an entity shall adjust the hedge ratio of the hedging
relationship so that it meets the qualifying criteria again (this is referred
to in this Standard as rebalancing’—see paragraphs B657–B6521)
656 An entity shall discontinue hedge accounting prospectively only when the
hedging relationship (or a part of a hedging relationship) ceases to meet
the qualifying criteria (after taking into account any rebalancing of the
hedging relationship if applicable) This includes instances when the
hedging instrument expires or is sold terminated or exercised For this
purpose the replacement or rollover of a hedging instrument into
another hedging instrument is not an expiration or termination if such a
replacement or rollover is part of and consistent with the entity’s
documented risk management objective Additionally for this purpose
there is not an expiration or termination of the hedging instrument if
(a) as a consequence of laws or regulations or the introduction of laws
or regulations the parties to the hedging instrument agree that
one or more clearing counterparties replace their original
counterparty to become the new counterparty to each of the
parties For this purpose a clearing counterparty is a central
counterparty (sometimes called a clearing organisation’ or
clearing agency’) or an entity or entities for example a clearing
member of a clearing organisation or a client of a clearing
member of a clearing organisation that are acting as a
counterparty in order to effect clearing by a central counterparty
However when the parties to the hedging instrument replace their
original counterparties with different counterparties the
requirement in this subparagraph is met only if each of those
parties effects clearing with the same central counterparty
(b) other changes if any to the hedging instrument are limited to
those that are necessary to effect such a replacement of the
counterparty Such changes are limited to those that are
consistent with the terms that would be expected if the hedging
instrument were originally cleared with the clearing counterparty
These changes include changes in the collateral requirements
rights to offset receivables and payables balances and charges
levied
Discontinuing hedge accounting can either affect a hedging relationship
in its entirety or only a part of it (in which case hedge accounting
continues for the remainder of the hedging relationship)
657 An entity shall apply
IFRS 9
IFRS FoundationA354(a) paragraph 6510 when it discontinues hedge accounting for a fair value
hedge for which the hedged item is (or is a component of) a financial
instrument measured at amortised cost and
(b) paragraph 6512 when it discontinues hedge accounting for cash flow
hedges
Fair value hedges
658 As long as a fair value hedge meets the qualifying criteria in
paragraph 641 the hedging relationship shall be accounted for as
follows
(a) the gain or loss on the hedging instrument shall be recognised in
profit or loss (or other comprehensive income if the hedging
instrument hedges an equity instrument for which an entity has
elected to present changes in fair value in other comprehensive
income in accordance with paragraph 575)
(b) the hedging gain or loss on the hedged item shall adjust the
carrying amount of the hedged item (if applicable) and be
recognised in profit or loss If the hedged item is a financial asset
(or a component thereof) that is measured at fair value through
other comprehensive income in accordance with paragraph 412A
the hedging gain or loss on the hedged item shall be recognised in
profit or loss However if the hedged item is an equity instrument
for which an entity has elected to present changes in fair value in
other comprehensive income in accordance with paragraph 575
those amounts shall remain in other comprehensive income
When a hedged item is an unrecognised firm commitment (or a
component thereof) the cumulative change in the fair value of the
hedged item subsequent to its designation is recognised as an
asset or a liability with a corresponding gain or loss recognised in
profit or loss
659 When a hedged item in a fair value hedge is a firm commitment (or a
component thereof) to acquire an asset or assume a liability the initial carrying
amount of the asset or the liability that results from the entity meeting the firm
commitment is adjusted to include the cumulative change in the fair value of
the hedged item that was recognised in the statement of financial position
6510 Any adjustment arising from paragraph 658(b) shall be amortised to profit or
loss if the hedged item is a financial instrument (or a component thereof)
measured at amortised cost Amortisation may begin as soon as an adjustment
exists and shall begin no later than when the hedged item ceases to be adjusted
for hedging gains and losses The amortisation is based on a recalculated
effective interest rate at the date that amortisation begins In the case of a
financial asset (or a component thereof) that is a hedged item and that is
measured at fair value through other comprehensive income in accordance with
paragraph 412A amortisation applies in the same manner but to the amount
that represents the cumulative gain or loss previously recognised in accordance
with paragraph 658(b) instead of by adjusting the carrying amount
IFRS 9
IFRS Foundation A355Cash flow hedges
6511 As long as a cash flow hedge meets the qualifying criteria in
paragraph 641 the hedging relationship shall be accounted for as
follows
(a) the separate component of equity associated with the hedged item
(cash flow hedge reserve) is adjusted to the lower of the following
(in absolute amounts)
(i) the cumulative gain or loss on the hedging instrument
from inception of the hedge and
(ii) the cumulative change in fair value (present value) of the
hedged item (ie the present value of the cumulative change
in the hedged expected future cash flows) from inception of
the hedge
(b) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (ie the portion that is offset by
the change in the cash flow hedge reserve calculated in accordance
with (a)) shall be recognised in other comprehensive income
(c) any remaining gain or loss on the hedging instrument (or any gain
or loss required to balance the change in the cash flow hedge
reserve calculated in accordance with (a)) is hedge ineffectiveness
that shall be recognised in profit or loss
(d) the amount that has been accumulated in the cash flow hedge
reserve in accordance with (a) shall be accounted for as follows
(i) if a hedged forecast transaction subsequently results in the
recognition of a nonfinancial asset or nonfinancial
liability or a hedged forecast transaction for a
nonfinancial asset or a nonfinancial liability becomes a
firm commitment for which fair value hedge accounting is
applied the entity shall remove that amount from the cash
flow hedge reserve and include it directly in the initial cost
or other carrying amount of the asset or the liability This
is not a reclassification adjustment (see IAS 1) and hence it
does not affect other comprehensive income
(ii) for cash flow hedges other than those covered by (i) that
amount shall be reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment (see
IAS 1) in the same period or periods during which the
hedged expected future cash flows affect profit or loss (for
example in the periods that interest income or interest
expense is recognised or when a forecast sale occurs)
(iii) however if that amount is a loss and an entity expects that
all or a portion of that loss will not be recovered in one or
more future periods it shall immediately reclassify the
amount that is not expected to be recovered into profit or
loss as a reclassification adjustment (see IAS 1)
IFRS 9
IFRS FoundationA3566512 When an entity discontinues hedge accounting for a cash flow hedge (see
paragraphs 656 and 657(b)) it shall account for the amount that has been
accumulated in the cash flow hedge reserve in accordance with
paragraph 6511(a) as follows
(a) if the hedged future cash flows are still expected to occur that amount
shall remain in the cash flow hedge reserve until the future cash flows
occur or until paragraph 6511(d)(iii) applies When the future cash
flows occur paragraph 6511(d) applies
(b) if the hedged future cash flows are no longer expected to occur that
amount shall be immediately reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment (see IAS 1) A
hedged future cash flow that is no longer highly probable to occur may
still be expected to occur
Hedges of a net investment in a foreign operation
6513 Hedges of a net investment in a foreign operation including a hedge of a
monetary item that is accounted for as part of the net investment (see
IAS 21) shall be accounted for similarly to cash flow hedges
(a) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge shall be recognised in other
comprehensive income (see paragraph 6511) and
(b) the ineffective portion shall be recognised in profit or loss
6514 The cumulative gain or loss on the hedging instrument relating to the
effective portion of the hedge that has been accumulated in the foreign
currency translation reserve shall be reclassified from equity to profit or
loss as a reclassification adjustment (see IAS 1) in accordance with
paragraphs 48–49 of IAS 21 on the disposal or partial disposal of the
foreign operation
Accounting for the time value of options
6515 When an entity separates the intrinsic value and time value of an option
contract and designates as the hedging instrument only the change in intrinsic
value of the option (see paragraph 624(a)) it shall account for the time value of
the option as follows (see paragraphs B6529–B6533)
(a) an entity shall distinguish the time value of options by the type of
hedged item that the option hedges (see paragraph B6529)
(i) a transaction related hedged item or
(ii) a timeperiod related hedged item
(b) the change in fair value of the time value of an option that hedges a
transaction related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged item
and shall be accumulated in a separate component of equity The
cumulative change in fair value arising from the time value of the option
that has been accumulated in a separate component of equity (the
amount’) shall be accounted for as follows
IFRS 9
IFRS Foundation A357(i) if the hedged item subsequently results in the recognition of a
nonfinancial asset or a nonfinancial liability or a firm
commitment for a nonfinancial asset or a nonfinancial liability
for which fair value hedge accounting is applied the entity shall
remove the amount from the separate component of equity and
include it directly in the initial cost or other carrying amount of
the asset or the liability This is not a reclassification adjustment
(see IAS 1) and hence does not affect other comprehensive
income
(ii) for hedging relationships other than those covered by (i) the
amount shall be reclassified from the separate component of
equity to profit or loss as a reclassification adjustment (see IAS 1)
in the same period or periods during which the hedged expected
future cash flows affect profit or loss (for example when a
forecast sale occurs)
(iii) however if all or a portion of that amount is not expected to be
recovered in one or more future periods the amount that is not
expected to be recovered shall be immediately reclassified into
profit or loss as a reclassification adjustment (see IAS 1)
(c) the change in fair value of the time value of an option that hedges a
timeperiod related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged item
and shall be accumulated in a separate component of equity The time
value at the date of designation of the option as a hedging instrument to
the extent that it relates to the hedged item shall be amortised on a
systematic and rational basis over the period during which the hedge
adjustment for the option’s intrinsic value could affect profit or loss (or
other comprehensive income if the hedged item is an equity instrument
for which an entity has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 575) Hence in
each reporting period the amortisation amount shall be reclassified
from the separate component of equity to profit or loss as a
reclassification adjustment (see IAS 1) However if hedge accounting is
discontinued for the hedging relationship that includes the change in
intrinsic value of the option as the hedging instrument the net amount
(ie including cumulative amortisation) that has been accumulated in the
separate component of equity shall be immediately reclassified into
profit or loss as a reclassification adjustment (see IAS 1)
Accounting for the forward element of forward contracts
and foreign currency basis spreads of financial
instruments
6516 When an entity separates the forward element and the spot element of a forward
contract and designates as the hedging instrument only the change in the value
of the spot element of the forward contract or when an entity separates the
foreign currency basis spread from a financial instrument and excludes it from
the designation of that financial instrument as the hedging instrument (see
paragraph 624(b)) the entity may apply paragraph 6515 to the forward
IFRS 9
IFRS FoundationA358element of the forward contract or to the foreign currency basis spread in the
same manner as it is applied to the time value of an option In that case the
entity shall apply the application guidance in paragraphs B6534–B6539
66 Hedges of a group of items
Eligibility of a group of items as the hedged item
661 A group of items (including a group of items that constitute a net
position see paragraphs B661–B668) is an eligible hedged item only if
(a) it consists of items (including components of items) that are
individually eligible hedged items
(b) the items in the group are managed together on a group basis for
risk management purposes and
(c) in the case of a cash flow hedge of a group of items whose
variabilities in cash flows are not expected to be approximately
proportional to the overall variability in cash flows of the group so
that offsetting risk positions arise
(i) it is a hedge of foreign currency risk and
(ii) the designation of that net position specifies the reporting
period in which the forecast transactions are expected to
affect profit or loss as well as their nature and volume (see
paragraphs B667–B668)
Designation of a component of a nominal amount
662 A component that is a proportion of an eligible group of items is an eligible
hedged item provided that designation is consistent with the entity’s risk
management objective
663 A layer component of an overall group of items (for example a bottom layer) is
eligible for hedge accounting only if
(a) it is separately identifiable and reliably measurable
(b) the risk management objective is to hedge a layer component
(c) the items in the overall group from which the layer is identified are
exposed to the same hedged risk (so that the measurement of the hedged
layer is not significantly affected by which particular items from the
overall group form part of the hedged layer)
(d) for a hedge of existing items (for example an unrecognised firm
commitment or a recognised asset) an entity can identify and track the
overall group of items from which the hedged layer is defined (so that
the entity is able to comply with the requirements for the accounting for
qualifying hedging relationships) and
(e) any items in the group that contain prepayment options meet the
requirements for components of a nominal amount (see
paragraph B6320)
IFRS 9
IFRS Foundation A359Presentation
664 For a hedge of a group of items with offsetting risk positions (ie in a hedge of a
net position) whose hedged risk affects different line items in the statement of
profit or loss and other comprehensive income any hedging gains or losses in
that statement shall be presented in a separate line from those affected by the
hedged items Hence in that statement the amount in the line item that relates
to the hedged item itself (for example revenue or cost of sales) remains
unaffected
665 For assets and liabilities that are hedged together as a group in a fair value
hedge the gain or loss in the statement of financial position on the individual
assets and liabilities shall be recognised as an adjustment of the carrying
amount of the respective individual items comprising the group in accordance
with paragraph 658(b)
Nil net positions
666 When the hedged item is a group that is a nil net position (ie the hedged items
among themselves fully offset the risk that is managed on a group basis) an
entity is permitted to designate it in a hedging relationship that does not
include a hedging instrument provided that
(a) the hedge is part of a rolling net risk hedging strategy whereby the
entity routinely hedges new positions of the same type as time moves on
(for example when transactions move into the time horizon for which
the entity hedges)
(b) the hedged net position changes in size over the life of the rolling net
risk hedging strategy and the entity uses eligible hedging instruments to
hedge the net risk (ie when the net position is not nil)
(c) hedge accounting is normally applied to such net positions when the net
position is not nil and it is hedged with eligible hedging instruments
and
(d) not applying hedge accounting to the nil net position would give rise to
inconsistent accounting outcomes because the accounting would not
recognise the offsetting risk positions that would otherwise be
recognised in a hedge of a net position
67 Option to designate a credit exposure as measured at fair
value through profit or loss
Eligibility of credit exposures for designation at fair
value through profit or loss
671 If an entity uses a credit derivative that is measured at fair value through
profit or loss to manage the credit risk of all or a part of a financial
instrument (credit exposure) it may designate that financial instrument
to the extent that it is so managed (ie all or a proportion of it) as
measured at fair value through profit or loss if
IFRS 9
IFRS FoundationA360(a) the name of the credit exposure (for example the borrower or the
holder of a loan commitment) matches the reference entity of the
credit derivative (name matching’) and
(b) the seniority of the financial instrument matches that of the
instruments that can be delivered in accordance with the credit
derivative
An entity may make this designation irrespective of whether the financial
instrument that is managed for credit risk is within the scope of this
Standard (for example an entity may designate loan commitments that
are outside the scope of this Standard) The entity may designate that
financial instrument at or subsequent to initial recognition or while it
is unrecognised The entity shall document the designation concurrently
Accounting for credit exposures designated at fair value
through profit or loss
672 If a financial instrument is designated in accordance with paragraph 671 as
measured at fair value through profit or loss after its initial recognition or was
previously not recognised the difference at the time of designation between the
carrying amount if any and the fair value shall immediately be recognised in
profit or loss For financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A the cumulative
gain or loss previously recognised in other comprehensive income shall
immediately be reclassified from equity to profit or loss as a reclassification
adjustment (see IAS 1)
673 An entity shall discontinue measuring the financial instrument that gave rise to
the credit risk or a proportion of that financial instrument at fair value
through profit or loss if
(a) the qualifying criteria in paragraph 671 are no longer met for example
(i) the credit derivative or the related financial instrument that
gives rise to the credit risk expires or is sold terminated or
settled or
(ii) the credit risk of the financial instrument is no longer managed
using credit derivatives For example this could occur because of
improvements in the credit quality of the borrower or the loan
commitment holder or changes to capital requirements imposed
on an entity and
(b) the financial instrument that gives rise to the credit risk is not otherwise
required to be measured at fair value through profit or loss (ie the
entity’s business model has not changed in the meantime so that a
reclassification in accordance with paragraph 441 was required)
674 When an entity discontinues measuring the financial instrument that gives rise
to the credit risk or a proportion of that financial instrument at fair value
through profit or loss that financial instrument’s fair value at the date of
discontinuation becomes its new carrying amount Subsequently the same
measurement that was used before designating the financial instrument at fair
value through profit or loss shall be applied (including amortisation that results
IFRS 9
IFRS Foundation A361from the new carrying amount) For example a financial asset that had
originally been classified as measured at amortised cost would revert to that
measurement and its effective interest rate would be recalculated based on its
new gross carrying amount on the date of discontinuing measurement at fair
value through profit or loss
Chapter 7 Effective date and transition
71 Effective date
711 An entity shall apply this Standard for annual periods beginning on or after
1 January 2018 Earlier application is permitted If an entity elects to apply this
Standard early it must disclose that fact and apply all of the requirements in
this Standard at the same time (but see also paragraphs 712 7221 and 732) It
shall also at the same time apply the amendments in Appendix C
712 Despite the requirements in paragraph 711 for annual periods beginning
before 1 January 2018 an entity may elect to early apply only the requirements
for the presentation of gains and losses on financial liabilities designated as at
fair value through profit or loss in paragraphs 571(c) 577–579 7214 and
B575–B5720 without applying the other requirements in this Standard If an
entity elects to apply only those paragraphs it shall disclose that fact and
provide on an ongoing basis the related disclosures set out in paragraphs 10–11
of IFRS 7 Financial Instruments Disclosures (as amended by IFRS 9 (2010)) (See also
paragraphs 722 and 7215)
713 Annual Improvements to IFRSs 2010–2012 Cycle issued in December 2013 amended
paragraphs 421 and 575 as a consequential amendment derived from the
amendment to IFRS 3 An entity shall apply that amendment prospectively to
business combinations to which the amendment to IFRS 3 applies
714 IFRS 15 issued in May 2014 amended paragraphs 311 421 511 521 576
B3213 B571 C5 and C42 and deleted paragraph C16 and its related heading
Paragraphs 513 and 571A and a definition to Appendix A were added An
entity shall apply those amendments when it applies IFRS 15
715 IFRS 16 issued in January 2016 amended paragraphs 21 5515 B438 B5534
and B5546 An entity shall apply those amendments when it applies IFRS 16
72 Transition
721 An entity shall apply this Standard retrospectively in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors except as specified in
paragraphs 724–7226 and 7228 This Standard shall not be applied to items
that have already been derecognised at the date of initial application
722 For the purposes of the transition provisions in paragraphs 721 723–7228
and 732 the date of initial application is the date when an entity first applies
those requirements of this Standard and must be the beginning of a reporting
period after the issue of this Standard Depending on the entity’s chosen
approach to applying IFRS 9 the transition can involve one or more than one
date of initial application for different requirements
IFRS 9
IFRS FoundationA362Transition for classification and measurement
(Chapters 4 and 5)
723 At the date of initial application an entity shall assess whether a financial asset
meets the condition in paragraphs 412(a) or 412A(a) on the basis of the facts
and circumstances that exist at that date The resulting classification shall be
applied retrospectively irrespective of the entity’s business model in prior
reporting periods
724 If at the date of initial application it is impracticable (as defined in IAS 8) for an
entity to assess a modified time value of money element in accordance with
paragraphs B419B–B419D on the basis of the facts and circumstances that
existed at the initial recognition of the financial asset an entity shall assess the
contractual cash flow characteristics of that financial asset on the basis of the
facts and circumstances that existed at the initial recognition of the financial
asset without taking into account the requirements related to the modification
of the time value of money element in paragraphs B419B–B419D (See also
paragraph 42R of IFRS 7)
725 If at the date of initial application it is impracticable (as defined in IAS 8) for an
entity to assess whether the fair value of a prepayment feature was insignificant
in accordance with paragraph B4112(c) on the basis of the facts and
circumstances that existed at the initial recognition of the financial asset an
entity shall assess the contractual cash flow characteristics of that financial asset
on the basis of the facts and circumstances that existed at the initial recognition
of the financial asset without taking into account the exception for prepayment
features in paragraph B4112 (See also paragraph 42S of IFRS 7)
726 If an entity measures a hybrid contract at fair value in accordance with
paragraphs 412A 414 or 415 but the fair value of the hybrid contract had not
been measured in comparative reporting periods the fair value of the hybrid
contract in the comparative reporting periods shall be the sum of the fair values
of the components (ie the nonderivative host and the embedded derivative) at
the end of each comparative reporting period if the entity restates prior periods
(see paragraph 7215)
727 If an entity has applied paragraph 726 then at the date of initial application the
entity shall recognise any difference between the fair value of the entire hybrid
contract at the date of initial application and the sum of the fair values of the
components of the hybrid contract at the date of initial application in the
opening retained earnings (or other component of equity as appropriate) of the
reporting period that includes the date of initial application
728 At the date of initial application an entity may designate
(a) a financial asset as measured at fair value through profit or loss in
accordance with paragraph 415 or
(b) an investment in an equity instrument as at fair value through other
comprehensive income in accordance with paragraph 575
Such a designation shall be made on the basis of the facts and circumstances
that exist at the date of initial application That classification shall be applied
retrospectively
IFRS 9
IFRS Foundation A363729 At the date of initial application an entity
(a) shall revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that financial asset does not meet the
condition in paragraph 415
(b) may revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that financial asset meets the
condition in paragraph 415
Such a revocation shall be made on the basis of the facts and circumstances that
exist at the date of initial application That classification shall be applied
retrospectively
7210 At the date of initial application an entity
(a) may designate a financial liability as measured at fair value through
profit or loss in accordance with paragraph 422(a)
(b) shall revoke its previous designation of a financial liability as measured
at fair value through profit or loss if such designation was made at initial
recognition in accordance with the condition now in paragraph 422(a)
and such designation does not satisfy that condition at the date of initial
application
(c) may revoke its previous designation of a financial liability as measured
at fair value through profit or loss if such designation was made at initial
recognition in accordance with the condition now in paragraph 422(a)
and such designation satisfies that condition at the date of initial
application
Such a designation and revocation shall be made on the basis of the facts and
circumstances that exist at the date of initial application That classification
shall be applied retrospectively
7211 If it is impracticable (as defined in IAS 8) for an entity to apply retrospectively
the effective interest method the entity shall treat
(a) the fair value of the financial asset or the financial liability at the end of
each comparative period presented as the gross carrying amount of that
financial asset or the amortised cost of that financial liability if the
entity restates prior periods and
(b) the fair value of the financial asset or the financial liability at the date of
initial application as the new gross carrying amount of that financial
asset or the new amortised cost of that financial liability at the date of
initial application of this Standard
7212 If an entity previously accounted at cost (in accordance with IAS 39) for an
investment in an equity instrument that does not have a quoted price in an
active market for an identical instrument (ie a Level 1 input) (or for a derivative
asset that is linked to and must be settled by delivery of such an equity
instrument) it shall measure that instrument at fair value at the date of initial
application Any difference between the previous carrying amount and the fair
IFRS 9
IFRS FoundationA364value shall be recognised in the opening retained earnings (or other component
of equity as appropriate) of the reporting period that includes the date of initial
application
7213 If an entity previously accounted for a derivative liability that is linked to and
must be settled by delivery of an equity instrument that does not have a quoted
price in an active market for an identical instrument (ie a Level 1 input) at cost
in accordance with IAS 39 it shall measure that derivative liability at fair value
at the date of initial application Any difference between the previous carrying
amount and the fair value shall be recognised in the opening retained earnings
of the reporting period that includes the date of initial application
7214 At the date of initial application an entity shall determine whether the
treatment in paragraph 577 would create or enlarge an accounting mismatch
in profit or loss on the basis of the facts and circumstances that exist at the date
of initial application This Standard shall be applied retrospectively on the basis
of that determination
7214A At the date of initial application an entity is permitted to make the designation
in paragraph 25 for contracts that already exist on the date but only if it
designates all similar contracts The change in the net assets resulting from
such designations shall be recognised in retained earnings at the date of initial
application
7215 Despite the requirement in paragraph 721 an entity that adopts the
classification and measurement requirements of this Standard (which include
the requirements related to amortised cost measurement for financial assets and
impairment in Sections 54 and 55) shall provide the disclosures set out in
paragraphs 42L–42O of IFRS 7 but need not restate prior periods The entity may
restate prior periods if and only if it is possible without the use of hindsight If
an entity does not restate prior periods the entity shall recognise any difference
between the previous carrying amount and the carrying amount at the
beginning of the annual reporting period that includes the date of initial
application in the opening retained earnings (or other component of equity as
appropriate) of the annual reporting period that includes the date of initial
application However if an entity restates prior periods the restated financial
statements must reflect all of the requirements in this Standard If an entity’s
chosen approach to applying IFRS 9 results in more than one date of initial
application for different requirements this paragraph applies at each date of
initial application (see paragraph 722) This would be the case for example if
an entity elects to early apply only the requirements for the presentation of
gains and losses on financial liabilities designated as at fair value through profit
or loss in accordance with paragraph 712 before applying the other
requirements in this Standard
7216 If an entity prepares interim financial reports in accordance with IAS 34 Interim
Financial Reporting the entity need not apply the requirements in this Standard to
interim periods prior to the date of initial application if it is impracticable
(as defined in IAS 8)
IFRS 9
IFRS Foundation A365Impairment (Section 55)
7217 An entity shall apply the impairment requirements in Section 55 retrospectively
in accordance with IAS 8 subject to paragraphs 7215 and 7218–7220
7218 At the date of initial application an entity shall use reasonable and supportable
information that is available without undue cost or effort to determine the
credit risk at the date that a financial instrument was initially recognised (or for
loan commitments and financial guarantee contracts at the date that the entity
became a party to the irrevocable commitment in accordance with
paragraph 556) and compare that to the credit risk at the date of initial
application of this Standard
7219 When determining whether there has been a significant increase in credit risk
since initial recognition an entity may apply
(a) the requirements in paragraphs 5510 and B5522–B5524 and
(b) the rebuttable presumption in paragraph 5511 for contractual
payments that are more than 30 days past due if an entity will apply the
impairment requirements by identifying significant increases in credit
risk since initial recognition for those financial instruments on the basis
of past due information
7220 If at the date of initial application determining whether there has been a
significant increase in credit risk since initial recognition would require undue
cost or effort an entity shall recognise a loss allowance at an amount equal to
lifetime expected credit losses at each reporting date until that financial
instrument is derecognised (unless that financial instrument is low credit risk at
a reporting date in which case paragraph 7219(a) applies)
Transition for hedge accounting (Chapter 6)
7221 When an entity first applies this Standard it may choose as its accounting policy
to continue to apply the hedge accounting requirements of IAS 39 instead of the
requirements in Chapter 6 of this Standard An entity shall apply that policy to
all of its hedging relationships An entity that chooses that policy shall also
apply IFRIC 16 Hedges of a Net Investment in a Foreign Operation without the
amendments that conform that Interpretation to the requirements in Chapter 6
of this Standard
7222 Except as provided in paragraph 7226 an entity shall apply the hedge
accounting requirements of this Standard prospectively
7223 To apply hedge accounting from the date of initial application of the hedge
accounting requirements of this Standard all qualifying criteria must be met as
at that date
7224 Hedging relationships that qualified for hedge accounting in accordance with
IAS 39 that also qualify for hedge accounting in accordance with the criteria of
this Standard (see paragraph 641) after taking into account any rebalancing of
the hedging relationship on transition (see paragraph 7225(b)) shall be
regarded as continuing hedging relationships
IFRS 9
IFRS FoundationA3667225 On initial application of the hedge accounting requirements of this Standard an
entity
(a) may start to apply those requirements from the same point in time as it
ceases to apply the hedge accounting requirements of IAS 39 and
(b) shall consider the hedge ratio in accordance with IAS 39 as the starting
point for rebalancing the hedge ratio of a continuing hedging
relationship if applicable Any gain or loss from such a rebalancing
shall be recognised in profit or loss
7226 As an exception to prospective application of the hedge accounting
requirements of this Standard an entity
(a) shall apply the accounting for the time value of options in accordance
with paragraph 6515 retrospectively if in accordance with IAS 39 only
the change in an option’s intrinsic value was designated as a hedging
instrument in a hedging relationship This retrospective application
applies only to those hedging relationships that existed at the beginning
of the earliest comparative period or were designated thereafter
(b) may apply the accounting for the forward element of forward contracts
in accordance with paragraph 6516 retrospectively if in accordance
with IAS 39 only the change in the spot element of a forward contract
was designated as a hedging instrument in a hedging relationship This
retrospective application applies only to those hedging relationships
that existed at the beginning of the earliest comparative period or were
designated thereafter In addition if an entity elects retrospective
application of this accounting it shall be applied to all hedging
relationships that qualify for this election (ie on transition this election
is not available on a hedgingrelationshipbyhedgingrelationship basis)
The accounting for foreign currency basis spreads (see paragraph 6516)
may be applied retrospectively for those hedging relationships that
existed at the beginning of the earliest comparative period or were
designated thereafter
(c) shall apply retrospectively the requirement of paragraph 656 that there
is not an expiration or termination of the hedging instrument if
(i) as a consequence of laws or regulations or the introduction of
laws or regulations the parties to the hedging instrument agree
that one or more clearing counterparties replace their original
counterparty to become the new counterparty to each of the
parties and
(ii) other changes if any to the hedging instrument are limited to
those that are necessary to effect such a replacement of the
counterparty
Entities that have applied IFRS 9 (2009) IFRS 9 (2010) or
IFRS 9 (2013) early
7227 An entity shall apply the transition requirements in paragraphs 721–7226 at
the relevant date of initial application An entity shall apply each of the
transition provisions in paragraphs 723–7214A and 7217–7226 only once
IFRS 9
IFRS Foundation A367(ie if an entity chooses an approach of applying IFRS 9 that involves more than
one date of initial application it cannot apply any of those provisions again if
they were already applied at an earlier date) (See paragraphs 722 and 732)
7228 An entity that applied IFRS 9 (2009) IFRS 9 (2010) or IFRS 9 (2013) and
subsequently applies this Standard
(a) shall revoke its previous designation of a financial asset as measured at
fair value through profit or loss if that designation was previously made
in accordance with the condition in paragraph 415 but that condition is
no longer satisfied as a result of the application of this Standard
(b) may designate a financial asset as measured at fair value through profit
or loss if that designation would not have previously satisfied the
condition in paragraph 415 but that condition is now satisfied as a
result of the application of this Standard
(c) shall revoke its previous designation of a financial liability as measured
at fair value through profit or loss if that designation was previously
made in accordance with the condition in paragraph 422(a) but that
condition is no longer satisfied as a result of the application of this
Standard and
(d) may designate a financial liability as measured at fair value through
profit or loss if that designation would not have previously satisfied the
condition in paragraph 422(a) but that condition is now satisfied as a
result of the application of this Standard
Such a designation and revocation shall be made on the basis of the facts and
circumstances that exist at the date of initial application of this Standard That
classification shall be applied retrospectively
73 Withdrawal of IFRIC 9 IFRS 9 (2009) IFRS 9 (2010) and
IFRS 9 (2013)
731 This Standard supersedes IFRIC 9 Reassessment of Embedded Derivatives The
requirements added to IFRS 9 in October 2010 incorporated the requirements
previously set out in paragraphs 5 and 7 of IFRIC 9 As a consequential
amendment IFRS 1 Firsttime Adoption of International Financial Reporting Standards
incorporated the requirements previously set out in paragraph 8 of IFRIC 9
732 This Standard supersedes IFRS 9 (2009) IFRS 9 (2010) and IFRS 9 (2013) However
for annual periods beginning before 1 January 2018 an entity may elect to apply
those earlier versions of IFRS 9 instead of applying this Standard if and only if
the entity’s relevant date of initial application is before 1 February 2015
IFRS 9
IFRS FoundationA368Appendix A
Defined terms
This appendix is an integral part of the Standard
12month expected
credit losses
The portion of lifetime expected credit losses that represent
the expected credit losses that result from default events on a
financial instrument that are possible within the 12 months after
the reporting date
amortised cost of a
financial asset or
financial liability
The amount at which the financial asset or financial liability is
measured at initial recognition minus the principal repayments
plus or minus the cumulative amortisation using the effective
interest method of any difference between that initial amount
and the maturity amount and for financial assets adjusted for
any loss allowance
contract assets Those rights that IFRS 15 Revenue from Contracts with Customers
specifies are accounted for in accordance with this Standard for
the purposes of recognising and measuring impairment gains or
losses
creditimpaired
financial asset
A financial asset is creditimpaired when one or more events that
have a detrimental impact on the estimated future cash flows of
that financial asset have occurred Evidence that a financial asset
is creditimpaired include observable data about the following
events
(a) significant financial difficulty of the issuer or the
borrower
(b) a breach of contract such as a default or past due event
(c) the lender(s) of the borrower for economic or contractual
reasons relating to the borrower’s financial difficulty
having granted to the borrower a concession(s) that the
lender(s) would not otherwise consider
(d) it is becoming probable that the borrower will enter
bankruptcy or other financial reorganisation
(e) the disappearance of an active market for that financial
asset because of financial difficulties or
(f) the purchase or origination of a financial asset at a deep
discount that reflects the incurred credit losses
It may not be possible to identify a single discrete event—instead
the combined effect of several events may have caused financial
assets to become creditimpaired
IFRS 9
IFRS Foundation A369credit loss The difference between all contractual cash flows that are due to
an entity in accordance with the contract and all the cash flows
that the entity expects to receive (ie all cash shortfalls)
discounted at the original effective interest rate (or
creditadjusted effective interest rate for purchased or
originated creditimpaired financial assets) An entity shall
estimate cash flows by considering all contractual terms of the
financial instrument (for example prepayment extension call
and similar options) through the expected life of that financial
instrument The cash flows that are considered shall include
cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms There
is a presumption that the expected life of a financial instrument
can be estimated reliably However in those rare cases when it is
not possible to reliably estimate the expected life of a financial
instrument the entity shall use the remaining contractual term
of the financial instrument
creditadjusted
effective interest rate
The rate that exactly discounts the estimated future cash
payments or receipts through the expected life of the financial
asset to the amortised cost of a financial asset that is a
purchased or originated creditimpaired financial asset
When calculating the creditadjusted effective interest rate an
entity shall estimate the expected cash flows by considering all
contractual terms of the financial asset (for example
prepayment extension call and similar options) and expected
credit losses The calculation includes all fees and points paid
or received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B541‒B543)
transaction costs and all other premiums or discounts There
is a presumption that the cash flows and the expected life of a
group of similar financial instruments can be estimated reliably
However in those rare cases when it is not possible to reliably
estimate the cash flows or the remaining life of a financial
instrument (or group of financial instruments) the entity shall
use the contractual cash flows over the full contractual term of
the financial instrument (or group of financial instruments)
derecognition The removal of a previously recognised financial asset or
financial liability from an entity’s statement of financial position
IFRS 9
IFRS FoundationA370derivative A financial instrument or other contract within the scope of this
Standard with all three of the following characteristics
(a) its value changes in response to the change in a specified
interest rate financial instrument price commodity
price foreign exchange rate index of prices or rates
credit rating or credit index or other variable provided
in the case of a nonfinancial variable that the variable is
not specific to a party to the contract (sometimes called
the underlying’)
(b) it requires no initial net investment or an initial net
investment that is smaller than would be required for
other types of contracts that would be expected to have a
similar response to changes in market factors
(c) it is settled at a future date
dividends Distributions of profits to holders of equity instruments in
proportion to their holdings of a particular class of capital
effective interest
method
The method that is used in the calculation of the amortised cost
of a financial asset or a financial liability and in the
allocation and recognition of the interest revenue or interest
expense in profit or loss over the relevant period
effective interest rate The rate that exactly discounts estimated future cash payments
or receipts through the expected life of the financial asset or
financial liability to the gross carrying amount of a financial
asset or to the amortised cost of a financial liability When
calculating the effective interest rate an entity shall estimate the
expected cash flows by considering all the contractual terms of
the financial instrument (for example prepayment extension
call and similar options) but shall not consider the expected
credit losses The calculation includes all fees and points paid
or received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B541–B543)
transaction costs and all other premiums or discounts There
is a presumption that the cash flows and the expected life of a
group of similar financial instruments can be estimated reliably
However in those rare cases when it is not possible to reliably
estimate the cash flows or the expected life of a financial
instrument (or group of financial instruments) the entity shall
use the contractual cash flows over the full contractual term of
the financial instrument (or group of financial instruments)
expected credit losses The weighted average of credit losses with the respective risks of
a default occurring as the weights
financial guarantee
contract
A contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument
IFRS 9
IFRS Foundation A371financial liability at
fair value through
profit or loss
A financial liability that meets one of the following conditions
(a) it meets the definition of held for trading
(b) upon initial recognition it is designated by the entity as at
fair value through profit or loss in accordance with
paragraph 422 or 435
(c) it is designated either upon initial recognition or
subsequently as at fair value through profit or loss in
accordance with paragraph 671
firm commitment A binding agreement for the exchange of a specified quantity of
resources at a specified price on a specified future date or dates
forecast transaction An uncommitted but anticipated future transaction
gross carrying amount
of a financial asset
The amortised cost of a financial asset before adjusting for
any loss allowance
hedge ratio The relationship between the quantity of the hedging instrument
and the quantity of the hedged item in terms of their relative
weighting
held for trading A financial asset or financial liability that
(a) is acquired or incurred principally for the purpose of
selling or repurchasing it in the near term
(b) on initial recognition is part of a portfolio of identified
financial instruments that are managed together and for
which there is evidence of a recent actual pattern of
shortterm profittaking or
(c) is a derivative (except for a derivative that is a financial
guarantee contract or a designated and effective hedging
instrument)
impairment gain or
loss
Gains or losses that are recognised in profit or loss in accordance
with paragraph 558 and that arise from applying the
impairment requirements in Section 55
lifetime expected
credit losses
The expected credit losses that result from all possible default
events over the expected life of a financial instrument
loss allowance The allowance for expected credit losses on financial assets
measured in accordance with paragraph 412 lease receivables
and contract assets the accumulated impairment amount for
financial assets measured in accordance with paragraph 412A
and the provision for expected credit losses on loan
commitments and financial guarantee contracts
IFRS 9
IFRS FoundationA372modification gain or
loss
The amount arising from adjusting the gross carrying amount
of a financial asset to reflect the renegotiated or modified
contractual cash flows The entity recalculates the gross carrying
amount of a financial asset as the present value of the estimated
future cash payments or receipts through the expected life of the
renegotiated or modified financial asset that are discounted at
the financial asset’s original effective interest rate (or the
original creditadjusted effective interest rate for purchased
or originated creditimpaired financial assets) or when
applicable the revised effective interest rate calculated in
accordance with paragraph 6510 When estimating the
expected cash flows of a financial asset an entity shall consider
all contractual terms of the financial asset (for example
prepayment call and similar options) but shall not consider the
expected credit losses unless the financial asset is a purchased
or originated creditimpaired financial asset in which case
an entity shall also consider the initial expected credit losses that
were considered when calculating the original creditadjusted
effective interest rate
past due A financial asset is past due when a counterparty has failed to
make a payment when that payment was contractually due
purchased or
originated
creditimpaired
financial asset
Purchased or originated financial asset(s) that are
creditimpaired on initial recognition
reclassification date The first day of the first reporting period following the change in
business model that results in an entity reclassifying financial
assets
regular way purchase
or sale
A purchase or sale of a financial asset under a contract whose
terms require delivery of the asset within the time frame
established generally by regulation or convention in the
marketplace concerned
transaction costs Incremental costs that are directly attributable to the acquisition
issue or disposal of a financial asset or financial liability (see
paragraph B548) An incremental cost is one that would not
have been incurred if the entity had not acquired issued or
disposed of the financial instrument
The following terms are defined in paragraph 11 of IAS 32 Appendix A of IFRS 7
Appendix A of IFRS 13 or Appendix A of IFRS 15 and are used in this Standard with the
meanings specified in IAS 32 IFRS 7 IFRS 13 or IFRS 15
(a) credit risk2
(b) equity instrument
(c) fair value
2 This term (as defined in IFRS 7) is used in the requirements for presenting the effects of changes in
credit risk on liabilities designated as at fair value through profit or loss (see paragraph 577)
IFRS 9
IFRS Foundation A373(d) financial asset
(e) financial instrument
(f) financial liability
(g) transaction price
IFRS 9
IFRS FoundationA374Appendix B
Application guidance
This appendix is an integral part of the Standard
Scope (Chapter 2)
B21 Some contracts require a payment based on climatic geological or other
physical variables (Those based on climatic variables are sometimes referred to
as weather derivatives’) If those contracts are not within the scope of IFRS 4
Insurance Contracts they are within the scope of this Standard
B22 This Standard does not change the requirements relating to employee benefit
plans that comply with IAS 26 Accounting and Reporting by Retirement Benefit Plans
and royalty agreements based on the volume of sales or service revenues that are
accounted for under IFRS 15 Revenue from Contracts with Customers
B23 Sometimes an entity makes what it views as a strategic investment’ in equity
instruments issued by another entity with the intention of establishing or
maintaining a longterm operating relationship with the entity in which the
investment is made The investor or joint venturer entity uses IAS 28 Investments
in Associates and Joint Ventures to determine whether the equity method of
accounting shall be applied to such an investment
B24 This Standard applies to the financial assets and financial liabilities of insurers
other than rights and obligations that paragraph 21(e) excludes because they
arise under contracts within the scope of IFRS 4
B25 Financial guarantee contracts may have various legal forms such as a guarantee
some types of letter of credit a credit default contract or an insurance contract
Their accounting treatment does not depend on their legal form The following
are examples of the appropriate treatment (see paragraph 21(e))
(a) Although a financial guarantee contract meets the definition of an
insurance contract in IFRS 4 if the risk transferred is significant the
issuer applies this Standard Nevertheless if the issuer has previously
asserted explicitly that it regards such contracts as insurance contracts
and has used accounting that is applicable to insurance contracts the
issuer may elect to apply either this Standard or IFRS 4 to such financial
guarantee contracts If this Standard applies paragraph 511 requires
the issuer to recognise a financial guarantee contract initially at fair
value If the financial guarantee contract was issued to an unrelated
party in a standalone arm’s length transaction its fair value at inception
is likely to equal the premium received unless there is evidence to the
contrary Subsequently unless the financial guarantee contract was
designated at inception as at fair value through profit or loss or unless
paragraphs 3215–3223 and B3212–B3217 apply (when a transfer of a
financial asset does not qualify for derecognition or the continuing
involvement approach applies) the issuer measures it at the higher of
(i) the amount determined in accordance with Section 55 and
IFRS 9
IFRS Foundation A375(ii) the amount initially recognised less when appropriate the
cumulative amount of income recognised in accordance with the
principles of IFRS 15 (see paragraph 421(c))
(b) Some creditrelated guarantees do not as a precondition for payment
require that the holder is exposed to and has incurred a loss on the
failure of the debtor to make payments on the guaranteed asset when
due An example of such a guarantee is one that requires payments in
response to changes in a specified credit rating or credit index Such
guarantees are not financial guarantee contracts as defined in this
Standard and are not insurance contracts as defined in IFRS 4 Such
guarantees are derivatives and the issuer applies this Standard to them
(c) If a financial guarantee contract was issued in connection with the sale
of goods the issuer applies IFRS 15 in determining when it recognises
the revenue from the guarantee and from the sale of goods
B26 Assertions that an issuer regards contracts as insurance contracts are typically
found throughout the issuer’s communications with customers and regulators
contracts business documentation and financial statements Furthermore
insurance contracts are often subject to accounting requirements that are
distinct from the requirements for other types of transaction such as contracts
issued by banks or commercial companies In such cases an issuer’s financial
statements typically include a statement that the issuer has used those
accounting requirements
Recognition and derecognition (Chapter 3)
Initial recognition (Section 31)
B311 As a consequence of the principle in paragraph 311 an entity recognises all of
its contractual rights and obligations under derivatives in its statement of
financial position as assets and liabilities respectively except for derivatives
that prevent a transfer of financial assets from being accounted for as a sale (see
paragraph B3214) If a transfer of a financial asset does not qualify for
derecognition the transferee does not recognise the transferred asset as its asset
(see paragraph B3215)
B312 The following are examples of applying the principle in paragraph 311
(a) Unconditional receivables and payables are recognised as assets or
liabilities when the entity becomes a party to the contract and as a
consequence has a legal right to receive or a legal obligation to pay cash
(b) Assets to be acquired and liabilities to be incurred as a result of a firm
commitment to purchase or sell goods or services are generally not
recognised until at least one of the parties has performed under the
agreement For example an entity that receives a firm order does not
generally recognise an asset (and the entity that places the order does not
recognise a liability) at the time of the commitment but instead delays
recognition until the ordered goods or services have been shipped
delivered or rendered If a firm commitment to buy or sell nonfinancial
items is within the scope of this Standard in accordance with
IFRS 9
IFRS FoundationA376paragraphs 24–27 its net fair value is recognised as an asset or a
liability on the commitment date (see paragraph B4130(c)) In addition
if a previously unrecognised firm commitment is designated as a hedged
item in a fair value hedge any change in the net fair value attributable
to the hedged risk is recognised as an asset or a liability after the
inception of the hedge (see paragraphs 658(b) and 659)
(c) A forward contract that is within the scope of this Standard (see
paragraph 21) is recognised as an asset or a liability on the commitment
date instead of on the date on which settlement takes place When an
entity becomes a party to a forward contract the fair values of the right
and obligation are often equal so that the net fair value of the forward is
zero If the net fair value of the right and obligation is not zero the
contract is recognised as an asset or liability
(d) Option contracts that are within the scope of this Standard (see
paragraph 21) are recognised as assets or liabilities when the holder or
writer becomes a party to the contract
(e) Planned future transactions no matter how likely are not assets and
liabilities because the entity has not become a party to a contract
Regular way purchase or sale of financial assets
B313 A regular way purchase or sale of financial assets is recognised using either trade
date accounting or settlement date accounting as described in paragraphs B315
and B316 An entity shall apply the same method consistently for all purchases
and sales of financial assets that are classified in the same way in accordance
with this Standard For this purpose assets that are mandatorily measured at
fair value through profit or loss form a separate classification from assets
designated as measured at fair value through profit or loss In addition
investments in equity instruments accounted for using the option provided in
paragraph 575 form a separate classification
B314 A contract that requires or permits net settlement of the change in the value of
the contract is not a regular way contract Instead such a contract is accounted
for as a derivative in the period between the trade date and the settlement date
B315 The trade date is the date that an entity commits itself to purchase or sell an
asset Trade date accounting refers to (a) the recognition of an asset to be
received and the liability to pay for it on the trade date and (b) derecognition of
an asset that is sold recognition of any gain or loss on disposal and the
recognition of a receivable from the buyer for payment on the trade date
Generally interest does not start to accrue on the asset and corresponding
liability until the settlement date when title passes
B316 The settlement date is the date that an asset is delivered to or by an entity
Settlement date accounting refers to (a) the recognition of an asset on the day it
is received by the entity and (b) the derecognition of an asset and recognition of
any gain or loss on disposal on the day that it is delivered by the entity When
settlement date accounting is applied an entity accounts for any change in the
fair value of the asset to be received during the period between the trade date
and the settlement date in the same way as it accounts for the acquired asset In
IFRS 9
IFRS Foundation A377other words the change in value is not recognised for assets measured at
amortised cost it is recognised in profit or loss for assets classified as financial
assets measured at fair value through profit or loss and it is recognised in other
comprehensive income for financial assets measured at fair value through other
comprehensive income in accordance with paragraph 412A and for
investments in equity instruments accounted for in accordance with
paragraph 575
IFRS 9
IFRS FoundationA378Derecognition of financial assets (Section 32)
B321 The following flow chart illustrates the evaluation of whether and to what
extent a financial asset is derecognised
Continue to recognise the asset
Continue to recognise the asset
Derecognise the asset
Derecognise the asset
Derecognise the asset
IFRS 9
IFRS Foundation A379Arrangements under which an entity retains the contractual rights to
receive the cash flows of a financial asset but assumes a contractual
obligation to pay the cash flows to one or more recipients
(paragraph 324(b))
B322 The situation described in paragraph 324(b) (when an entity retains the
contractual rights to receive the cash flows of the financial asset but assumes a
contractual obligation to pay the cash flows to one or more recipients) occurs
for example if the entity is a trust and issues to investors beneficial interests in
the underlying financial assets that it owns and provides servicing of those
financial assets In that case the financial assets qualify for derecognition if the
conditions in paragraphs 325 and 326 are met
B323 In applying paragraph 325 the entity could be for example the originator of
the financial asset or it could be a group that includes a subsidiary that has
acquired the financial asset and passes on cash flows to unrelated third party
investors
Evaluation of the transfer of risks and rewards of ownership
(paragraph 326)
B324 Examples of when an entity has transferred substantially all the risks and
rewards of ownership are
(a) an unconditional sale of a financial asset
(b) a sale of a financial asset together with an option to repurchase the
financial asset at its fair value at the time of repurchase and
(c) a sale of a financial asset together with a put or call option that is deeply
out of the money (ie an option that is so far out of the money it is highly
unlikely to go into the money before expiry)
B325 Examples of when an entity has retained substantially all the risks and rewards
of ownership are
(a) a sale and repurchase transaction where the repurchase price is a fixed
price or the sale price plus a lender’s return
(b) a securities lending agreement
(c) a sale of a financial asset together with a total return swap that transfers
the market risk exposure back to the entity
(d) a sale of a financial asset together with a deep inthemoney put or call
option (ie an option that is so far in the money that it is highly unlikely
to go out of the money before expiry) and
(e) a sale of shortterm receivables in which the entity guarantees to
compensate the transferee for credit losses that are likely to occur
B326 If an entity determines that as a result of the transfer it has transferred
substantially all the risks and rewards of ownership of the transferred asset it
does not recognise the transferred asset again in a future period unless it
reacquires the transferred asset in a new transaction
IFRS 9
IFRS FoundationA380Evaluation of the transfer of control
B327 An entity has not retained control of a transferred asset if the transferee has the
practical ability to sell the transferred asset An entity has retained control of a
transferred asset if the transferee does not have the practical ability to sell the
transferred asset A transferee has the practical ability to sell the transferred
asset if it is traded in an active market because the transferee could repurchase
the transferred asset in the market if it needs to return the asset to the entity
For example a transferee may have the practical ability to sell a transferred asset
if the transferred asset is subject to an option that allows the entity to
repurchase it but the transferee can readily obtain the transferred asset in the
market if the option is exercised A transferee does not have the practical ability
to sell the transferred asset if the entity retains such an option and the
transferee cannot readily obtain the transferred asset in the market if the entity
exercises its option
B328 The transferee has the practical ability to sell the transferred asset only if the
transferee can sell the transferred asset in its entirety to an unrelated third party
and is able to exercise that ability unilaterally and without imposing additional
restrictions on the transfer The critical question is what the transferee is able to
do in practice not what contractual rights the transferee has concerning what it
can do with the transferred asset or what contractual prohibitions exist In
particular
(a) a contractual right to dispose of the transferred asset has little practical
effect if there is no market for the transferred asset and
(b) an ability to dispose of the transferred asset has little practical effect if it
cannot be exercised freely For that reason
(i) the transferee’s ability to dispose of the transferred asset must be
independent of the actions of others (ie it must be a unilateral
ability) and
(ii) the transferee must be able to dispose of the transferred asset
without needing to attach restrictive conditions or strings’ to the
transfer (eg conditions about how a loan asset is serviced or an
option giving the transferee the right to repurchase the asset)
B329 That the transferee is unlikely to sell the transferred asset does not of itself
mean that the transferor has retained control of the transferred asset However
if a put option or guarantee constrains the transferee from selling the
transferred asset then the transferor has retained control of the transferred
asset For example if a put option or guarantee is sufficiently valuable it
constrains the transferee from selling the transferred asset because the
transferee would in practice not sell the transferred asset to a third party
without attaching a similar option or other restrictive conditions Instead the
transferee would hold the transferred asset so as to obtain payments under the
guarantee or put option Under these circumstances the transferor has retained
control of the transferred asset
IFRS 9
IFRS Foundation A381Transfers that qualify for derecognition
B3210 An entity may retain the right to a part of the interest payments on transferred
assets as compensation for servicing those assets The part of the interest
payments that the entity would give up upon termination or transfer of the
servicing contract is allocated to the servicing asset or servicing liability The
part of the interest payments that the entity would not give up is an
interestonly strip receivable For example if the entity would not give up any
interest upon termination or transfer of the servicing contract the entire
interest spread is an interestonly strip receivable For the purposes of applying
paragraph 3213 the fair values of the servicing asset and interestonly strip
receivable are used to allocate the carrying amount of the receivable between
the part of the asset that is derecognised and the part that continues to be
recognised If there is no servicing fee specified or the fee to be received is not
expected to compensate the entity adequately for performing the servicing a
liability for the servicing obligation is recognised at fair value
B3211 When measuring the fair values of the part that continues to be recognised and
the part that is derecognised for the purposes of applying paragraph 3213 an
entity applies the fair value measurement requirements in IFRS 13 Fair Value
Measurement in addition to paragraph 3214
Transfers that do not qualify for derecognition
B3212 The following is an application of the principle outlined in paragraph 3215 If
a guarantee provided by the entity for default losses on the transferred asset
prevents a transferred asset from being derecognised because the entity has
retained substantially all the risks and rewards of ownership of the transferred
asset the transferred asset continues to be recognised in its entirety and the
consideration received is recognised as a liability
Continuing involvement in transferred assets
B3213 The following are examples of how an entity measures a transferred asset and
the associated liability under paragraph 3216
All assets
(a) If a guarantee provided by an entity to pay for default losses on a
transferred asset prevents the transferred asset from being derecognised
to the extent of the continuing involvement the transferred asset at the
date of the transfer is measured at the lower of (i) the carrying amount of
the asset and (ii) the maximum amount of the consideration received in
the transfer that the entity could be required to repay (the guarantee
amount’) The associated liability is initially measured at the guarantee
amount plus the fair value of the guarantee (which is normally the
consideration received for the guarantee) Subsequently the initial fair
value of the guarantee is recognised in profit or loss when (or as) the
obligation is satisfied (in accordance with the principles of IFRS 15) and
the carrying value of the asset is reduced by any loss allowance
IFRS 9
IFRS FoundationA382Assets measured at amortised cost
(b) If a put option obligation written by an entity or call option right held by
an entity prevents a transferred asset from being derecognised and the
entity measures the transferred asset at amortised cost the associated
liability is measured at its cost (ie the consideration received) adjusted
for the amortisation of any difference between that cost and the gross
carrying amount of the transferred asset at the expiration date of the
option For example assume that the gross carrying amount of the asset
on the date of the transfer is CU98 and that the consideration received is
CU95 The gross carrying amount of the asset on the option exercise date
will be CU100 The initial carrying amount of the associated liability is
CU95 and the difference between CU95 and CU100 is recognised in profit
or loss using the effective interest method If the option is exercised any
difference between the carrying amount of the associated liability and
the exercise price is recognised in profit or loss
Assets measured at fair value
(c) If a call option right retained by an entity prevents a transferred asset
from being derecognised and the entity measures the transferred asset at
fair value the asset continues to be measured at its fair value The
associated liability is measured at (i) the option exercise price less the
time value of the option if the option is in or at the money or (ii) the fair
value of the transferred asset less the time value of the option if the
option is out of the money The adjustment to the measurement of the
associated liability ensures that the net carrying amount of the asset and
the associated liability is the fair value of the call option right For
example if the fair value of the underlying asset is CU80 the option
exercise price is CU95 and the time value of the option is CU5 the
carrying amount of the associated liability is CU75 (CU80 – CU5) and the
carrying amount of the transferred asset is CU80 (ie its fair value)
(d) If a put option written by an entity prevents a transferred asset from
being derecognised and the entity measures the transferred asset at fair
value the associated liability is measured at the option exercise price
plus the time value of the option The measurement of the asset at fair
value is limited to the lower of the fair value and the option exercise
price because the entity has no right to increases in the fair value of the
transferred asset above the exercise price of the option This ensures that
the net carrying amount of the asset and the associated liability is the
fair value of the put option obligation For example if the fair value of
the underlying asset is CU120 the option exercise price is CU100 and the
time value of the option is CU5 the carrying amount of the associated
liability is CU105 (CU100 + CU5) and the carrying amount of the asset is
CU100 (in this case the option exercise price)
(e) If a collar in the form of a purchased call and written put prevents a
transferred asset from being derecognised and the entity measures the
asset at fair value it continues to measure the asset at fair value The
associated liability is measured at (i) the sum of the call exercise price
and fair value of the put option less the time value of the call option if
IFRS 9
IFRS Foundation A383the call option is in or at the money or (ii) the sum of the fair value of
the asset and the fair value of the put option less the time value of the
call option if the call option is out of the money The adjustment to the
associated liability ensures that the net carrying amount of the asset and
the associated liability is the fair value of the options held and written by
the entity For example assume an entity transfers a financial asset that
is measured at fair value while simultaneously purchasing a call with an
exercise price of CU120 and writing a put with an exercise price of CU80
Assume also that the fair value of the asset is CU100 at the date of the
transfer The time value of the put and call are CU1 and CU5
respectively In this case the entity recognises an asset of CU100 (the fair
value of the asset) and a liability of CU96 [(CU100 + CU1) – CU5] This
gives a net asset value of CU4 which is the fair value of the options held
and written by the entity
All transfers
B3214 To the extent that a transfer of a financial asset does not qualify for
derecognition the transferor’s contractual rights or obligations related to the
transfer are not accounted for separately as derivatives if recognising both the
derivative and either the transferred asset or the liability arising from the
transfer would result in recognising the same rights or obligations twice For
example a call option retained by the transferor may prevent a transfer of
financial assets from being accounted for as a sale In that case the call option is
not separately recognised as a derivative asset
B3215 To the extent that a transfer of a financial asset does not qualify for
derecognition the transferee does not recognise the transferred asset as its asset
The transferee derecognises the cash or other consideration paid and recognises
a receivable from the transferor If the transferor has both a right and an
obligation to reacquire control of the entire transferred asset for a fixed amount
(such as under a repurchase agreement) the transferee may measure its
receivable at amortised cost if it meets the criteria in paragraph 412
Examples
B3216 The following examples illustrate the application of the derecognition
principles of this Standard
(a) Repurchase agreements and securities lending If a financial asset is sold under
an agreement to repurchase it at a fixed price or at the sale price plus a
lender’s return or if it is loaned under an agreement to return it to the
transferor it is not derecognised because the transferor retains
substantially all the risks and rewards of ownership If the transferee
obtains the right to sell or pledge the asset the transferor reclassifies the
asset in its statement of financial position for example as a loaned asset
or repurchase receivable
(b) Repurchase agreements and securities lending—assets that are substantially the
same If a financial asset is sold under an agreement to repurchase the
same or substantially the same asset at a fixed price or at the sale price
plus a lender’s return or if a financial asset is borrowed or loaned under
an agreement to return the same or substantially the same asset to the
IFRS 9
IFRS FoundationA384transferor it is not derecognised because the transferor retains
substantially all the risks and rewards of ownership
(c) Repurchase agreements and securities lending—right of substitutionIfa
repurchase agreement at a fixed repurchase price or a price equal to the
sale price plus a lender’s return or a similar securities lending
transaction provides the transferee with a right to substitute assets that
are similar and of equal fair value to the transferred asset at the
repurchase date the asset sold or lent under a repurchase or securities
lending transaction is not derecognised because the transferor retains
substantially all the risks and rewards of ownership
(d) Repurchase right of first refusal at fair value If an entity sells a financial asset
and retains only a right of first refusal to repurchase the transferred
asset at fair value if the transferee subsequently sells it the entity
derecognises the asset because it has transferred substantially all the
risks and rewards of ownership
(e) Wash sale transaction The repurchase of a financial asset shortly after it
has been sold is sometimes referred to as a wash sale Such a repurchase
does not preclude derecognition provided that the original transaction
met the derecognition requirements However if an agreement to sell a
financial asset is entered into concurrently with an agreement to
repurchase the same asset at a fixed price or the sale price plus a lender’s
return then the asset is not derecognised
(f) Put options and call options that are deeply in the money If a transferred
financial asset can be called back by the transferor and the call option is
deeply in the money the transfer does not qualify for derecognition
because the transferor has retained substantially all the risks and
rewards of ownership Similarly if the financial asset can be put back by
the transferee and the put option is deeply in the money the transfer
does not qualify for derecognition because the transferor has retained
substantially all the risks and rewards of ownership
(g) Put options and call options that are deeply out of the money A financial asset
that is transferred subject only to a deep outofthemoney put option
held by the transferee or a deep outofthemoney call option held by the
transferor is derecognised This is because the transferor has transferred
substantially all the risks and rewards of ownership
(h) Readily obtainable assets subject to a call option that is neither deeply in the money
nor deeply out of the money If an entity holds a call option on an asset that
is readily obtainable in the market and the option is neither deeply in
the money nor deeply out of the money the asset is derecognised This is
because the entity (i) has neither retained nor transferred substantially
all the risks and rewards of ownership and (ii) has not retained control
However if the asset is not readily obtainable in the market
derecognition is precluded to the extent of the amount of the asset that
is subject to the call option because the entity has retained control of the
asset
IFRS 9
IFRS Foundation A385(i) A not readily obtainable asset subject to a put option written by an entity that is
neither deeply in the money nor deeply out of the money If an entity transfers a
financial asset that is not readily obtainable in the market and writes a
put option that is not deeply out of the money the entity neither retains
nor transfers substantially all the risks and rewards of ownership
because of the written put option The entity retains control of the asset
if the put option is sufficiently valuable to prevent the transferee from
selling the asset in which case the asset continues to be recognised to
the extent of the transferor’s continuing involvement (see
paragraph B329) The entity transfers control of the asset if the put
option is not sufficiently valuable to prevent the transferee from selling
the asset in which case the asset is derecognised
(j) Assets subject to a fair value put or call option or a forward repurchase agreement
A transfer of a financial asset that is subject only to a put or call option
or a forward repurchase agreement that has an exercise or repurchase
price equal to the fair value of the financial asset at the time of
repurchase results in derecognition because of the transfer of
substantially all the risks and rewards of ownership
(k) Cashsettled call or put options An entity evaluates the transfer of a
financial asset that is subject to a put or call option or a forward
repurchase agreement that will be settled net in cash to determine
whether it has retained or transferred substantially all the risks and
rewards of ownership If the entity has not retained substantially all the
risks and rewards of ownership of the transferred asset it determines
whether it has retained control of the transferred asset That the put or
the call or the forward repurchase agreement is settled net in cash does
not automatically mean that the entity has transferred control (see
paragraphs B329 and (g) (h) and (i) above)
(l) Removal of accounts provision A removal of accounts provision is an
unconditional repurchase (call) option that gives an entity the right to
reclaim assets transferred subject to some restrictions Provided that
such an option results in the entity neither retaining nor transferring
substantially all the risks and rewards of ownership it precludes
derecognition only to the extent of the amount subject to repurchase
(assuming that the transferee cannot sell the assets) For example if the
carrying amount and proceeds from the transfer of loan assets are
CU100000 and any individual loan could be called back but the
aggregate amount of loans that could be repurchased could not exceed
CU10000 CU90000 of the loans would qualify for derecognition
(m) Cleanup calls An entity which may be a transferor that services
transferred assets may hold a cleanup call to purchase remaining
transferred assets when the amount of outstanding assets falls to a
specified level at which the cost of servicing those assets becomes
burdensome in relation to the benefits of servicing Provided that such a
cleanup call results in the entity neither retaining nor transferring
substantially all the risks and rewards of ownership and the transferee
cannot sell the assets it precludes derecognition only to the extent of the
amount of the assets that is subject to the call option
IFRS 9
IFRS FoundationA386(n) Subordinated retained interests and credit guarantees An entity may provide
the transferee with credit enhancement by subordinating some or all of
its interest retained in the transferred asset Alternatively an entity may
provide the transferee with credit enhancement in the form of a credit
guarantee that could be unlimited or limited to a specified amount If
the entity retains substantially all the risks and rewards of ownership of
the transferred asset the asset continues to be recognised in its entirety
If the entity retains some but not substantially all of the risks and
rewards of ownership and has retained control derecognition is
precluded to the extent of the amount of cash or other assets that the
entity could be required to pay
(o) Total return swaps An entity may sell a financial asset to a transferee and
enter into a total return swap with the transferee whereby all of the
interest payment cash flows from the underlying asset are remitted to
the entity in exchange for a fixed payment or variable rate payment and
any increases or declines in the fair value of the underlying asset are
absorbed by the entity In such a case derecognition of all of the asset is
prohibited
(p) Interest rate swaps An entity may transfer to a transferee a fixed rate
financial asset and enter into an interest rate swap with the transferee to
receive a fixed interest rate and pay a variable interest rate based on a
notional amount that is equal to the principal amount of the transferred
financial asset The interest rate swap does not preclude derecognition
of the transferred asset provided the payments on the swap are not
conditional on payments being made on the transferred asset
(q) Amortising interest rate swaps An entity may transfer to a transferee a fixed
rate financial asset that is paid off over time and enter into an
amortising interest rate swap with the transferee to receive a fixed
interest rate and pay a variable interest rate based on a notional amount
If the notional amount of the swap amortises so that it equals the
principal amount of the transferred financial asset outstanding at any
point in time the swap would generally result in the entity retaining
substantial prepayment risk in which case the entity either continues to
recognise all of the transferred asset or continues to recognise the
transferred asset to the extent of its continuing involvement
Conversely if the amortisation of the notional amount of the swap is not
linked to the principal amount outstanding of the transferred asset such
a swap would not result in the entity retaining prepayment risk on the
asset Hence it would not preclude derecognition of the transferred
asset provided the payments on the swap are not conditional on interest
payments being made on the transferred asset and the swap does not
result in the entity retaining any other significant risks and rewards of
ownership on the transferred asset
(r) Writeoff An entity has no reasonable expectations of recovering the
contractual cash flows on a financial asset in its entirety or a portion
thereof
IFRS 9
IFRS Foundation A387B3217 This paragraph illustrates the application of the continuing involvement
approach when the entity’s continuing involvement is in a part of a financial
asset
Assume an entity has a portfolio of prepayable loans whose coupon and
effective interest rate is 10 per cent and whose principal amount and
amortised cost is CU10000 It enters into a transaction in which in return
for a payment of CU9115 the transferee obtains the right to CU9000 of any
collections of principal plus interest thereon at 95 per cent The entity
retains rights to CU1000 of any collections of principal plus interest thereon
at 10 per cent plus the excess spread of 05 per cent on the remaining
CU9000 of principal Collections from prepayments are allocated between
the entity and the transferee proportionately in the ratio of 19 but any
defaults are deducted from the entity’s interest of CU1000 until that interest
is exhausted The fair value of the loans at the date of the transaction is
CU10100 and the fair value of the excess spread of 05 per cent is CU40
The entity determines that it has transferred some significant risks and
rewards of ownership (for example significant prepayment risk) but has also
retained some significant risks and rewards of ownership (because of its
subordinated retained interest) and has retained control It therefore applies
the continuing involvement approach
To apply this Standard the entity analyses the transaction as (a) a retention
of a fully proportionate retained interest of CU1000 plus (b) the
subordination of that retained interest to provide credit enhancement to the
transferee for credit losses
The entity calculates that CU9090 (90 × CU10100) of the consideration
received of CU9115 represents the consideration for a fully proportionate
90 per cent share The remainder of the consideration received (CU25)
represents consideration received for subordinating its retained interest to
provide credit enhancement to the transferee for credit losses In addition
the excess spread of 05 per cent represents consideration received for the
credit enhancement Accordingly the total consideration received for the
credit enhancement is CU65 (CU25 + CU40)
continued
IFRS 9
IFRS FoundationA388continued
The entity calculates the gain or loss on the sale of the 90 per cent share of
cash flows Assuming that separate fair values of the 90 per cent part
transferred and the 10 per cent part retained are not available at the date of
the transfer the entity allocates the carrying amount of the asset in
accordance with paragraph 3214 of IFRS 9 as follows
Fair value Percentage Allocated
carrying
amount
Portion transferred 9090 90 9000
Portion retained 1010 10 1000
Total 10100 10000
The entity computes its gain or loss on the sale of the 90 per cent share of
the cash flows by deducting the allocated carrying amount of the portion
transferred from the consideration received ie CU90 (CU9090 – CU9000)
The carrying amount of the portion retained by the entity is CU1000
In addition the entity recognises the continuing involvement that results
from the subordination of its retained interest for credit losses Accordingly
it recognises an asset of CU1000 (the maximum amount of the cash flows it
would not receive under the subordination) and an associated liability of
CU1065 (which is the maximum amount of the cash flows it would not
receive under the subordination ie CU1000 plus the fair value of the
subordination of CU65)
The entity uses all of the above information to account for the transaction as
follows
Debit Credit
Original asset — 9000
Asset recognised for subordination or the
residual interest 1000 —
Asset for the consideration received in the
form of excess spread 40 —
Profit or loss (gain on transfer) — 90
Liability — 1065
Cash received 9115 —
Total 10155 10155
continued
IFRS 9
IFRS Foundation A389continued
Immediately following the transaction the carrying amount of the asset is
CU2040 comprising CU1000 representing the allocated cost of the portion
retained and CU1040 representing the entity’s additional continuing
involvement from the subordination of its retained interest for credit losses
(which includes the excess spread of CU40)
In subsequent periods the entity recognises the consideration received for
the credit enhancement (CU65) on a time proportion basis accrues interest
on the recognised asset using the effective interest method and recognises
any impairment losses on the recognised assets As an example of the latter
assume that in the following year there is an impairment loss on the
underlying loans of CU300 The entity reduces its recognised asset by CU600
(CU300 relating to its retained interest and CU300 relating to the additional
continuing involvement that arises from the subordination of its retained
interest for impairment losses) and reduces its recognised liability by CU300
The net result is a charge to profit or loss for impairment losses of CU300
Derecognition of financial liabilities (Section 33)
B331 A financial liability (or part of it) is extinguished when the debtor either
(a) discharges the liability (or part of it) by paying the creditor normally
with cash other financial assets goods or services or
(b) is legally released from primary responsibility for the liability (or part of
it) either by process of law or by the creditor (If the debtor has given a
guarantee this condition may still be met)
B332 If an issuer of a debt instrument repurchases that instrument the debt is
extinguished even if the issuer is a market maker in that instrument or intends
to resell it in the near term
B333 Payment to a third party including a trust (sometimes called insubstance
defeasance’) does not by itself relieve the debtor of its primary obligation to the
creditor in the absence of legal release
B334 If a debtor pays a third party to assume an obligation and notifies its creditor
that the third party has assumed its debt obligation the debtor does not
derecognise the debt obligation unless the condition in paragraph B331(b) is
met If the debtor pays a third party to assume an obligation and obtains a legal
release from its creditor the debtor has extinguished the debt However if the
debtor agrees to make payments on the debt to the third party or direct to its
original creditor the debtor recognises a new debt obligation to the third party
B335 Although legal release whether judicially or by the creditor results in
derecognition of a liability the entity may recognise a new liability if the
derecognition criteria in paragraphs 321–3223 are not met for the financial
assets transferred If those criteria are not met the transferred assets are not
derecognised and the entity recognises a new liability relating to the transferred
assets
IFRS 9
IFRS FoundationA390B336 For the purpose of paragraph 332 the terms are substantially different if the
discounted present value of the cash flows under the new terms including any
fees paid net of any fees received and discounted using the original effective
interest rate is at least 10 per cent different from the discounted present value
of the remaining cash flows of the original financial liability If an exchange of
debt instruments or modification of terms is accounted for as an
extinguishment any costs or fees incurred are recognised as part of the gain or
loss on the extinguishment If the exchange or modification is not accounted
for as an extinguishment any costs or fees incurred adjust the carrying amount
of the liability and are amortised over the remaining term of the modified
liability
B337 In some cases a creditor releases a debtor from its present obligation to make
payments but the debtor assumes a guarantee obligation to pay if the party
assuming primary responsibility defaults In these circumstances the debtor
(a) recognises a new financial liability based on the fair value of its
obligation for the guarantee and
(b) recognises a gain or loss based on the difference between (i) any proceeds
paid and (ii) the carrying amount of the original financial liability less
the fair value of the new financial liability
Classification (Chapter 4)
Classification of financial assets (Section 41)
The entity’s business model for managing financial assets
B411 Paragraph 411(a) requires an entity to classify financial assets on the basis of
the entity’s business model for managing the financial assets unless
paragraph 415 applies An entity assesses whether its financial assets meet the
condition in paragraph 412(a) or the condition in paragraph 412A(a) on the
basis of the business model as determined by the entity’s key management
personnel (as defined in IAS 24 Related Party Disclosures)
B412 An entity’s business model is determined at a level that reflects how groups of
financial assets are managed together to achieve a particular business objective
The entity’s business model does not depend on management’s intentions for an
individual instrument Accordingly this condition is not an
instrumentbyinstrument approach to classification and should be determined
on a higher level of aggregation However a single entity may have more than
one business model for managing its financial instruments Consequently
classification need not be determined at the reporting entity level For example
an entity may hold a portfolio of investments that it manages in order to collect
contractual cash flows and another portfolio of investments that it manages in
order to trade to realise fair value changes Similarly in some circumstances it
may be appropriate to separate a portfolio of financial assets into subportfolios
in order to reflect the level at which an entity manages those financial assets
For example that may be the case if an entity originates or purchases a portfolio
IFRS 9
IFRS Foundation A391of mortgage loans and manages some of the loans with an objective of collecting
contractual cash flows and manages the other loans with an objective of selling
them
B412A An entity’s business model refers to how an entity manages its financial assets in
order to generate cash flows That is the entity’s business model determines
whether cash flows will result from collecting contractual cash flows selling
financial assets or both Consequently this assessment is not performed on the
basis of scenarios that the entity does not reasonably expect to occur such as
socalled worst case’ or stress case’ scenarios For example if an entity expects
that it will sell a particular portfolio of financial assets only in a stress case
scenario that scenario would not affect the entity’s assessment of the business
model for those assets if the entity reasonably expects that such a scenario will
not occur If cash flows are realised in a way that is different from the entity’s
expectations at the date that the entity assessed the business model
(for example if the entity sells more or fewer financial assets than it expected
when it classified the assets) that does not give rise to a prior period error in the
entity’s financial statements (see IAS 8 Accounting Policies Changes in Accounting
Estimates and Errors) nor does it change the classification of the remaining
financial assets held in that business model (ie those assets that the entity
recognised in prior periods and still holds) as long as the entity considered all
relevant information that was available at the time that it made the business
model assessment However when an entity assesses the business model for
newly originated or newly purchased financial assets it must consider
information about how cash flows were realised in the past along with all other
relevant information
B412B An entity’s business model for managing financial assets is a matter of fact and
not merely an assertion It is typically observable through the activities that the
entity undertakes to achieve the objective of the business model An entity will
need to use judgement when it assesses its business model for managing
financial assets and that assessment is not determined by a single factor or
activity Instead the entity must consider all relevant evidence that is available
at the date of the assessment Such relevant evidence includes but is not limited
to
(a) how the performance of the business model and the financial assets held
within that business model are evaluated and reported to the entity’s key
management personnel
(b) the risks that affect the performance of the business model (and the
financial assets held within that business model) and in particular the
way in which those risks are managed and
(c) how managers of the business are compensated (for example whether
the compensation is based on the fair value of the assets managed or on
the contractual cash flows collected)
A business model whose objective is to hold assets in order to collect
contractual cash flows
B412C Financial assets that are held within a business model whose objective is to hold
assets in order to collect contractual cash flows are managed to realise cash
IFRS 9
IFRS FoundationA392flows by collecting contractual payments over the life of the instrument That is
the entity manages the assets held within the portfolio to collect those
particular contractual cash flows (instead of managing the overall return on the
portfolio by both holding and selling assets) In determining whether cash flows
are going to be realised by collecting the financial assets’ contractual cash flows
it is necessary to consider the frequency value and timing of sales in prior
periods the reasons for those sales and expectations about future sales activity
However sales in themselves do not determine the business model and therefore
cannot be considered in isolation Instead information about past sales and
expectations about future sales provide evidence related to how the entity’s
stated objective for managing the financial assets is achieved and specifically
how cash flows are realised An entity must consider information about past
sales within the context of the reasons for those sales and the conditions that
existed at that time as compared to current conditions
B413 Although the objective of an entity’s business model may be to hold financial
assets in order to collect contractual cash flows the entity need not hold all of
those instruments until maturity Thus an entity’s business model can be to
hold financial assets to collect contractual cash flows even when sales of
financial assets occur or are expected to occur in the future
B413A The business model may be to hold assets to collect contractual cash flows even
if the entity sells financial assets when there is an increase in the assets’ credit
risk To determine whether there has been an increase in the assets’ credit risk
the entity considers reasonable and supportable information including forward
looking information Irrespective of their frequency and value sales due to an
increase in the assets’ credit risk are not inconsistent with a business model
whose objective is to hold financial assets to collect contractual cash flows
because the credit quality of financial assets is relevant to the entity’s ability to
collect contractual cash flows Credit risk management activities that are aimed
at minimising potential credit losses due to credit deterioration are integral to
such a business model Selling a financial asset because it no longer meets the
credit criteria specified in the entity’s documented investment policy is an
example of a sale that has occurred due to an increase in credit risk However in
the absence of such a policy the entity may demonstrate in other ways that the
sale occurred due to an increase in credit risk
B413B Sales that occur for other reasons such as sales made to manage credit
concentration risk (without an increase in the assets’ credit risk) may also be
consistent with a business model whose objective is to hold financial assets in
order to collect contractual cash flows In particular such sales may be
consistent with a business model whose objective is to hold financial assets in
order to collect contractual cash flows if those sales are infrequent (even if
significant in value) or insignificant in value both individually and in aggregate
(even if frequent) If more than an infrequent number of such sales are made out
of a portfolio and those sales are more than insignificant in value (either
individually or in aggregate) the entity needs to assess whether and how such
sales are consistent with an objective of collecting contractual cash flows
Whether a third party imposes the requirement to sell the financial assets or
that activity is at the entity’s discretion is not relevant to this assessment An
increase in the frequency or value of sales in a particular period is not
IFRS 9
IFRS Foundation A393necessarily inconsistent with an objective to hold financial assets in order to
collect contractual cash flows if an entity can explain the reasons for those sales
and demonstrate why those sales do not reflect a change in the entity’s business
model In addition sales may be consistent with the objective of holding
financial assets in order to collect contractual cash flows if the sales are made
close to the maturity of the financial assets and the proceeds from the sales
approximate the collection of the remaining contractual cash flows
B414 The following are examples of when the objective of an entity’s business model
may be to hold financial assets to collect the contractual cash flows This list of
examples is not exhaustive Furthermore the examples are not intended to
discuss all factors that may be relevant to the assessment of the entity’s business
model nor specify the relative importance of the factors
Example Analysis
Example 1
An entity holds investments to collect
their contractual cash flows The
funding needs of the entity are
predictable and the maturity of its
financial assets is matched to the
entity’s estimated funding needs
The entity performs credit risk
management activities with the
objective of minimising credit losses
In the past sales have typically
occurred when the financial assets’
credit risk has increased such that
the assets no longer meet the credit
criteria specified in the entity’s
documented investment policy In
addition infrequent sales have
occurred as a result of unanticipated
funding needs
Reports to key management
personnel focus on the credit quality
of the financial assets and the
contractual return The entity also
monitors fair values of the financial
assets among other information
Although the entity considers among
other information the financial
assets’ fair values from a liquidity
perspective (ie the cash amount that
would be realised if the entity needs
to sell assets) the entity’s objective is
to hold the financial assets in order
to collect the contractual cash flows
Sales would not contradict that
objective if they were in response to
an increase in the assets’ credit risk
for example if the assets no longer
meet the credit criteria specified in
the entity’s documented investment
policy Infrequent sales resulting
from unanticipated funding needs
(eg in a stress case scenario) also
would not contradict that objective
even if such sales are significant in
value
continued
IFRS 9
IFRS FoundationA394continued
Example Analysis
Example 2
An entity’s business model is to
purchase portfolios of financial
assets such as loans Those portfolios
may or may not include financial
assets that are credit impaired
If payment on the loans is not made
on a timely basis the entity attempts
to realise the contractual cash flows
through various means—for example
by contacting the debtor by mail
telephone or other methods The
entity’s objective is to collect the
contractual cash flows and the entity
does not manage any of the loans in
this portfolio with an objective of
realising cash flows by selling them
In some cases the entity enters into
interest rate swaps to change the
interest rate on particular financial
assets in a portfolio from a floating
interest rate to a fixed interest rate
The objective of the entity’s business
model is to hold the financial assets
in order to collect the contractual
cash flows
The same analysis would apply even
if the entity does not expect to
receive all of the contractual cash
flows (eg some of the financial assets
are credit impaired at initial
recognition)
Moreover the fact that the entity
enters into derivatives to modify the
cash flows of the portfolio does not in
itself change the entity’s business
model
continued
IFRS 9
IFRS Foundation A395continued
Example Analysis
Example 3
An entity has a business model with
the objective of originating loans to
customers and subsequently selling
those loans to a securitisation vehicle
The securitisation vehicle issues
instruments to investors
The originating entity controls the
securitisation vehicle and thus
consolidates it
The securitisation vehicle collects the
contractual cash flows from the loans
and passes them on to its investors
It is assumed for the purposes of this
example that the loans continue to
be recognised in the consolidated
statement of financial position
because they are not derecognised by
the securitisation vehicle
The consolidated group originated
the loans with the objective of
holding them to collect the
contractual cash flows
However the originating entity has
an objective of realising cash flows on
the loan portfolio by selling the loans
to the securitisation vehicle so for
the purposes of its separate financial
statements it would not be
considered to be managing this
portfolio in order to collect the
contractual cash flows
continued
IFRS 9
IFRS FoundationA396continued
Example Analysis
Example 4
A financial institution holds financial
assets to meet liquidity needs in a
stress case’ scenario (eg a run on the
bank’s deposits) The entity does not
anticipate selling these assets except
in such scenarios
The entity monitors the credit quality
of the financial assets and its
objective in managing the financial
assets is to collect the contractual
cash flows The entity evaluates the
performance of the assets on the
basis of interest revenue earned and
credit losses realised
However the entity also monitors the
fair value of the financial assets from
a liquidity perspective to ensure that
the cash amount that would be
realised if the entity needed to sell
the assets in a stress case scenario
would be sufficient to meet the
entity’s liquidity needs Periodically
the entity makes sales that are
insignificant in value to demonstrate
liquidity
The objective of the entity’s business
model is to hold the financial assets
to collect contractual cash flows
The analysis would not change even
if during a previous stress case
scenario the entity had sales that
were significant in value in order to
meet its liquidity needs Similarly
recurring sales activity that is
insignificant in value is not
inconsistent with holding financial
assets to collect contractual cash
flows
In contrast if an entity holds
financial assets to meet its everyday
liquidity needs and meeting that
objective involves frequent sales that
are significant in value the objective
of the entity’s business model is not
to hold the financial assets to collect
contractual cash flows
Similarly if the entity is required by
its regulator to routinely sell
financial assets to demonstrate that
the assets are liquid and the value of
the assets sold is significant the
entity’s business model is not to hold
financial assets to collect contractual
cash flows Whether a third party
imposes the requirement to sell the
financial assets or that activity is at
the entity’s discretion is not relevant
to the analysis
A business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets
B414A An entity may hold financial assets in a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets
In this type of business model the entity’s key management personnel have
made a decision that both collecting contractual cash flows and selling financial
assets are integral to achieving the objective of the business model There are
various objectives that may be consistent with this type of business model For
example the objective of the business model may be to manage everyday
IFRS 9
IFRS Foundation A397liquidity needs to maintain a particular interest yield profile or to match the
duration of the financial assets to the duration of the liabilities that those assets
are funding To achieve such an objective the entity will both collect
contractual cash flows and sell financial assets
B414B Compared to a business model whose objective is to hold financial assets to
collect contractual cash flows this business model will typically involve greater
frequency and value of sales This is because selling financial assets is integral to
achieving the business model’s objective instead of being only incidental to it
However there is no threshold for the frequency or value of sales that must
occur in this business model because both collecting contractual cash flows and
selling financial assets are integral to achieving its objective
B414C The following are examples of when the objective of the entity’s business model
may be achieved by both collecting contractual cash flows and selling financial
assets This list of examples is not exhaustive Furthermore the examples are
not intended to describe all the factors that may be relevant to the assessment of
the entity’s business model nor specify the relative importance of the factors
IFRS 9
IFRS FoundationA398Example Analysis
Example 5
An entity anticipates capital
expenditure in a few years The
entity invests its excess cash in short
and longterm financial assets so that
it can fund the expenditure when the
need arises Many of the financial
assets have contractual lives that
exceed the entity’s anticipated
investment period
The entity will hold financial assets
to collect the contractual cash flows
and when an opportunity arises it
will sell financial assets to reinvest
the cash in financial assets with a
higher return
The managers responsible for the
portfolio are remunerated based on
the overall return generated by the
portfolio
The objective of the business model is
achieved by both collecting
contractual cash flows and selling
financial assets The entity will make
decisions on an ongoing basis about
whether collecting contractual cash
flows or selling financial assets will
maximise the return on the portfolio
until the need arises for the invested
cash
In contrast consider an entity that
anticipates a cash outflow in five
years to fund capital expenditure and
invests excess cash in shortterm
financial assets When the
investments mature the entity
reinvests the cash in new shortterm
financial assets The entity maintains
this strategy until the funds are
needed at which time the entity uses
the proceeds from the maturing
financial assets to fund the capital
expenditure Only sales that are
insignificant in value occur before
maturity (unless there is an increase
in credit risk) The objective of this
contrasting business model is to hold
financial assets to collect contractual
cash flows
continued
IFRS 9
IFRS Foundation A399continued
Example Analysis
Example 6
A financial institution holds financial
assets to meet its everyday liquidity
needs The entity seeks to minimise
the costs of managing those liquidity
needs and therefore actively manages
the return on the portfolio That
return consists of collecting
contractual payments as well as gains
and losses from the sale of financial
assets
As a result the entity holds financial
assets to collect contractual cash
flows and sells financial assets to
reinvest in higher yielding financial
assets or to better match the duration
of its liabilities In the past this
strategy has resulted in frequent sales
activity and such sales have been
significant in value This activity is
expected to continue in the future
The objective of the business model is
to maximise the return on the
portfolio to meet everyday liquidity
needs and the entity achieves that
objective by both collecting
contractual cash flows and selling
financial assets In other words both
collecting contractual cash flows and
selling financial assets are integral to
achieving the business model’s
objective
Example 7
An insurer holds financial assets in
order to fund insurance contract
liabilities The insurer uses the
proceeds from the contractual cash
flows on the financial assets to settle
insurance contract liabilities as they
come due To ensure that the
contractual cash flows from the
financial assets are sufficient to settle
those liabilities the insurer
undertakes significant buying and
selling activity on a regular basis to
rebalance its portfolio of assets and to
meet cash flow needs as they arise
The objective of the business model is
to fund the insurance contract
liabilities To achieve this objective
the entity collects contractual cash
flows as they come due and sells
financial assets to maintain the
desired profile of the asset portfolio
Thus both collecting contractual cash
flows and selling financial assets are
integral to achieving the business
model’s objective
Other business models
B415 Financial assets are measured at fair value through profit or loss if they are not
held within a business model whose objective is to hold assets to collect
contractual cash flows or within a business model whose objective is achieved by
both collecting contractual cash flows and selling financial assets (but see also
IFRS 9
IFRS FoundationA400paragraph 575) One business model that results in measurement at fair value
through profit or loss is one in which an entity manages the financial assets
with the objective of realising cash flows through the sale of the assets The
entity makes decisions based on the assets’ fair values and manages the assets to
realise those fair values In this case the entity’s objective will typically result in
active buying and selling Even though the entity will collect contractual cash
flows while it holds the financial assets the objective of such a business model is
not achieved by both collecting contractual cash flows and selling financial
assets This is because the collection of contractual cash flows is not integral to
achieving the business model’s objective instead it is incidental to it
B416 A portfolio of financial assets that is managed and whose performance is
evaluated on a fair value basis (as described in paragraph 422(b)) is neither held
to collect contractual cash flows nor held both to collect contractual cash flows
and to sell financial assets The entity is primarily focused on fair value
information and uses that information to assess the assets’ performance and to
make decisions In addition a portfolio of financial assets that meets the
definition of held for trading is not held to collect contractual cash flows or held
both to collect contractual cash flows and to sell financial assets For such
portfolios the collection of contractual cash flows is only incidental to achieving
the business model’s objective Consequently such portfolios of financial assets
must be measured at fair value through profit or loss
Contractual cash flows that are solely payments of principal and
interest on the principal amount outstanding
B417 Paragraph 411(b) requires an entity to classify a financial asset on the basis of
its contractual cash flow characteristics if the financial asset is held within a
business model whose objective is to hold assets to collect contractual cash flows
or within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets unless paragraph 415
applies To do so the condition in paragraphs 412(b) and 412A(b) requires an
entity to determine whether the asset’s contractual cash flows are solely
payments of principal and interest on the principal amount outstanding
B417A Contractual cash flows that are solely payments of principal and interest on the
principal amount outstanding are consistent with a basic lending arrangement
In a basic lending arrangement consideration for the time value of money (see
paragraphs B419A–B419E) and credit risk are typically the most significant
elements of interest However in such an arrangement interest can also
include consideration for other basic lending risks (for example liquidity risk)
and costs (for example administrative costs) associated with holding the
financial asset for a particular period of time In addition interest can include a
profit margin that is consistent with a basic lending arrangement In extreme
economic circumstances interest can be negative if for example the holder of a
financial asset either explicitly or implicitly pays for the deposit of its money for
a particular period of time (and that fee exceeds the consideration that the
holder receives for the time value of money credit risk and other basic lending
risks and costs) However contractual terms that introduce exposure to risks or
volatility in the contractual cash flows that is unrelated to a basic lending
arrangement such as exposure to changes in equity prices or commodity prices
IFRS 9
IFRS Foundation A401do not give rise to contractual cash flows that are solely payments of principal
and interest on the principal amount outstanding An originated or a purchased
financial asset can be a basic lending arrangement irrespective of whether it is a
loan in its legal form
B417B In accordance with paragraph 413(a) principal is the fair value of the financial
asset at initial recognition However that principal amount may change over the
life of the financial asset (for example if there are repayments of principal)
B418 An entity shall assess whether contractual cash flows are solely payments of
principal and interest on the principal amount outstanding for the currency in
which the financial asset is denominated
B419 Leverage is a contractual cash flow characteristic of some financial assets
Leverage increases the variability of the contractual cash flows with the result
that they do not have the economic characteristics of interest Standalone
option forward and swap contracts are examples of financial assets that include
such leverage Thus such contracts do not meet the condition in
paragraphs 412(b) and 412A(b) and cannot be subsequently measured at
amortised cost or fair value through other comprehensive income
Consideration for the time value of money
B419A Time value of money is the element of interest that provides consideration for
only the passage of time That is the time value of money element does not
provide consideration for other risks or costs associated with holding the
financial asset In order to assess whether the element provides consideration
for only the passage of time an entity applies judgement and considers relevant
factors such as the currency in which the financial asset is denominated and the
period for which the interest rate is set
B419B However in some cases the time value of money element may be modified
(ie imperfect) That would be the case for example if a financial asset’s interest
rate is periodically reset but the frequency of that reset does not match the tenor
of the interest rate (for example the interest rate resets every month to a
oneyear rate) or if a financial asset’s interest rate is periodically reset to an
average of particular short and longterm interest rates In such cases an entity
must assess the modification to determine whether the contractual cash flows
represent solely payments of principal and interest on the principal amount
outstanding In some circumstances the entity may be able to make that
determination by performing a qualitative assessment of the time value of
money element whereas in other circumstances it may be necessary to perform
a quantitative assessment
B419C When assessing a modified time value of money element the objective is to
determine how different the contractual (undiscounted) cash flows could be
from the (undiscounted) cash flows that would arise if the time value of money
element was not modified (the benchmark cash flows) For example if the
financial asset under assessment contains a variable interest rate that is reset
every month to a oneyear interest rate the entity would compare that financial
asset to a financial instrument with identical contractual terms and the
identical credit risk except the variable interest rate is reset monthly to a
onemonth interest rate If the modified time value of money element could
IFRS 9
IFRS FoundationA402result in contractual (undiscounted) cash flows that are significantly different
from the (undiscounted) benchmark cash flows the financial asset does not
meet the condition in paragraphs 412(b) and 412A(b) To make this
determination the entity must consider the effect of the modified time value of
money element in each reporting period and cumulatively over the life of the
financial instrument The reason for the interest rate being set in this way is not
relevant to the analysis If it is clear with little or no analysis whether the
contractual (undiscounted) cash flows on the financial asset under the
assessment could (or could not) be significantly different from the
(undiscounted) benchmark cash flows an entity need not perform a detailed
assessment
B419D When assessing a modified time value of money element an entity must
consider factors that could affect future contractual cash flows For example if
an entity is assessing a bond with a fiveyear term and the variable interest rate
is reset every six months to a fiveyear rate the entity cannot conclude that the
contractual cash flows are solely payments of principal and interest on the
principal amount outstanding simply because the interest rate curve at the time
of the assessment is such that the difference between a fiveyear interest rate and
a sixmonth interest rate is not significant Instead the entity must also
consider whether the relationship between the fiveyear interest rate and the
sixmonth interest rate could change over the life of the instrument such that
the contractual (undiscounted) cash flows over the life of the instrument could
be significantly different from the (undiscounted) benchmark cash flows
However an entity must consider only reasonably possible scenarios instead of
every possible scenario If an entity concludes that the contractual
(undiscounted) cash flows could be significantly different from the
(undiscounted) benchmark cash flows the financial asset does not meet the
condition in paragraphs 412(b) and 412A(b) and therefore cannot be measured
at amortised cost or fair value through other comprehensive income
B419E In some jurisdictions the government or a regulatory authority sets interest
rates For example such government regulation of interest rates may be part of
a broad macroeconomic policy or it may be introduced to encourage entities to
invest in a particular sector of the economy In some of these cases the objective
of the time value of money element is not to provide consideration for only the
passage of time However despite paragraphs B419A–B419D a regulated
interest rate shall be considered a proxy for the time value of money element for
the purpose of applying the condition in paragraphs 412(b) and 412A(b) if that
regulated interest rate provides consideration that is broadly consistent with the
passage of time and does not provide exposure to risks or volatility in the
contractual cash flows that are inconsistent with a basic lending arrangement
Contractual terms that change the timing or amount of contractual
cash flows
B4110 If a financial asset contains a contractual term that could change the timing or
amount of contractual cash flows (for example if the asset can be prepaid before
maturity or its term can be extended) the entity must determine whether the
contractual cash flows that could arise over the life of the instrument due to
that contractual term are solely payments of principal and interest on the
IFRS 9
IFRS Foundation A403principal amount outstanding To make this determination the entity must
assess the contractual cash flows that could arise both before and after the
change in contractual cash flows The entity may also need to assess the nature
of any contingent event (ie the trigger) that would change the timing or amount
of the contractual cash flows While the nature of the contingent event in itself
is not a determinative factor in assessing whether the contractual cash flows are
solely payments of principal and interest it may be an indicator For example
compare a financial instrument with an interest rate that is reset to a higher
rate if the debtor misses a particular number of payments to a financial
instrument with an interest rate that is reset to a higher rate if a specified equity
index reaches a particular level It is more likely in the former case that the
contractual cash flows over the life of the instrument will be solely payments of
principal and interest on the principal amount outstanding because of the
relationship between missed payments and an increase in credit risk (See also
paragraph B4118)
B4111 The following are examples of contractual terms that result in contractual cash
flows that are solely payments of principal and interest on the principal amount
outstanding
(a) a variable interest rate that consists of consideration for the time value of
money the credit risk associated with the principal amount outstanding
during a particular period of time (the consideration for credit risk may
be determined at initial recognition only and so may be fixed) and other
basic lending risks and costs as well as a profit margin
(b) a contractual term that permits the issuer (ie the debtor) to prepay a debt
instrument or permits the holder (ie the creditor) to put a debt
instrument back to the issuer before maturity and the prepayment
amount substantially represents unpaid amounts of principal and
interest on the principal amount outstanding which may include
reasonable additional compensation for the early termination of the
contract and
(c) a contractual term that permits the issuer or the holder to extend the
contractual term of a debt instrument (ie an extension option) and the
terms of the extension option result in contractual cash flows during the
extension period that are solely payments of principal and interest on
the principal amount outstanding which may include reasonable
additional compensation for the extension of the contract
B4112 Despite paragraph B4110 a financial asset that would otherwise meet the
condition in paragraphs 412(b) and 412A(b) but does not do so only as a result
of a contractual term that permits (or requires) the issuer to prepay a debt
instrument or permits (or requires) the holder to put a debt instrument back to
the issuer before maturity is eligible to be measured at amortised cost or fair
value through other comprehensive income (subject to meeting the condition in
paragraph 412(a) or the condition in paragraph 412A(a)) if
(a) the entity acquires or originates the financial asset at a premium or
discount to the contractual par amount
IFRS 9
IFRS FoundationA404(b) the prepayment amount substantially represents the contractual par
amount and accrued (but unpaid) contractual interest which may
include reasonable additional compensation for the early termination of
the contract and
(c) when the entity initially recognises the financial asset the fair value of
the prepayment feature is insignificant
B4113 The following examples illustrate contractual cash flows that are solely
payments of principal and interest on the principal amount outstanding This
list of examples is not exhaustive
Instrument Analysis
Instrument A
Instrument A is a bond with a stated
maturity date Payments of principal
and interest on the principal amount
outstanding are linked to an inflation
index of the currency in which the
instrument is issued The inflation
link is not leveraged and the principal
is protected
The contractual cash flows are solely
payments of principal and interest
on the principal amount
outstanding Linking payments of
principal and interest on the
principal amount outstanding to an
unleveraged inflation index resets
the time value of money to a current
level In other words the interest
rate on the instrument reflects real’
interest Thus the interest amounts
are consideration for the time value
of money on the principal amount
outstanding
However if the interest payments
were indexed to another variable
such as the debtor’s performance
(eg the debtor’s net income) or an
equity index the contractual cash
flows are not payments of principal
and interest on the principal amount
outstanding (unless the indexing to
the debtor’s performance results in
an adjustment that only compensates
the holder for changes in the credit
risk of the instrument such that
contractual cash flows are solely
payments of principal and interest)
That is because the contractual cash
flows reflect a return that is
inconsistent with a basic lending
arrangement (see paragraph B417A)
continued
IFRS 9
IFRS Foundation A405continued
Instrument Analysis
Instrument B
Instrument B is a variable interest
rate instrument with a stated
maturity date that permits the
borrower to choose the market
interest rate on an ongoing basis For
example at each interest rate reset
date the borrower can choose to pay
threemonth LIBOR for a threemonth
term or onemonth LIBOR for a
onemonth term
The contractual cash flows are solely
payments of principal and interest
on the principal amount outstanding
as long as the interest paid over the
life of the instrument reflects
consideration for the time value of
money for the credit risk associated
with the instrument and for other
basic lending risks and costs as well
as a profit margin (see
paragraph B417A) The fact that the
LIBOR interest rate is reset during
the life of the instrument does not in
itself disqualify the instrument
However if the borrower is able to
choose to pay a onemonth interest
rate that is reset every three months
the interest rate is reset with a
frequency that does not match the
tenor of the interest rate
Consequently the time value of
money element is modified
Similarly if an instrument has a
contractual interest rate that is based
on a term that can exceed the
instrument’s remaining life (for
example if an instrument with a
fiveyear maturity pays a variable rate
that is reset periodically but always
reflects a fiveyear maturity) the time
value of money element is modified
That is because the interest payable
in each period is disconnected from
the interest period
In such cases the entity must
qualitatively or quantitatively assess
the contractual cash flows against
those on an instrument that is
identical in all respects except the
tenor of the interest rate matches the
interest period to determine if the
cash flows are solely payments of
principal and interest on the
principal amount outstanding (But
see paragraph B419E for guidance
on regulated interest rates)
continued
IFRS 9
IFRS FoundationA406continued
Instrument Analysis
For example in assessing a bond
with a fiveyear term that pays a
variable rate that is reset every
six months but always reflects a
fiveyear maturity an entity
considers the contractual cash flows
on an instrument that resets every
six months to a sixmonth interest
rate but is otherwise identical
The same analysis would apply if the
borrower is able to choose between
the lender’s various published
interest rates (eg the borrower can
choose between the lender’s
published onemonth variable
interest rate and the lender’s
published threemonth variable
interest rate)
continued
IFRS 9
IFRS Foundation A407continued
Instrument Analysis
Instrument C
Instrument C is a bond with a stated
maturity date and pays a variable
market interest rate That variable
interest rate is capped
The contractual cash flows of both
(a) an instrument that has a
fixed interest rate and
(b) an instrument that has a
variable interest rate
are payments of principal and
interest on the principal amount
outstanding as long as the interest
reflects consideration for the time
value of money for the credit risk
associated with the instrument
during the term of the instrument
and for other basic lending risks and
costs as well as a profit margin (See
paragraph B417A)
Consequently an instrument that is
a combination of (a) and (b) (eg a
bond with an interest rate cap) can
have cash flows that are solely
payments of principal and interest
on the principal amount
outstanding Such a contractual
term may reduce cash flow
variability by setting a limit on a
variable interest rate (eg an interest
rate cap or floor) or increase the cash
flow variability because a fixed rate
becomes variable
Instrument D
Instrument D is a full recourse loan
and is secured by collateral
The fact that a full recourse loan is
collateralised does not in itself affect
the analysis of whether the
contractual cash flows are solely
payments of principal and interest
on the principal amount
outstanding
continued
IFRS 9
IFRS FoundationA408continued
Instrument Analysis
Instrument E
Instrument E is issued by a regulated
bank and has a stated maturity date
The instrument pays a fixed interest
rate and all contractual cash flows are
nondiscretionary
However the issuer is subject to
legislation that permits or requires a
national resolving authority to
impose losses on holders of particular
instruments including Instrument E
in particular circumstances For
example the national resolving
authority has the power to write
down the par amount of Instrument E
or to convert it into a fixed number of
the issuer’s ordinary shares if the
national resolving authority
determines that the issuer is having
severe financial difficulties needs
additional regulatory capital or is
failing’
The holder would analyse the
contractual terms of the financial
instrument to determine whether
they give rise to cash flows that are
solely payments of principal and
interest on the principal amount
outstanding and thus are consistent
with a basic lending arrangement
That analysis would not consider the
payments that arise only as a result
of the national resolving authority’s
power to impose losses on the
holders of Instrument E That is
because that power and the
resulting payments are not
contractual terms of the financial
instrument
In contrast the contractual cash
flows would not be solely payments
of principal and interest on the
principal amount outstanding if the
contractual terms of the financial
instrument permit or require the
issuer or another entity to impose
losses on the holder (eg by writing
down the par amount or by
converting the instrument into a
fixed number of the issuer’s ordinary
shares) as long as those contractual
terms are genuine even if the
probability is remote that such a loss
will be imposed
B4114 The following examples illustrate contractual cash flows that are not solely
payments of principal and interest on the principal amount outstanding This
list of examples is not exhaustive
IFRS 9
IFRS Foundation A409Instrument Analysis
Instrument F
Instrument F is a bond that is
convertible into a fixed number of
equity instruments of the issuer
The holder would analyse the
convertible bond in its entirety
The contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
because they reflect a return that is
inconsistent with a basic lending
arrangement (see paragraph B417A)
ie the return is linked to the value of
the equity of the issuer
Instrument G
Instrument G is a loan that pays an
inverse floating interest rate (ie the
interest rate has an inverse
relationship to market interest rates)
The contractual cash flows are not
solely payments of principal and
interest on the principal amount
outstanding
The interest amounts are not
consideration for the time value of
money on the principal amount
outstanding
Instrument H
Instrument H is a perpetual
instrument but the issuer may call
the instrument at any point and pay
the holder the par amount plus
accrued interest due
Instrument H pays a market interest
rate but payment of interest cannot
be made unless the issuer is able to
remain solvent immediately
afterwards
Deferred interest does not accrue
additional interest
The contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
That is because the issuer may be
required to defer interest payments
and additional interest does not
accrue on those deferred interest
amounts As a result interest
amounts are not consideration for
the time value of money on the
principal amount outstanding
If interest accrued on the deferred
amounts the contractual cash flows
could be payments of principal and
interest on the principal amount
outstanding
continued
IFRS 9
IFRS FoundationA410continued
Instrument Analysis
The fact that Instrument H is
perpetual does not in itself mean that
the contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
In effect a perpetual instrument has
continuous (multiple) extension
options Such options may result in
contractual cash flows that are
payments of principal and interest on
the principal amount outstanding if
interest payments are mandatory and
must be paid in perpetuity
Also the fact that Instrument H is
callable does not mean that the
contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
unless it is callable at an amount that
does not substantially reflect
payment of outstanding principal
and interest on that principal
amount outstanding Even if the
callable amount includes an amount
that reasonably compensates the
holder for the early termination of
the instrument the contractual cash
flows could be payments of principal
and interest on the principal amount
outstanding (See also
paragraph B4112)
B4115 In some cases a financial asset may have contractual cash flows that are
described as principal and interest but those cash flows do not represent the
payment of principal and interest on the principal amount outstanding as
described in paragraphs 412(b) 412A(b) and 413 of this Standard
B4116 This may be the case if the financial asset represents an investment in particular
assets or cash flows and hence the contractual cash flows are not solely
payments of principal and interest on the principal amount outstanding For
example if the contractual terms stipulate that the financial asset’s cash flows
increase as more automobiles use a particular toll road those contractual cash
flows are inconsistent with a basic lending arrangement As a result the
instrument would not satisfy the condition in paragraphs 412(b) and 412A(b)
IFRS 9
IFRS Foundation A411This could be the case when a creditor’s claim is limited to specified assets of the
debtor or the cash flows from specified assets (for example a nonrecourse’
financial asset)
B4117 However the fact that a financial asset is nonrecourse does not in itself
necessarily preclude the financial asset from meeting the condition in
paragraphs 412(b) and 412A(b) In such situations the creditor is required to
assess (look through to’) the particular underlying assets or cash flows to
determine whether the contractual cash flows of the financial asset being
classified are payments of principal and interest on the principal amount
outstanding If the terms of the financial asset give rise to any other cash flows
or limit the cash flows in a manner inconsistent with payments representing
principal and interest the financial asset does not meet the condition in
paragraphs 412(b) and 412A(b) Whether the underlying assets are financial
assets or nonfinancial assets does not in itself affect this assessment
B4118 A contractual cash flow characteristic does not affect the classification of the
financial asset if it could have only a de minimis effect on the contractual cash
flows of the financial asset To make this determination an entity must
consider the possible effect of the contractual cash flow characteristic in each
reporting period and cumulatively over the life of the financial instrument In
addition if a contractual cash flow characteristic could have an effect on the
contractual cash flows that is more than de minimis (either in a single reporting
period or cumulatively) but that cash flow characteristic is not genuine it does
not affect the classification of a financial asset A cash flow characteristic is not
genuine if it affects the instrument’s contractual cash flows only on the
occurrence of an event that is extremely rare highly abnormal and very unlikely
to occur
B4119 In almost every lending transaction the creditor’s instrument is ranked relative
to the instruments of the debtor’s other creditors An instrument that is
subordinated to other instruments may have contractual cash flows that are
payments of principal and interest on the principal amount outstanding if the
debtor’s nonpayment is a breach of contract and the holder has a contractual
right to unpaid amounts of principal and interest on the principal amount
outstanding even in the event of the debtor’s bankruptcy For example a trade
receivable that ranks its creditor as a general creditor would qualify as having
payments of principal and interest on the principal amount outstanding This is
the case even if the debtor issued loans that are collateralised which in the
event of bankruptcy would give that loan holder priority over the claims of the
general creditor in respect of the collateral but does not affect the contractual
right of the general creditor to unpaid principal and other amounts due
Contractually linked instruments
B4120 In some types of transactions an issuer may prioritise payments to the holders
of financial assets using multiple contractually linked instruments that create
concentrations of credit risk (tranches) Each tranche has a subordination
ranking that specifies the order in which any cash flows generated by the issuer
are allocated to the tranche In such situations the holders of a tranche have
IFRS 9
IFRS FoundationA412the right to payments of principal and interest on the principal amount
outstanding only if the issuer generates sufficient cash flows to satisfy
higherranking tranches
B4121 In such transactions a tranche has cash flow characteristics that are payments
of principal and interest on the principal amount outstanding only if
(a) the contractual terms of the tranche being assessed for classification
(without looking through to the underlying pool of financial
instruments) give rise to cash flows that are solely payments of principal
and interest on the principal amount outstanding (eg the interest rate on
the tranche is not linked to a commodity index)
(b) the underlying pool of financial instruments has the cash flow
characteristics set out in paragraphs B4123 and B4124 and
(c) the exposure to credit risk in the underlying pool of financial
instruments inherent in the tranche is equal to or lower than the
exposure to credit risk of the underlying pool of financial instruments
(for example the credit rating of the tranche being assessed for
classification is equal to or higher than the credit rating that would
apply to a single tranche that funded the underlying pool of financial
instruments)
B4122 An entity must look through until it can identify the underlying pool of
instruments that are creating (instead of passing through) the cash flows This is
the underlying pool of financial instruments
B4123 The underlying pool must contain one or more instruments that have
contractual cash flows that are solely payments of principal and interest on the
principal amount outstanding
B4124 The underlying pool of instruments may also include instruments that
(a) reduce the cash flow variability of the instruments in paragraph B4123
and when combined with the instruments in paragraph B4123 result
in cash flows that are solely payments of principal and interest on the
principal amount outstanding (eg an interest rate cap or floor or a
contract that reduces the credit risk on some or all of the instruments in
paragraph B4123) or
(b) align the cash flows of the tranches with the cash flows of the pool of
underlying instruments in paragraph B4123 to address differences in
and only in
(i) whether the interest rate is fixed or floating
(ii) the currency in which the cash flows are denominated including
inflation in that currency or
(iii) the timing of the cash flows
B4125 If any instrument in the pool does not meet the conditions in either
paragraph B4123 or paragraph B4124 the condition in paragraph B4121(b) is
not met In performing this assessment a detailed instrumentbyinstrument
analysis of the pool may not be necessary However an entity must use
IFRS 9
IFRS Foundation A413judgement and perform sufficient analysis to determine whether the
instruments in the pool meet the conditions in paragraphs B4123–B4124 (See
also paragraph B4118 for guidance on contractual cash flow characteristics
that have only a de minimis effect)
B4126 If the holder cannot assess the conditions in paragraph B4121 at initial
recognition the tranche must be measured at fair value through profit or loss
If the underlying pool of instruments can change after initial recognition in
such a way that the pool may not meet the conditions in
paragraphs B4123–B4124 the tranche does not meet the conditions in
paragraph B4121 and must be measured at fair value through profit or loss
However if the underlying pool includes instruments that are collateralised by
assets that do not meet the conditions in paragraphs B4123–B4124 the ability
to take possession of such assets shall be disregarded for the purposes of
applying this paragraph unless the entity acquired the tranche with the
intention of controlling the collateral
Option to designate a financial asset or financial liability
as at fair value through profit or loss (Sections 41
and 42)
B4127 Subject to the conditions in paragraphs 415 and 422 this Standard allows an
entity to designate a financial asset a financial liability or a group of financial
instruments (financial assets financial liabilities or both) as at fair value
through profit or loss provided that doing so results in more relevant
information
B4128 The decision of an entity to designate a financial asset or financial liability as at
fair value through profit or loss is similar to an accounting policy choice
(although unlike an accounting policy choice it is not required to be applied
consistently to all similar transactions) When an entity has such a choice
paragraph 14(b) of IAS 8 requires the chosen policy to result in the financial
statements providing reliable and more relevant information about the effects of
transactions other events and conditions on the entity’s financial position
financial performance or cash flows For example in the case of designation of a
financial liability as at fair value through profit or loss paragraph 422 sets out
the two circumstances when the requirement for more relevant information
will be met Accordingly to choose such designation in accordance with
paragraph 422 the entity needs to demonstrate that it falls within one (or both)
of these two circumstances
Designation eliminates or significantly reduces an accounting
mismatch
B4129 Measurement of a financial asset or financial liability and classification of
recognised changes in its value are determined by the item’s classification and
whether the item is part of a designated hedging relationship Those
requirements can create a measurement or recognition inconsistency
(sometimes referred to as an accounting mismatch’) when for example in the
absence of designation as at fair value through profit or loss a financial asset
would be classified as subsequently measured at fair value through profit or loss
and a liability the entity considers related would be subsequently measured at
IFRS 9
IFRS FoundationA414amortised cost (with changes in fair value not recognised) In such
circumstances an entity may conclude that its financial statements would
provide more relevant information if both the asset and the liability were
measured as at fair value through profit or loss
B4130 The following examples show when this condition could be met In all cases an
entity may use this condition to designate financial assets or financial liabilities
as at fair value through profit or loss only if it meets the principle in
paragraph 415 or 422(a)
(a) an entity has liabilities under insurance contracts whose measurement
incorporates current information (as permitted by paragraph 24 of
IFRS 4) and financial assets that it considers to be related and that would
otherwise be measured at either fair value through other comprehensive
income or amortised cost
(b) an entity has financial assets financial liabilities or both that share a
risk such as interest rate risk and that gives rise to opposite changes in
fair value that tend to offset each other However only some of the
instruments would be measured at fair value through profit or loss (for
example those that are derivatives or are classified as held for trading)
It may also be the case that the requirements for hedge accounting are
not met because for example the requirements for hedge effectiveness
in paragraph 641 are not met
(c) an entity has financial assets financial liabilities or both that share a
risk such as interest rate risk that gives rise to opposite changes in fair
value that tend to offset each other and none of the financial assets or
financial liabilities qualifies for designation as a hedging instrument
because they are not measured at fair value through profit or loss
Furthermore in the absence of hedge accounting there is a significant
inconsistency in the recognition of gains and losses For example the
entity has financed a specified group of loans by issuing traded bonds
whose changes in fair value tend to offset each other If in addition the
entity regularly buys and sells the bonds but rarely if ever buys and sells
the loans reporting both the loans and the bonds at fair value through
profit or loss eliminates the inconsistency in the timing of the
recognition of the gains and losses that would otherwise result from
measuring them both at amortised cost and recognising a gain or loss
each time a bond is repurchased
B4131 In cases such as those described in the preceding paragraph to designate at
initial recognition the financial assets and financial liabilities not otherwise so
measured as at fair value through profit or loss may eliminate or significantly
reduce the measurement or recognition inconsistency and produce more
relevant information For practical purposes the entity need not enter into all
of the assets and liabilities giving rise to the measurement or recognition
inconsistency at exactly the same time A reasonable delay is permitted
provided that each transaction is designated as at fair value through profit or
loss at its initial recognition and at that time any remaining transactions are
expected to occur
IFRS 9
IFRS Foundation A415B4132 It would not be acceptable to designate only some of the financial assets and
financial liabilities giving rise to the inconsistency as at fair value through profit
or loss if to do so would not eliminate or significantly reduce the inconsistency
and would therefore not result in more relevant information However it would
be acceptable to designate only some of a number of similar financial assets or
similar financial liabilities if doing so achieves a significant reduction (and
possibly a greater reduction than other allowable designations) in the
inconsistency For example assume an entity has a number of similar financial
liabilities that sum to CU100 and a number of similar financial assets that sum
to CU50 but are measured on a different basis The entity may significantly
reduce the measurement inconsistency by designating at initial recognition all
of the assets but only some of the liabilities (for example individual liabilities
with a combined total of CU45) as at fair value through profit or loss However
because designation as at fair value through profit or loss can be applied only to
the whole of a financial instrument the entity in this example must designate
one or more liabilities in their entirety It could not designate either a
component of a liability (eg changes in value attributable to only one risk such
as changes in a benchmark interest rate) or a proportion (ie percentage) of a
liability
A group of financial liabilities or financial assets and financial
liabilities is managed and its performance is evaluated on a fair
value basis
B4133 An entity may manage and evaluate the performance of a group of financial
liabilities or financial assets and financial liabilities in such a way that
measuring that group at fair value through profit or loss results in more
relevant information The focus in this instance is on the way the entity
manages and evaluates performance instead of on the nature of its financial
instruments
B4134 For example an entity may use this condition to designate financial liabilities as
at fair value through profit or loss if it meets the principle in paragraph 422(b)
and the entity has financial assets and financial liabilities that share one or
more risks and those risks are managed and evaluated on a fair value basis in
accordance with a documented policy of asset and liability management An
example could be an entity that has issued structured products’ containing
multiple embedded derivatives and manages the resulting risks on a fair value
basis using a mix of derivative and nonderivative financial instruments
B4135 As noted above this condition relies on the way the entity manages and
evaluates performance of the group of financial instruments under
consideration Accordingly (subject to the requirement of designation at initial
recognition) an entity that designates financial liabilities as at fair value through
profit or loss on the basis of this condition shall so designate all eligible
financial liabilities that are managed and evaluated together
B4136 Documentation of the entity’s strategy need not be extensive but should be
sufficient to demonstrate compliance with paragraph 422(b) Such
documentation is not required for each individual item but may be on a
portfolio basis For example if the performance management system for a
department—as approved by the entity’s key management personnel—clearly
IFRS 9
IFRS FoundationA416demonstrates that its performance is evaluated on this basis no further
documentation is required to demonstrate compliance with paragraph 422(b)
Embedded derivatives (Section 43)
B431 When an entity becomes a party to a hybrid contract with a host that is not an
asset within the scope of this Standard paragraph 433 requires the entity to
identify any embedded derivative assess whether it is required to be separated
from the host contract and for those that are required to be separated measure
the derivatives at fair value at initial recognition and subsequently at fair value
through profit or loss
B432 If a host contract has no stated or predetermined maturity and represents a
residual interest in the net assets of an entity then its economic characteristics
and risks are those of an equity instrument and an embedded derivative would
need to possess equity characteristics related to the same entity to be regarded as
closely related If the host contract is not an equity instrument and meets the
definition of a financial instrument then its economic characteristics and risks
are those of a debt instrument
B433 An embedded nonoption derivative (such as an embedded forward or swap) is
separated from its host contract on the basis of its stated or implied substantive
terms so as to result in it having a fair value of zero at initial recognition An
embedded optionbased derivative (such as an embedded put call cap floor or
swaption) is separated from its host contract on the basis of the stated terms of
the option feature The initial carrying amount of the host instrument is the
residual amount after separating the embedded derivative
B434 Generally multiple embedded derivatives in a single hybrid contract are treated
as a single compound embedded derivative However embedded derivatives
that are classified as equity (see IAS 32 Financial Instruments Presentation) are
accounted for separately from those classified as assets or liabilities In addition
if a hybrid contract has more than one embedded derivative and those
derivatives relate to different risk exposures and are readily separable and
independent of each other they are accounted for separately from each other
B435 The economic characteristics and risks of an embedded derivative are not closely
related to the host contract (paragraph 433(a)) in the following examples In
these examples assuming the conditions in paragraph 433(b) and (c) are met
an entity accounts for the embedded derivative separately from the host
contract
(a) A put option embedded in an instrument that enables the holder to
require the issuer to reacquire the instrument for an amount of cash or
other assets that varies on the basis of the change in an equity or
commodity price or index is not closely related to a host debt
instrument
(b) An option or automatic provision to extend the remaining term to
maturity of a debt instrument is not closely related to the host debt
instrument unless there is a concurrent adjustment to the approximate
current market rate of interest at the time of the extension If an entity
issues a debt instrument and the holder of that debt instrument writes a
IFRS 9
IFRS Foundation A417call option on the debt instrument to a third party the issuer regards the
call option as extending the term to maturity of the debt instrument
provided the issuer can be required to participate in or facilitate the
remarketing of the debt instrument as a result of the call option being
exercised
(c) Equityindexed interest or principal payments embedded in a host debt
instrument or insurance contract—by which the amount of interest or
principal is indexed to the value of equity instruments—are not closely
related to the host instrument because the risks inherent in the host and
the embedded derivative are dissimilar
(d) Commodityindexed interest or principal payments embedded in a host
debt instrument or insurance contract—by which the amount of interest
or principal is indexed to the price of a commodity (such as gold)—are
not closely related to the host instrument because the risks inherent in
the host and the embedded derivative are dissimilar
(e) A call put or prepayment option embedded in a host debt contract or
host insurance contract is not closely related to the host contract unless
(i) the option’s exercise price is approximately equal on each
exercise date to the amortised cost of the host debt instrument or
the carrying amount of the host insurance contract or
(ii) the exercise price of a prepayment option reimburses the lender
for an amount up to the approximate present value of lost
interest for the remaining term of the host contract Lost interest
is the product of the principal amount prepaid multiplied by the
interest rate differential The interest rate differential is the
excess of the effective interest rate of the host contract over the
effective interest rate the entity would receive at the prepayment
date if it reinvested the principal amount prepaid in a similar
contract for the remaining term of the host contract
The assessment of whether the call or put option is closely related to the
host debt contract is made before separating the equity element of a
convertible debt instrument in accordance with IAS 32
(f) Credit derivatives that are embedded in a host debt instrument and
allow one party (the beneficiary’) to transfer the credit risk of a
particular reference asset which it may not own to another party (the
guarantor’) are not closely related to the host debt instrument Such
credit derivatives allow the guarantor to assume the credit risk
associated with the reference asset without directly owning it
B436 An example of a hybrid contract is a financial instrument that gives the holder a
right to put the financial instrument back to the issuer in exchange for an
amount of cash or other financial assets that varies on the basis of the change in
an equity or commodity index that may increase or decrease (a puttable
instrument’) Unless the issuer on initial recognition designates the puttable
instrument as a financial liability at fair value through profit or loss it is
required to separate an embedded derivative (ie the indexed principal payment)
under paragraph 433 because the host contract is a debt instrument under
IFRS 9
IFRS FoundationA418paragraph B432 and the indexed principal payment is not closely related to a
host debt instrument under paragraph B435(a) Because the principal payment
can increase and decrease the embedded derivative is a nonoption derivative
whose value is indexed to the underlying variable
B437 In the case of a puttable instrument that can be put back at any time for cash
equal to a proportionate share of the net asset value of an entity (such as units of
an openended mutual fund or some unitlinked investment products) the effect
of separating an embedded derivative and accounting for each component is to
measure the hybrid contract at the redemption amount that is payable at the
end of the reporting period if the holder exercised its right to put the
instrument back to the issuer
B438 The economic characteristics and risks of an embedded derivative are closely
related to the economic characteristics and risks of the host contract in the
following examples In these examples an entity does not account for the
embedded derivative separately from the host contract
(a) An embedded derivative in which the underlying is an interest rate or
interest rate index that can change the amount of interest that would
otherwise be paid or received on an interestbearing host debt contract or
insurance contract is closely related to the host contract unless the
hybrid contract can be settled in such a way that the holder would not
recover substantially all of its recognised investment or the embedded
derivative could at least double the holder’s initial rate of return on the
host contract and could result in a rate of return that is at least twice
what the market return would be for a contract with the same terms as
the host contract
(b) An embedded floor or cap on the interest rate on a debt contract or
insurance contract is closely related to the host contract provided the
cap is at or above the market rate of interest and the floor is at or below
the market rate of interest when the contract is issued and the cap or
floor is not leveraged in relation to the host contract Similarly
provisions included in a contract to purchase or sell an asset (eg a
commodity) that establish a cap and a floor on the price to be paid or
received for the asset are closely related to the host contract if both the
cap and floor were out of the money at inception and are not leveraged
(c) An embedded foreign currency derivative that provides a stream of
principal or interest payments that are denominated in a foreign
currency and is embedded in a host debt instrument (for example a dual
currency bond) is closely related to the host debt instrument Such a
derivative is not separated from the host instrument because IAS 21 The
Effects of Changes in Foreign Exchange Rates requires foreign currency gains
and losses on monetary items to be recognised in profit or loss
(d) An embedded foreign currency derivative in a host contract that is an
insurance contract or not a financial instrument (such as a contract for
the purchase or sale of a nonfinancial item where the price is
denominated in a foreign currency) is closely related to the host contract
provided it is not leveraged does not contain an option feature and
requires payments denominated in one of the following currencies
IFRS 9
IFRS Foundation A419(i) the functional currency of any substantial party to that contract
(ii) the currency in which the price of the related good or service that
is acquired or delivered is routinely denominated in commercial
transactions around the world (such as the US dollar for crude oil
transactions) or
(iii) a currency that is commonly used in contracts to purchase or sell
nonfinancial items in the economic environment in which the
transaction takes place (eg a relatively stable and liquid currency
that is commonly used in local business transactions or external
trade)
(e) An embedded prepayment option in an interestonly or principalonly
strip is closely related to the host contract provided the host contract
(i) initially resulted from separating the right to receive contractual cash
flows of a financial instrument that in and of itself did not contain an
embedded derivative and (ii) does not contain any terms not present in
the original host debt contract
(f) An embedded derivative in a host lease contract is closely related to the
host contract if the embedded derivative is (i) an inflationrelated index
such as an index of lease payments to a consumer price index (provided
that the lease is not leveraged and the index relates to inflation in the
entity’s own economic environment) (ii) variable lease payments based
on related sales or (iii) variable lease payments based on variable interest
rates
(g) A unitlinking feature embedded in a host financial instrument or host
insurance contract is closely related to the host instrument or host
contract if the unitdenominated payments are measured at current unit
values that reflect the fair values of the assets of the fund A unitlinking
feature is a contractual term that requires payments denominated in
units of an internal or external investment fund
(h) A derivative embedded in an insurance contract is closely related to the
host insurance contract if the embedded derivative and host insurance
contract are so interdependent that an entity cannot measure the
embedded derivative separately (ie without considering the host
contract)
Instruments containing embedded derivatives
B439 As noted in paragraph B431 when an entity becomes a party to a hybrid
contract with a host that is not an asset within the scope of this Standard and
with one or more embedded derivatives paragraph 433 requires the entity to
identify any such embedded derivative assess whether it is required to be
separated from the host contract and for those that are required to be
separated measure the derivatives at fair value at initial recognition and
subsequently These requirements can be more complex or result in less
reliable measures than measuring the entire instrument at fair value through
profit or loss For that reason this Standard permits the entire hybrid contract to
be designated as at fair value through profit or loss
IFRS 9
IFRS FoundationA420B4310 Such designation may be used whether paragraph 433 requires the embedded
derivatives to be separated from the host contract or prohibits such separation
However paragraph 435 would not justify designating the hybrid contract as at
fair value through profit or loss in the cases set out in paragraph 435(a) and (b)
because doing so would not reduce complexity or increase reliability
Reassessment of embedded derivatives
B4311 In accordance with paragraph 433 an entity shall assess whether an embedded
derivative is required to be separated from the host contract and accounted for
as a derivative when the entity first becomes a party to the contract Subsequent
reassessment is prohibited unless there is a change in the terms of the contract
that significantly modifies the cash flows that otherwise would be required
under the contract in which case reassessment is required An entity
determines whether a modification to cash flows is significant by considering
the extent to which the expected future cash flows associated with the
embedded derivative the host contract or both have changed and whether the
change is significant relative to the previously expected cash flows on the
contract
B4312 Paragraph B4311 does not apply to embedded derivatives in contracts acquired
in
(a) a business combination (as defined in IFRS 3 Business Combinations)
(b) a combination of entities or businesses under common control as
described in paragraphs B1–B4 of IFRS 3 or
(c) the formation of a joint venture as defined in IFRS 11 Joint Arrangements
or their possible reassessment at the date of acquisition3
Reclassification of financial assets (Section 44)
Reclassification of financial assets
B441 Paragraph 441 requires an entity to reclassify financial assets if the entity
changes its business model for managing those financial assets Such changes
are expected to be very infrequent Such changes are determined by the entity’s
senior management as a result of external or internal changes and must be
significant to the entity’s operations and demonstrable to external parties
Accordingly a change in an entity’s business model will occur only when an
entity either begins or ceases to perform an activity that is significant to its
operations for example when the entity has acquired disposed of or
terminated a business line Examples of a change in business model include the
following
(a) An entity has a portfolio of commercial loans that it holds to sell in the
short term The entity acquires a company that manages commercial
loans and has a business model that holds the loans in order to collect
the contractual cash flows The portfolio of commercial loans is no
3 IFRS 3 addresses the acquisition of contracts with embedded derivatives in a business combination
IFRS 9
IFRS Foundation A421longer for sale and the portfolio is now managed together with the
acquired commercial loans and all are held to collect the contractual
cash flows
(b) A financial services firm decides to shut down its retail mortgage
business That business no longer accepts new business and the financial
services firm is actively marketing its mortgage loan portfolio for sale
B442 A change in the objective of the entity’s business model must be effected before
the reclassification date For example if a financial services firm decides on
15 February to shut down its retail mortgage business and hence must reclassify
all affected financial assets on 1 April (ie the first day of the entity’s next
reporting period) the entity must not accept new retail mortgage business or
otherwise engage in activities consistent with its former business model after
15 February
B443 The following are not changes in business model
(a) a change in intention related to particular financial assets (even in
circumstances of significant changes in market conditions)
(b) the temporary disappearance of a particular market for financial assets
(c) a transfer of financial assets between parts of the entity with different
business models
Measurement (Chapter 5)
Initial measurement (Section 51)
B511 The fair value of a financial instrument at initial recognition is normally the
transaction price (ie the fair value of the consideration given or received see also
paragraph B512A and IFRS 13) However if part of the consideration given or
received is for something other than the financial instrument an entity shall
measure the fair value of the financial instrument For example the fair value
of a longterm loan or receivable that carries no interest can be measured as the
present value of all future cash receipts discounted using the prevailing market
rate(s) of interest for a similar instrument (similar as to currency term type of
interest rate and other factors) with a similar credit rating Any additional
amount lent is an expense or a reduction of income unless it qualifies for
recognition as some other type of asset
B512 If an entity originates a loan that bears an offmarket interest rate (eg 5 per cent
when the market rate for similar loans is 8 per cent) and receives an upfront fee
as compensation the entity recognises the loan at its fair value ie net of the fee
it receives
B512A The best evidence of the fair value of a financial instrument at initial
recognition is normally the transaction price (ie the fair value of the
consideration given or received see also IFRS 13) If an entity determines that
the fair value at initial recognition differs from the transaction price as
mentioned in paragraph 511A the entity shall account for that instrument at
that date as follows
IFRS 9
IFRS FoundationA422(a) at the measurement required by paragraph 511 if that fair value is
evidenced by a quoted price in an active market for an identical asset or
liability (ie a Level 1 input) or based on a valuation technique that uses
only data from observable markets An entity shall recognise the
difference between the fair value at initial recognition and the
transaction price as a gain or loss
(b) in all other cases at the measurement required by paragraph 511
adjusted to defer the difference between the fair value at initial
recognition and the transaction price After initial recognition the
entity shall recognise that deferred difference as a gain or loss only to the
extent that it arises from a change in a factor (including time) that
market participants would take into account when pricing the asset or
liability
Subsequent measurement (Sections 52 and 53)
B521 If a financial instrument that was previously recognised as a financial asset is
measured at fair value through profit or loss and its fair value decreases below
zero it is a financial liability measured in accordance with paragraph 421
However hybrid contracts with hosts that are assets within the scope of this
Standard are always measured in accordance with paragraph 432
B522 The following example illustrates the accounting for transaction costs on the
initial and subsequent measurement of a financial asset measured at fair value
with changes through other comprehensive income in accordance with either
paragraph 575 or 412A An entity acquires a financial asset for CU100 plus a
purchase commission of CU2 Initially the entity recognises the asset at CU102
The reporting period ends one day later when the quoted market price of the
asset is CU100 If the asset were sold a commission of CU3 would be paid On
that date the entity measures the asset at CU100 (without regard to the possible
commission on sale) and recognises a loss of CU2 in other comprehensive
income If the financial asset is measured at fair value through other
comprehensive income in accordance with paragraph 412A the transaction
costs are amortised to profit or loss using the effective interest method
B522A The subsequent measurement of a financial asset or financial liability and the
subsequent recognition of gains and losses described in paragraph B512A shall
be consistent with the requirements of this Standard
Investments in equity instruments and contracts on those
investments
B523 All investments in equity instruments and contracts on those instruments must
be measured at fair value However in limited circumstances cost may be an
appropriate estimate of fair value That may be the case if insufficient more
recent information is available to measure fair value or if there is a wide range
of possible fair value measurements and cost represents the best estimate of fair
value within that range
B524 Indicators that cost might not be representative of fair value include
(a) a significant change in the performance of the investee compared with
budgets plans or milestones
IFRS 9
IFRS Foundation A423(b) changes in expectation that the investee’s technical product milestones
will be achieved
(c) a significant change in the market for the investee’s equity or its
products or potential products
(d) a significant change in the global economy or the economic
environment in which the investee operates
(e) a significant change in the performance of comparable entities or in the
valuations implied by the overall market
(f) internal matters of the investee such as fraud commercial disputes
litigation changes in management or strategy
(g) evidence from external transactions in the investee’s equity either by
the investee (such as a fresh issue of equity) or by transfers of equity
instruments between third parties
B525 The list in paragraph B524 is not exhaustive An entity shall use all
information about the performance and operations of the investee that becomes
available after the date of initial recognition To the extent that any such
relevant factors exist they may indicate that cost might not be representative of
fair value In such cases the entity must measure fair value
B526 Cost is never the best estimate of fair value for investments in quoted equity
instruments (or contracts on quoted equity instruments)
Amortised cost measurement (Section 54)
Effective interest method
B541 In applying the effective interest method an entity identifies fees that are an
integral part of the effective interest rate of a financial instrument The
description of fees for financial services may not be indicative of the nature and
substance of the services provided Fees that are an integral part of the effective
interest rate of a financial instrument are treated as an adjustment to the
effective interest rate unless the financial instrument is measured at fair value
with the change in fair value being recognised in profit or loss In those cases
the fees are recognised as revenue or expense when the instrument is initially
recognised
B542 Fees that are an integral part of the effective interest rate of a financial
instrument include
(a) origination fees received by the entity relating to the creation or
acquisition of a financial asset Such fees may include compensation for
activities such as evaluating the borrower’s financial condition
evaluating and recording guarantees collateral and other security
arrangements negotiating the terms of the instrument preparing and
processing documents and closing the transaction These fees are an
integral part of generating an involvement with the resulting financial
instrument
IFRS 9
IFRS FoundationA424(b) commitment fees received by the entity to originate a loan when the
loan commitment is not measured in accordance with paragraph 421(a)
and it is probable that the entity will enter into a specific lending
arrangement These fees are regarded as compensation for an ongoing
involvement with the acquisition of a financial instrument If the
commitment expires without the entity making the loan the fee is
recognised as revenue on expiry
(c) origination fees paid on issuing financial liabilities measured at
amortised cost These fees are an integral part of generating an
involvement with a financial liability An entity distinguishes fees and
costs that are an integral part of the effective interest rate for the
financial liability from origination fees and transaction costs relating to
the right to provide services such as investment management services
B543 Fees that are not an integral part of the effective interest rate of a financial
instrument and are accounted for in accordance with IFRS 15 include
(a) fees charged for servicing a loan
(b) commitment fees to originate a loan when the loan commitment is not
measured in accordance with paragraph 421(a) and it is unlikely that a
specific lending arrangement will be entered into and
(c) loan syndication fees received by an entity that arranges a loan and
retains no part of the loan package for itself (or retains a part at the same
effective interest rate for comparable risk as other participants)
B544 When applying the effective interest method an entity generally amortises any
fees points paid or received transaction costs and other premiums or discounts
that are included in the calculation of the effective interest rate over the
expected life of the financial instrument However a shorter period is used if
this is the period to which the fees points paid or received transaction costs
premiums or discounts relate This will be the case when the variable to which
the fees points paid or received transaction costs premiums or discounts relate
is repriced to market rates before the expected maturity of the financial
instrument In such a case the appropriate amortisation period is the period to
the next such repricing date For example if a premium or discount on a
floatingrate financial instrument reflects the interest that has accrued on that
financial instrument since the interest was last paid or changes in the market
rates since the floating interest rate was reset to the market rates it will be
amortised to the next date when the floating interest is reset to market rates
This is because the premium or discount relates to the period to the next
interest reset date because at that date the variable to which the premium or
discount relates (ie interest rates) is reset to the market rates If however the
premium or discount results from a change in the credit spread over the floating
rate specified in the financial instrument or other variables that are not reset to
the market rates it is amortised over the expected life of the financial
instrument
B545 For floatingrate financial assets and floatingrate financial liabilities periodic
reestimation of cash flows to reflect the movements in the market rates of
interest alters the effective interest rate If a floatingrate financial asset or a
IFRS 9
IFRS Foundation A425floatingrate financial liability is recognised initially at an amount equal to the
principal receivable or payable on maturity reestimating the future interest
payments normally has no significant effect on the carrying amount of the asset
or the liability
B546 If an entity revises its estimates of payments or receipts (excluding modifications
in accordance with paragraph 543 and changes in estimates of expected credit
losses) it shall adjust the gross carrying amount of the financial asset or
amortised cost of a financial liability (or group of financial instruments) to
reflect actual and revised estimated contractual cash flows The entity
recalculates the gross carrying amount of the financial asset or amortised cost of
the financial liability as the present value of the estimated future contractual
cash flows that are discounted at the financial instrument’s original effective
interest rate (or creditadjusted effective interest rate for purchased or originated
creditimpaired financial assets) or when applicable the revised effective
interest rate calculated in accordance with paragraph 6510 The adjustment is
recognised in profit or loss as income or expense
B547 In some cases a financial asset is considered creditimpaired at initial
recognition because the credit risk is very high and in the case of a purchase it
is acquired at a deep discount An entity is required to include the initial
expected credit losses in the estimated cash flows when calculating the
creditadjusted effective interest rate for financial assets that are considered to
be purchased or originated creditimpaired at initial recognition However this
does not mean that a creditadjusted effective interest rate should be applied
solely because the financial asset has high credit risk at initial recognition
Transaction costs
B548 Transaction costs include fees and commission paid to agents (including
employees acting as selling agents) advisers brokers and dealers levies by
regulatory agencies and security exchanges and transfer taxes and duties
Transaction costs do not include debt premiums or discounts financing costs or
internal administrative or holding costs
Writeoff
B549 Writeoffs can relate to a financial asset in its entirety or to a portion of it For
example an entity plans to enforce the collateral on a financial asset and
expects to recover no more than 30 per cent of the financial asset from the
collateral If the entity has no reasonable prospects of recovering any further
cash flows from the financial asset it should write off the remaining 70 per cent
of the financial asset
Impairment (Section 55)
Collective and individual assessment basis
B551 In order to meet the objective of recognising lifetime expected credit losses for
significant increases in credit risk since initial recognition it may be necessary
to perform the assessment of significant increases in credit risk on a collective
basis by considering information that is indicative of significant increases in
credit risk on for example a group or subgroup of financial instruments This
IFRS 9
IFRS FoundationA426is to ensure that an entity meets the objective of recognising lifetime expected
credit losses when there are significant increases in credit risk even if evidence
of such significant increases in credit risk at the individual instrument level is
not yet available
B552 Lifetime expected credit losses are generally expected to be recognised before a
financial instrument becomes past due Typically credit risk increases
significantly before a financial instrument becomes past due or other lagging
borrowerspecific factors (for example a modification or restructuring) are
observed Consequently when reasonable and supportable information that is
more forwardlooking than past due information is available without undue cost
or effort it must be used to assess changes in credit risk
B553 However depending on the nature of the financial instruments and the credit
risk information available for particular groups of financial instruments an
entity may not be able to identify significant changes in credit risk for individual
financial instruments before the financial instrument becomes past due This
may be the case for financial instruments such as retail loans for which there is
little or no updated credit risk information that is routinely obtained and
monitored on an individual instrument until a customer breaches the
contractual terms If changes in the credit risk for individual financial
instruments are not captured before they become past due a loss allowance
based only on credit information at an individual financial instrument level
would not faithfully represent the changes in credit risk since initial
recognition
B554 In some circumstances an entity does not have reasonable and supportable
information that is available without undue cost or effort to measure lifetime
expected credit losses on an individual instrument basis In that case lifetime
expected credit losses shall be recognised on a collective basis that considers
comprehensive credit risk information This comprehensive credit risk
information must incorporate not only past due information but also all
relevant credit information including forwardlooking macroeconomic
information in order to approximate the result of recognising lifetime expected
credit losses when there has been a significant increase in credit risk since initial
recognition on an individual instrument level
B555 For the purpose of determining significant increases in credit risk and
recognising a loss allowance on a collective basis an entity can group financial
instruments on the basis of shared credit risk characteristics with the objective
of facilitating an analysis that is designed to enable significant increases in
credit risk to be identified on a timely basis The entity should not obscure this
information by grouping financial instruments with different risk
characteristics Examples of shared credit risk characteristics may include but
are not limited to the
(a) instrument type
(b) credit risk ratings
(c) collateral type
(d) date of initial recognition
IFRS 9
IFRS Foundation A427(e) remaining term to maturity
(f) industry
(g) geographical location of the borrower and
(h) the value of collateral relative to the financial asset if it has an impact on
the probability of a default occurring (for example nonrecourse loans in
some jurisdictions or loantovalue ratios)
B556 Paragraph 554 requires that lifetime expected credit losses are recognised on
all financial instruments for which there has been significant increases in credit
risk since initial recognition In order to meet this objective if an entity is not
able to group financial instruments for which the credit risk is considered to
have increased significantly since initial recognition based on shared credit risk
characteristics the entity should recognise lifetime expected credit losses on a
portion of the financial assets for which credit risk is deemed to have increased
significantly The aggregation of financial instruments to assess whether there
are changes in credit risk on a collective basis may change over time as new
information becomes available on groups of or individual financial
instruments
Timing of recognising lifetime expected credit losses
B557 The assessment of whether lifetime expected credit losses should be recognised
is based on significant increases in the likelihood or risk of a default occurring
since initial recognition (irrespective of whether a financial instrument has been
repriced to reflect an increase in credit risk) instead of on evidence of a financial
asset being creditimpaired at the reporting date or an actual default occurring
Generally there will be a significant increase in credit risk before a financial
asset becomes creditimpaired or an actual default occurs
B558 For loan commitments an entity considers changes in the risk of a default
occurring on the loan to which a loan commitment relates For financial
guarantee contracts an entity considers the changes in the risk that the
specified debtor will default on the contract
B559 The significance of a change in the credit risk since initial recognition depends
on the risk of a default occurring as at initial recognition Thus a given change
in absolute terms in the risk of a default occurring will be more significant for a
financial instrument with a lower initial risk of a default occurring compared to
a financial instrument with a higher initial risk of a default occurring
B5510 The risk of a default occurring on financial instruments that have comparable
credit risk is higher the longer the expected life of the instrument for example
the risk of a default occurring on an AAArated bond with an expected life of
10 years is higher than that on an AAArated bond with an expected life of
five years
B5511 Because of the relationship between the expected life and the risk of a default
occurring the change in credit risk cannot be assessed simply by comparing the
change in the absolute risk of a default occurring over time For example if the
risk of a default occurring for a financial instrument with an expected life of
10 years at initial recognition is identical to the risk of a default occurring on
IFRS 9
IFRS FoundationA428that financial instrument when its expected life in a subsequent period is only
five years that may indicate an increase in credit risk This is because the risk of
a default occurring over the expected life usually decreases as time passes if the
credit risk is unchanged and the financial instrument is closer to maturity
However for financial instruments that only have significant payment
obligations close to the maturity of the financial instrument the risk of a default
occurring may not necessarily decrease as time passes In such a case an entity
should also consider other qualitative factors that would demonstrate whether
credit risk has increased significantly since initial recognition
B5512 An entity may apply various approaches when assessing whether the credit risk
on a financial instrument has increased significantly since initial recognition or
when measuring expected credit losses An entity may apply different
approaches for different financial instruments An approach that does not
include an explicit probability of default as an input per se such as a credit loss
rate approach can be consistent with the requirements in this Standard
provided that an entity is able to separate the changes in the risk of a default
occurring from changes in other drivers of expected credit losses such as
collateral and considers the following when making the assessment
(a) the change in the risk of a default occurring since initial recognition
(b) the expected life of the financial instrument and
(c) reasonable and supportable information that is available without undue
cost or effort that may affect credit risk
B5513 The methods used to determine whether credit risk has increased significantly
on a financial instrument since initial recognition should consider the
characteristics of the financial instrument (or group of financial instruments)
and the default patterns in the past for comparable financial instruments
Despite the requirement in paragraph 559 for financial instruments for which
default patterns are not concentrated at a specific point during the expected life
of the financial instrument changes in the risk of a default occurring over the
next 12 months may be a reasonable approximation of the changes in the
lifetime risk of a default occurring In such cases an entity may use changes in
the risk of a default occurring over the next 12 months to determine whether
credit risk has increased significantly since initial recognition unless
circumstances indicate that a lifetime assessment is necessary
B5514 However for some financial instruments or in some circumstances it may not
be appropriate to use changes in the risk of a default occurring over the next
12 months to determine whether lifetime expected credit losses should be
recognised For example the change in the risk of a default occurring in the
next 12 months may not be a suitable basis for determining whether credit risk
has increased on a financial instrument with a maturity of more than
12 months when
(a) the financial instrument only has significant payment obligations
beyond the next 12 months
(b) changes in relevant macroeconomic or other creditrelated factors occur
that are not adequately reflected in the risk of a default occurring in the
next 12 months or
IFRS 9
IFRS Foundation A429(c) changes in creditrelated factors only have an impact on the credit risk of
the financial instrument (or have a more pronounced effect) beyond
12 months
Determining whether credit risk has increased significantly since
initial recognition
B5515 When determining whether the recognition of lifetime expected credit losses is
required an entity shall consider reasonable and supportable information that
is available without undue cost or effort and that may affect the credit risk on a
financial instrument in accordance with paragraph 5517(c) An entity need not
undertake an exhaustive search for information when determining whether
credit risk has increased significantly since initial recognition
B5516 Credit risk analysis is a multifactor and holistic analysis whether a specific
factor is relevant and its weight compared to other factors will depend on the
type of product characteristics of the financial instruments and the borrower as
well as the geographical region An entity shall consider reasonable and
supportable information that is available without undue cost or effort and that
is relevant for the particular financial instrument being assessed However
some factors or indicators may not be identifiable on an individual financial
instrument level In such a case the factors or indicators should be assessed for
appropriate portfolios groups of portfolios or portions of a portfolio of financial
instruments to determine whether the requirement in paragraph 553 for the
recognition of lifetime expected credit losses has been met
B5517 The following nonexhaustive list of information may be relevant in assessing
changes in credit risk
(a) significant changes in internal price indicators of credit risk as a result of
a change in credit risk since inception including but not limited to the
credit spread that would result if a particular financial instrument or
similar financial instrument with the same terms and the same
counterparty were newly originated or issued at the reporting date
(b) other changes in the rates or terms of an existing financial instrument
that would be significantly different if the instrument was newly
originated or issued at the reporting date (such as more stringent
covenants increased amounts of collateral or guarantees or higher
income coverage) because of changes in the credit risk of the financial
instrument since initial recognition
(c) significant changes in external market indicators of credit risk for a
particular financial instrument or similar financial instruments with the
same expected life Changes in market indicators of credit risk include
but are not limited to
(i) the credit spread
(ii) the credit default swap prices for the borrower
(iii) the length of time or the extent to which the fair value of a
financial asset has been less than its amortised cost and
IFRS 9
IFRS FoundationA430(iv) other market information related to the borrower such as
changes in the price of a borrower’s debt and equity instruments
(d) an actual or expected significant change in the financial instrument’s
external credit rating
(e) an actual or expected internal credit rating downgrade for the borrower
or decrease in behavioural scoring used to assess credit risk internally
Internal credit ratings and internal behavioural scoring are more reliable
when they are mapped to external ratings or supported by default
studies
(f) existing or forecast adverse changes in business financial or economic
conditions that are expected to cause a significant change in the
borrower’s ability to meet its debt obligations such as an actual or
expected increase in interest rates or an actual or expected significant
increase in unemployment rates
(g) an actual or expected significant change in the operating results of the
borrower Examples include actual or expected declining revenues or
margins increasing operating risks working capital deficiencies
decreasing asset quality increased balance sheet leverage liquidity
management problems or changes in the scope of business or
organisational structure (such as the discontinuance of a segment of the
business) that results in a significant change in the borrower’s ability to
meet its debt obligations
(h) significant increases in credit risk on other financial instruments of the
same borrower
(i) an actual or expected significant adverse change in the regulatory
economic or technological environment of the borrower that results in a
significant change in the borrower’s ability to meet its debt obligations
such as a decline in the demand for the borrower’s sales product because
of a shift in technology
(j) significant changes in the value of the collateral supporting the
obligation or in the quality of thirdparty guarantees or credit
enhancements which are expected to reduce the borrower’s economic
incentive to make scheduled contractual payments or to otherwise have
an effect on the probability of a default occurring For example if the
value of collateral declines because house prices decline borrowers in
some jurisdictions have a greater incentive to default on their
mortgages
(k) a significant change in the quality of the guarantee provided by a
shareholder (or an individual’s parents) if the shareholder (or parents)
have an incentive and financial ability to prevent default by capital or
cash infusion
(l) significant changes such as reductions in financial support from a
parent entity or other affiliate or an actual or expected significant
change in the quality of credit enhancement that are expected to reduce
the borrower’s economic incentive to make scheduled contractual
IFRS 9
IFRS Foundation A431payments Credit quality enhancements or support include the
consideration of the financial condition of the guarantor andor for
interests issued in securitisations whether subordinated interests are
expected to be capable of absorbing expected credit losses (for example
on the loans underlying the security)
(m) expected changes in the loan documentation including an expected
breach of contract that may lead to covenant waivers or amendments
interest payment holidays interest rate stepups requiring additional
collateral or guarantees or other changes to the contractual framework
of the instrument
(n) significant changes in the expected performance and behaviour of the
borrower including changes in the payment status of borrowers in the
group (for example an increase in the expected number or extent of
delayed contractual payments or significant increases in the expected
number of credit card borrowers who are expected to approach or exceed
their credit limit or who are expected to be paying the minimum
monthly amount)
(o) changes in the entity’s credit management approach in relation to the
financial instrument ie based on emerging indicators of changes in the
credit risk of the financial instrument the entity’s credit risk
management practice is expected to become more active or to be focused
on managing the instrument including the instrument becoming more
closely monitored or controlled or the entity specifically intervening
with the borrower
(p) past due information including the rebuttable presumption as set out in
paragraph 5511
B5518 In some cases the qualitative and nonstatistical quantitative information
available may be sufficient to determine that a financial instrument has met the
criterion for the recognition of a loss allowance at an amount equal to lifetime
expected credit losses That is the information does not need to flow through a
statistical model or credit ratings process in order to determine whether there
has been a significant increase in the credit risk of the financial instrument In
other cases an entity may need to consider other information including
information from its statistical models or credit ratings processes Alternatively
the entity may base the assessment on both types of information ie qualitative
factors that are not captured through the internal ratings process and a specific
internal rating category at the reporting date taking into consideration the
credit risk characteristics at initial recognition if both types of information are
relevant
More than 30 days past due rebuttable presumption
B5519 The rebuttable presumption in paragraph 5511 is not an absolute indicator
that lifetime expected credit losses should be recognised but is presumed to be
the latest point at which lifetime expected credit losses should be recognised
even when using forwardlooking information (including macroeconomic
factors on a portfolio level)
IFRS 9
IFRS FoundationA432B5520 An entity can rebut this presumption However it can do so only when it has
reasonable and supportable information available that demonstrates that even if
contractual payments become more than 30 days past due this does not
represent a significant increase in the credit risk of a financial instrument For
example when nonpayment was an administrative oversight instead of
resulting from financial difficulty of the borrower or the entity has access to
historical evidence that demonstrates that there is no correlation between
significant increases in the risk of a default occurring and financial assets on
which payments are more than 30 days past due but that evidence does identify
such a correlation when payments are more than 60 days past due
B5521 An entity cannot align the timing of significant increases in credit risk and the
recognition of lifetime expected credit losses to when a financial asset is
regarded as creditimpaired or an entity’s internal definition of default
Financial instruments that have low credit risk at the reporting date
B5522 The credit risk on a financial instrument is considered low for the purposes of
paragraph 5510 if the financial instrument has a low risk of default the
borrower has a strong capacity to meet its contractual cash flow obligations in
the near term and adverse changes in economic and business conditions in the
longer term may but will not necessarily reduce the ability of the borrower to
fulfil its contractual cash flow obligations Financial instruments are not
considered to have low credit risk when they are regarded as having a low risk of
loss simply because of the value of collateral and the financial instrument
without that collateral would not be considered low credit risk Financial
instruments are also not considered to have low credit risk simply because they
have a lower risk of default than the entity’s other financial instruments or
relative to the credit risk of the jurisdiction within which an entity operates
B5523 To determine whether a financial instrument has low credit risk an entity may
use its internal credit risk ratings or other methodologies that are consistent
with a globally understood definition of low credit risk and that consider the
risks and the type of financial instruments that are being assessed An external
rating of investment grade’ is an example of a financial instrument that may be
considered as having low credit risk However financial instruments are not
required to be externally rated to be considered to have low credit risk They
should however be considered to have low credit risk from a market
participant perspective taking into account all of the terms and conditions of
the financial instrument
B5524 Lifetime expected credit losses are not recognised on a financial instrument
simply because it was considered to have low credit risk in the previous
reporting period and is not considered to have low credit risk at the reporting
date In such a case an entity shall determine whether there has been a
significant increase in credit risk since initial recognition and thus whether
lifetime expected credit losses are required to be recognised in accordance with
paragraph 553
IFRS 9
IFRS Foundation A433Modifications
B5525 In some circumstances the renegotiation or modification of the contractual
cash flows of a financial asset can lead to the derecognition of the existing
financial asset in accordance with this Standard When the modification of a
financial asset results in the derecognition of the existing financial asset and the
subsequent recognition of the modified financial asset the modified asset is
considered a new’ financial asset for the purposes of this Standard
B5526 Accordingly the date of the modification shall be treated as the date of initial
recognition of that financial asset when applying the impairment requirements
to the modified financial asset This typically means measuring the loss
allowance at an amount equal to 12month expected credit losses until the
requirements for the recognition of lifetime expected credit losses in
paragraph 553 are met However in some unusual circumstances following a
modification that results in derecognition of the original financial asset there
may be evidence that the modified financial asset is creditimpaired at initial
recognition and thus the financial asset should be recognised as an originated
creditimpaired financial asset This might occur for example in a situation in
which there was a substantial modification of a distressed asset that resulted in
the derecognition of the original financial asset In such a case it may be
possible for the modification to result in a new financial asset which is credit
impaired at initial recognition
B5527 If the contractual cash flows on a financial asset have been renegotiated or
otherwise modified but the financial asset is not derecognised that financial
asset is not automatically considered to have lower credit risk An entity shall
assess whether there has been a significant increase in credit risk since initial
recognition on the basis of all reasonable and supportable information that is
available without undue cost or effort This includes historical and
forwardlooking information and an assessment of the credit risk over the
expected life of the financial asset which includes information about the
circumstances that led to the modification Evidence that the criteria for the
recognition of lifetime expected credit losses are no longer met may include a
history of uptodate and timely payment performance against the modified
contractual terms Typically a customer would need to demonstrate consistently
good payment behaviour over a period of time before the credit risk is
considered to have decreased For example a history of missed or incomplete
payments would not typically be erased by simply making one payment on time
following a modification of the contractual terms
Measurement of expected credit losses
Expected credit losses
B5528 Expected credit losses are a probabilityweighted estimate of credit losses (ie the
present value of all cash shortfalls) over the expected life of the financial
instrument A cash shortfall is the difference between the cash flows that are
due to an entity in accordance with the contract and the cash flows that the
entity expects to receive Because expected credit losses consider the amount
and timing of payments a credit loss arises even if the entity expects to be paid
in full but later than when contractually due
IFRS 9
IFRS FoundationA434B5529 For financial assets a credit loss is the present value of the difference between
(a) the contractual cash flows that are due to an entity under the contract
and
(b) the cash flows that the entity expects to receive
B5530 For undrawn loan commitments a credit loss is the present value of the
difference between
(a) the contractual cash flows that are due to the entity if the holder of the
loan commitment draws down the loan and
(b) the cash flows that the entity expects to receive if the loan is drawn
down
B5531 An entity’s estimate of expected credit losses on loan commitments shall be
consistent with its expectations of drawdowns on that loan commitment ie it
shall consider the expected portion of the loan commitment that will be drawn
down within 12 months of the reporting date when estimating 12month
expected credit losses and the expected portion of the loan commitment that
will be drawn down over the expected life of the loan commitment when
estimating lifetime expected credit losses
B5532 For a financial guarantee contract the entity is required to make payments only
in the event of a default by the debtor in accordance with the terms of the
instrument that is guaranteed Accordingly cash shortfalls are the expected
payments to reimburse the holder for a credit loss that it incurs less any
amounts that the entity expects to receive from the holder the debtor or any
other party If the asset is fully guaranteed the estimation of cash shortfalls for
a financial guarantee contract would be consistent with the estimations of cash
shortfalls for the asset subject to the guarantee
B5533 For a financial asset that is creditimpaired at the reporting date but that is not
a purchased or originated creditimpaired financial asset an entity shall
measure the expected credit losses as the difference between the asset’s gross
carrying amount and the present value of estimated future cash flows
discounted at the financial asset’s original effective interest rate Any
adjustment is recognised in profit or loss as an impairment gain or loss
B5534 When measuring a loss allowance for a lease receivable the cash flows used for
determining the expected credit losses should be consistent with the cash flows
used in measuring the lease receivable in accordance with IFRS 16 Leases
B5535 An entity may use practical expedients when measuring expected credit losses if
they are consistent with the principles in paragraph 5517 An example of a
practical expedient is the calculation of the expected credit losses on trade
receivables using a provision matrix The entity would use its historical credit
loss experience (adjusted as appropriate in accordance with paragraphs
B5551–B5552) for trade receivables to estimate the 12month expected credit
losses or the lifetime expected credit losses on the financial assets as relevant A
provision matrix might for example specify fixed provision rates depending on
the number of days that a trade receivable is past due (for example 1 per cent if
not past due 2 per cent if less than 30 days past due 3 per cent if more than
30 days but less than 90 days past due 20 per cent if 90–180 days past due etc)
IFRS 9
IFRS Foundation A435Depending on the diversity of its customer base the entity would use
appropriate groupings if its historical credit loss experience shows significantly
different loss patterns for different customer segments Examples of criteria
that might be used to group assets include geographical region product type
customer rating collateral or trade credit insurance and type of customer (such
as wholesale or retail)
Definition of default
B5536 Paragraph 559 requires that when determining whether the credit risk on a
financial instrument has increased significantly an entity shall consider the
change in the risk of a default occurring since initial recognition
B5537 When defining default for the purposes of determining the risk of a default
occurring an entity shall apply a default definition that is consistent with the
definition used for internal credit risk management purposes for the relevant
financial instrument and consider qualitative indicators (for example financial
covenants) when appropriate However there is a rebuttable presumption that
default does not occur later than when a financial asset is 90 days past due
unless an entity has reasonable and supportable information to demonstrate
that a more lagging default criterion is more appropriate The definition of
default used for these purposes shall be applied consistently to all financial
instruments unless information becomes available that demonstrates that
another default definition is more appropriate for a particular financial
instrument
Period over which to estimate expected credit losses
B5538 In accordance with paragraph 5519 the maximum period over which expected
credit losses shall be measured is the maximum contractual period over which
the entity is exposed to credit risk For loan commitments and financial
guarantee contracts this is the maximum contractual period over which an
entity has a present contractual obligation to extend credit
B5539 However in accordance with paragraph 5520 some financial instruments
include both a loan and an undrawn commitment component and the entity’s
contractual ability to demand repayment and cancel the undrawn commitment
does not limit the entity’s exposure to credit losses to the contractual notice
period For example revolving credit facilities such as credit cards and
overdraft facilities can be contractually withdrawn by the lender with as little
as one day’s notice However in practice lenders continue to extend credit for a
longer period and may only withdraw the facility after the credit risk of the
borrower increases which could be too late to prevent some or all of the
expected credit losses These financial instruments generally have the following
characteristics as a result of the nature of the financial instrument the way in
which the financial instruments are managed and the nature of the available
information about significant increases in credit risk
(a) the financial instruments do not have a fixed term or repayment
structure and usually have a short contractual cancellation period (for
example one day)
IFRS 9
IFRS FoundationA436(b) the contractual ability to cancel the contract is not enforced in the
normal daytoday management of the financial instrument and the
contract may only be cancelled when the entity becomes aware of an
increase in credit risk at the facility level and
(c) the financial instruments are managed on a collective basis
B5540 When determining the period over which the entity is expected to be exposed to
credit risk but for which expected credit losses would not be mitigated by the
entity’s normal credit risk management actions an entity should consider
factors such as historical information and experience about
(a) the period over which the entity was exposed to credit risk on similar
financial instruments
(b) the length of time for related defaults to occur on similar financial
instruments following a significant increase in credit risk and
(c) the credit risk management actions that an entity expects to take once
the credit risk on the financial instrument has increased such as the
reduction or removal of undrawn limits
Probabilityweighted outcome
B5541 The purpose of estimating expected credit losses is neither to estimate a
worstcase scenario nor to estimate the bestcase scenario Instead an estimate
of expected credit losses shall always reflect the possibility that a credit loss
occurs and the possibility that no credit loss occurs even if the most likely
outcome is no credit loss
B5542 Paragraph 5517(a) requires the estimate of expected credit losses to reflect an
unbiased and probabilityweighted amount that is determined by evaluating a
range of possible outcomes In practice this may not need to be a complex
analysis In some cases relatively simple modelling may be sufficient without
the need for a large number of detailed simulations of scenarios For example
the average credit losses of a large group of financial instruments with shared
risk characteristics may be a reasonable estimate of the probabilityweighted
amount In other situations the identification of scenarios that specify the
amount and timing of the cash flows for particular outcomes and the estimated
probability of those outcomes will probably be needed In those situations the
expected credit losses shall reflect at least two outcomes in accordance with
paragraph 5518
B5543 For lifetime expected credit losses an entity shall estimate the risk of a default
occurring on the financial instrument during its expected life 12month
expected credit losses are a portion of the lifetime expected credit losses and
represent the lifetime cash shortfalls that will result if a default occurs in the
12 months after the reporting date (or a shorter period if the expected life of a
financial instrument is less than 12 months) weighted by the probability of that
default occurring Thus 12month expected credit losses are neither the lifetime
expected credit losses that an entity will incur on financial instruments that it
predicts will default in the next 12 months nor the cash shortfalls that are
predicted over the next 12 months
IFRS 9
IFRS Foundation A437Time value of money
B5544 Expected credit losses shall be discounted to the reporting date not to the
expected default or some other date using the effective interest rate determined
at initial recognition or an approximation thereof If a financial instrument has
a variable interest rate expected credit losses shall be discounted using the
current effective interest rate determined in accordance with paragraph B545
B5545 For purchased or originated creditimpaired financial assets expected credit
losses shall be discounted using the creditadjusted effective interest rate
determined at initial recognition
B5546 Expected credit losses on lease receivables shall be discounted using the same
discount rate used in the measurement of the lease receivable in accordance
with IFRS 16
B5547 The expected credit losses on a loan commitment shall be discounted using the
effective interest rate or an approximation thereof that will be applied when
recognising the financial asset resulting from the loan commitment This is
because for the purpose of applying the impairment requirements a financial
asset that is recognised following a draw down on a loan commitment shall be
treated as a continuation of that commitment instead of as a new financial
instrument The expected credit losses on the financial asset shall therefore be
measured considering the initial credit risk of the loan commitment from the
date that the entity became a party to the irrevocable commitment
B5548 Expected credit losses on financial guarantee contracts or on loan commitments
for which the effective interest rate cannot be determined shall be discounted by
applying a discount rate that reflects the current market assessment of the time
value of money and the risks that are specific to the cash flows but only if and to
the extent that the risks are taken into account by adjusting the discount rate
instead of adjusting the cash shortfalls being discounted
Reasonable and supportable information
B5549 For the purpose of this Standard reasonable and supportable information is that
which is reasonably available at the reporting date without undue cost or effort
including information about past events current conditions and forecasts of
future economic conditions Information that is available for financial
reporting purposes is considered to be available without undue cost or effort
B5550 An entity is not required to incorporate forecasts of future conditions over the
entire expected life of a financial instrument The degree of judgement that is
required to estimate expected credit losses depends on the availability of
detailed information As the forecast horizon increases the availability of
detailed information decreases and the degree of judgement required to
estimate expected credit losses increases The estimate of expected credit losses
does not require a detailed estimate for periods that are far in the future—for
such periods an entity may extrapolate projections from available detailed
information
B5551 An entity need not undertake an exhaustive search for information but shall
consider all reasonable and supportable information that is available without
undue cost or effort and that is relevant to the estimate of expected credit losses
IFRS 9
IFRS FoundationA438including the effect of expected prepayments The information used shall
include factors that are specific to the borrower general economic conditions
and an assessment of both the current as well as the forecast direction of
conditions at the reporting date An entity may use various sources of data that
may be both internal (entityspecific) and external Possible data sources include
internal historical credit loss experience internal ratings credit loss experience
of other entities and external ratings reports and statistics Entities that have
no or insufficient sources of entityspecific data may use peer group experience
for the comparable financial instrument (or groups of financial instruments)
B5552 Historical information is an important anchor or base from which to measure
expected credit losses However an entity shall adjust historical data such as
credit loss experience on the basis of current observable data to reflect the
effects of the current conditions and its forecasts of future conditions that did
not affect the period on which the historical data is based and to remove the
effects of the conditions in the historical period that are not relevant to the
future contractual cash flows In some cases the best reasonable and
supportable information could be the unadjusted historical information
depending on the nature of the historical information and when it was
calculated compared to circumstances at the reporting date and the
characteristics of the financial instrument being considered Estimates of
changes in expected credit losses should reflect and be directionally consistent
with changes in related observable data from period to period (such as changes
in unemployment rates property prices commodity prices payment status or
other factors that are indicative of credit losses on the financial instrument or in
the group of financial instruments and in the magnitude of those changes) An
entity shall regularly review the methodology and assumptions used for
estimating expected credit losses to reduce any differences between estimates
and actual credit loss experience
B5553 When using historical credit loss experience in estimating expected credit
losses it is important that information about historical credit loss rates is
applied to groups that are defined in a manner that is consistent with the
groups for which the historical credit loss rates were observed Consequently
the method used shall enable each group of financial assets to be associated with
information about past credit loss experience in groups of financial assets with
similar risk characteristics and with relevant observable data that reflects
current conditions
B5554 Expected credit losses reflect an entity’s own expectations of credit losses
However when considering all reasonable and supportable information that is
available without undue cost or effort in estimating expected credit losses an
entity should also consider observable market information about the credit risk
of the particular financial instrument or similar financial instruments
Collateral
B5555 For the purposes of measuring expected credit losses the estimate of expected
cash shortfalls shall reflect the cash flows expected from collateral and other
credit enhancements that are part of the contractual terms and are not
recognised separately by the entity The estimate of expected cash shortfalls on
a collateralised financial instrument reflects the amount and timing of cash
IFRS 9
IFRS Foundation A439flows that are expected from foreclosure on the collateral less the costs of
obtaining and selling the collateral irrespective of whether foreclosure is
probable (ie the estimate of expected cash flows considers the probability of a
foreclosure and the cash flows that would result from it) Consequently any
cash flows that are expected from the realisation of the collateral beyond the
contractual maturity of the contract should be included in this analysis Any
collateral obtained as a result of foreclosure is not recognised as an asset that is
separate from the collateralised financial instrument unless it meets the
relevant recognition criteria for an asset in this or other Standards
Reclassification of financial assets (Section 56)
B561 If an entity reclassifies financial assets in accordance with paragraph 441
paragraph 561 requires that the reclassification is applied prospectively from
the reclassification date Both the amortised cost measurement category and the
fair value through other comprehensive income measurement category require
that the effective interest rate is determined at initial recognition Both of those
measurement categories also require that the impairment requirements are
applied in the same way Consequently when an entity reclassifies a financial
asset between the amortised cost measurement category and the fair value
through other comprehensive income measurement category
(a) the recognition of interest revenue will not change and therefore the
entity continues to use the same effective interest rate
(b) the measurement of expected credit losses will not change because both
measurement categories apply the same impairment approach However
if a financial asset is reclassified out of the fair value through other
comprehensive income measurement category and into the amortised
cost measurement category a loss allowance would be recognised as an
adjustment to the gross carrying amount of the financial asset from the
reclassification date If a financial asset is reclassified out of the
amortised cost measurement category and into the fair value through
other comprehensive income measurement category the loss allowance
would be derecognised (and thus would no longer be recognised as an
adjustment to the gross carrying amount) but instead would be
recognised as an accumulated impairment amount (of an equal amount)
in other comprehensive income and would be disclosed from the
reclassification date
B562 However an entity is not required to separately recognise interest revenue or
impairment gains or losses for a financial asset measured at fair value through
profit or loss Consequently when an entity reclassifies a financial asset out of
the fair value through profit or loss measurement category the effective interest
rate is determined on the basis of the fair value of the asset at the reclassification
date In addition for the purposes of applying Section 55 to the financial asset
from the reclassification date the date of the reclassification is treated as the
date of initial recognition
Gains and losses (Section 57)
B571 Paragraph 575 permits an entity to make an irrevocable election to present in
other comprehensive income changes in the fair value of an investment in an
IFRS 9
IFRS FoundationA440equity instrument that is not held for trading This election is made on an
instrumentbyinstrument (ie sharebyshare) basis Amounts presented in other
comprehensive income shall not be subsequently transferred to profit or loss
However the entity may transfer the cumulative gain or loss within equity
Dividends on such investments are recognised in profit or loss in accordance
with paragraph 576 unless the dividend clearly represents a recovery of part of
the cost of the investment
B571A Unless paragraph 415 applies paragraph 412A requires that a financial asset
is measured at fair value through other comprehensive income if 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 and the
asset is held in a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets This measurement category
recognises information in profit or loss as if the financial asset is measured at
amortised cost while the financial asset is measured in the statement of
financial position at fair value Gains or losses other than those that are
recognised in profit or loss in accordance with paragraphs 5710–5711 are
recognised in other comprehensive income When these financial assets are
derecognised cumulative gains or losses previously recognised in other
comprehensive income are reclassified to profit or loss This reflects the gain or
loss that would have been recognised in profit or loss upon derecognition if the
financial asset had been measured at amortised cost
B572 An entity applies IAS 21 to financial assets and financial liabilities that are
monetary items in accordance with IAS 21 and denominated in a foreign
currency IAS 21 requires any foreign exchange gains and losses on monetary
assets and monetary liabilities to be recognised in profit or loss An exception is
a monetary item that is designated as a hedging instrument in a cash flow hedge
(see paragraph 6511) a hedge of a net investment (see paragraph 6513) or a
fair value hedge of an equity instrument for which an entity has elected to
present changes in fair value in other comprehensive income in accordance with
paragraph 575 (see paragraph 658)
B572A For the purpose of recognising foreign exchange gains and losses under IAS 21 a
financial asset measured at fair value through other comprehensive income in
accordance with paragraph 412A is treated as a monetary item Accordingly
such a financial asset is treated as an asset measured at amortised cost in the
foreign currency Exchange differences on the amortised cost are recognised in
profit or loss and other changes in the carrying amount are recognised in
accordance with paragraph 5710
B573 Paragraph 575 permits an entity to make an irrevocable election to present in
other comprehensive income subsequent changes in the fair value of particular
investments in equity instruments Such an investment is not a monetary item
Accordingly the gain or loss that is presented in other comprehensive income in
accordance with paragraph 575 includes any related foreign exchange
component
B574 If there is a hedging relationship between a nonderivative monetary asset and a
nonderivative monetary liability changes in the foreign currency component of
those financial instruments are presented in profit or loss
IFRS 9
IFRS Foundation A441Liabilities designated as at fair value through profit or loss
B575 When an entity designates a financial liability as at fair value through profit or
loss it must determine whether presenting in other comprehensive income the
effects of changes in the liability’s credit risk would create or enlarge an
accounting mismatch in profit or loss An accounting mismatch would be
created or enlarged if presenting the effects of changes in the liability’s credit
risk in other comprehensive income would result in a greater mismatch in
profit or loss than if those amounts were presented in profit or loss
B576 To make that determination an entity must assess whether it expects that the
effects of changes in the liability’s credit risk will be offset in profit or loss by a
change in the fair value of another financial instrument measured at fair value
through profit or loss Such an expectation must be based on an economic
relationship between the characteristics of the liability and the characteristics of
the other financial instrument
B577 That determination is made at initial recognition and is not reassessed For
practical purposes the entity need not enter into all of the assets and liabilities
giving rise to an accounting mismatch at exactly the same time A reasonable
delay is permitted provided that any remaining transactions are expected to
occur An entity must apply consistently its methodology for determining
whether presenting in other comprehensive income the effects of changes in the
liability’s credit risk would create or enlarge an accounting mismatch in profit
or loss However an entity may use different methodologies when there are
different economic relationships between the characteristics of the liabilities
designated as at fair value through profit or loss and the characteristics of the
other financial instruments IFRS 7 requires an entity to provide qualitative
disclosures in the notes to the financial statements about its methodology for
making that determination
B578 If such a mismatch would be created or enlarged the entity is required to
present all changes in fair value (including the effects of changes in the credit
risk of the liability) in profit or loss If such a mismatch would not be created or
enlarged the entity is required to present the effects of changes in the liability’s
credit risk in other comprehensive income
B579 Amounts presented in other comprehensive income shall not be subsequently
transferred to profit or loss However the entity may transfer the cumulative
gain or loss within equity
B5710 The following example describes a situation in which an accounting mismatch
would be created in profit or loss if the effects of changes in the credit risk of the
liability were presented in other comprehensive income A mortgage bank
provides loans to customers and funds those loans by selling bonds with
matching characteristics (eg amount outstanding repayment profile term and
currency) in the market The contractual terms of the loan permit the mortgage
customer to prepay its loan (ie satisfy its obligation to the bank) by buying the
corresponding bond at fair value in the market and delivering that bond to the
mortgage bank As a result of that contractual prepayment right if the credit
quality of the bond worsens (and thus the fair value of the mortgage bank’s
liability decreases) the fair value of the mortgage bank’s loan asset also
IFRS 9
IFRS FoundationA442decreases The change in the fair value of the asset reflects the mortgage
customer’s contractual right to prepay the mortgage loan by buying the
underlying bond at fair value (which in this example has decreased) and
delivering the bond to the mortgage bank Consequently the effects of changes
in the credit risk of the liability (the bond) will be offset in profit or loss by a
corresponding change in the fair value of a financial asset (the loan) If the
effects of changes in the liability’s credit risk were presented in other
comprehensive income there would be an accounting mismatch in profit or loss
Consequently the mortgage bank is required to present all changes in fair value
of the liability (including the effects of changes in the liability’s credit risk) in
profit or loss
B5711 In the example in paragraph B5710 there is a contractual linkage between the
effects of changes in the credit risk of the liability and changes in the fair value
of the financial asset (ie as a result of the mortgage customer’s contractual right
to prepay the loan by buying the bond at fair value and delivering the bond to
the mortgage bank) However an accounting mismatch may also occur in the
absence of a contractual linkage
B5712 For the purposes of applying the requirements in paragraphs 577 and 578 an
accounting mismatch is not caused solely by the measurement method that an
entity uses to determine the effects of changes in a liability’s credit risk An
accounting mismatch in profit or loss would arise only when the effects of
changes in the liability’s credit risk (as defined in IFRS 7) are expected to be
offset by changes in the fair value of another financial instrument A mismatch
that arises solely as a result of the measurement method (ie because an entity
does not isolate changes in a liability’s credit risk from some other changes in its
fair value) does not affect the determination required by paragraphs 577 and
578 For example an entity may not isolate changes in a liability’s credit risk
from changes in liquidity risk If the entity presents the combined effect of both
factors in other comprehensive income a mismatch may occur because changes
in liquidity risk may be included in the fair value measurement of the entity’s
financial assets and the entire fair value change of those assets is presented in
profit or loss However such a mismatch is caused by measurement
imprecision not the offsetting relationship described in paragraph B576 and
therefore does not affect the determination required by paragraphs 577
and 578
The meaning of credit risk’ (paragraphs 577 and 578)
B5713 IFRS 7 defines credit risk as the risk that one party to a financial instrument will
cause a financial loss for the other party by failing to discharge an obligation’
The requirement in paragraph 577(a) relates to the risk that the issuer will fail
to perform on that particular liability It does not necessarily relate to the
creditworthiness of the issuer For example if an entity issues a collateralised
liability and a noncollateralised liability that are otherwise identical the credit
risk of those two liabilities will be different even though they are issued by the
same entity The credit risk on the collateralised liability will be less than the
credit risk of the noncollateralised liability The credit risk for a collateralised
liability may be close to zero
IFRS 9
IFRS Foundation A443B5714 For the purposes of applying the requirement in paragraph 577(a) credit risk is
different from assetspecific performance risk Assetspecific performance risk is
not related to the risk that an entity will fail to discharge a particular obligation
but instead it is related to the risk that a single asset or a group of assets will
perform poorly (or not at all)
B5715 The following are examples of assetspecific performance risk
(a) a liability with a unitlinking feature whereby the amount due to
investors is contractually determined on the basis of the performance of
specified assets The effect of that unitlinking feature on the fair value
of the liability is assetspecific performance risk not credit risk
(b) a liability issued by a structured entity with the following characteristics
The entity is legally isolated so the assets in the entity are ringfenced
solely for the benefit of its investors even in the event of bankruptcy
The entity enters into no other transactions and the assets in the entity
cannot be hypothecated Amounts are due to the entity’s investors only
if the ringfenced assets generate cash flows Thus changes in the fair
value of the liability primarily reflect changes in the fair value of the
assets The effect of the performance of the assets on the fair value of the
liability is assetspecific performance risk not credit risk
Determining the effects of changes in credit risk
B5716 For the purposes of applying the requirement in paragraph 577(a) an entity
shall determine the amount of change in the fair value of the financial liability
that is attributable to changes in the credit risk of that liability either
(a) as the amount of change in its fair value that is not attributable to
changes in market conditions that give rise to market risk (see
paragraphs B5717 and B5718) or
(b) using an alternative method the entity believes more faithfully
represents the amount of change in the liability’s fair value that is
attributable to changes in its credit risk
B5717 Changes in market conditions that give rise to market risk include changes in a
benchmark interest rate the price of another entity’s financial instrument a
commodity price a foreign exchange rate or an index of prices or rates
B5718 If the only significant relevant changes in market conditions for a liability are
changes in an observed (benchmark) interest rate the amount in
paragraph B5716(a) can be estimated as follows
(a) First the entity computes the liability’s internal rate of return at the
start of the period using the fair value of the liability and the liability’s
contractual cash flows at the start of the period It deducts from this rate
of return the observed (benchmark) interest rate at the start of the
period to arrive at an instrumentspecific component of the internal rate
of return
(b) Next the entity calculates the present value of the cash flows associated
with the liability using the liability’s contractual cash flows at the end of
the period and a discount rate equal to the sum of (i) the observed
IFRS 9
IFRS FoundationA444(benchmark) interest rate at the end of the period and (ii) the
instrumentspecific component of the internal rate of return as
determined in (a)
(c) The difference between the fair value of the liability at the end of the
period and the amount determined in (b) is the change in fair value that
is not attributable to changes in the observed (benchmark) interest rate
This is the amount to be presented in other comprehensive income in
accordance with paragraph 577(a)
B5719 The example in paragraph B5718 assumes that changes in fair value arising
from factors other than changes in the instrument’s credit risk or changes in
observed (benchmark) interest rates are not significant This method would not
be appropriate if changes in fair value arising from other factors are significant
In those cases an entity is required to use an alternative method that more
faithfully measures the effects of changes in the liability’s credit risk (see
paragraph B5716(b)) For example if the instrument in the example contains
an embedded derivative the change in fair value of the embedded derivative is
excluded in determining the amount to be presented in other comprehensive
income in accordance with paragraph 577(a)
B5720 As with all fair value measurements an entity’s measurement method for
determining the portion of the change in the liability’s fair value that is
attributable to changes in its credit risk must make maximum use of relevant
observable inputs and minimum use of unobservable inputs
Hedge accounting (Chapter 6)
Hedging instruments (Section 62)
Qualifying instruments
B621 Derivatives that are embedded in hybrid contracts but that are not separately
accounted for cannot be designated as separate hedging instruments
B622 An entity’s own equity instruments are not financial assets or financial
liabilities of the entity and therefore cannot be designated as hedging
instruments
B623 For hedges of foreign currency risk the foreign currency risk component of a
nonderivative financial instrument is determined in accordance with IAS 21
Written options
B624 This Standard does not restrict the circumstances in which a derivative that is
measured at fair value through profit or loss may be designated as a hedging
instrument except for some written options A written option does not qualify
as a hedging instrument unless it is designated as an offset to a purchased
option including one that is embedded in another financial instrument (for
example a written call option used to hedge a callable liability)
IFRS 9
IFRS Foundation A445Designation of hedging instruments
B625 For hedges other than hedges of foreign currency risk when an entity designates
a nonderivative financial asset or a nonderivative financial liability measured
at fair value through profit or loss as a hedging instrument it may only
designate the nonderivative financial instrument in its entirety or a proportion
of it
B626 A single hedging instrument may be designated as a hedging instrument of
more than one type of risk provided that there is a specific designation of the
hedging instrument and of the different risk positions as hedged items Those
hedged items can be in different hedging relationships
Hedged items (Section 63)
Qualifying items
B631 A firm commitment to acquire a business in a business combination cannot be a
hedged item except for foreign currency risk because the other risks being
hedged cannot be specifically identified and measured Those other risks are
general business risks
B632 An equity method investment cannot be a hedged item in a fair value hedge
This is because the equity method recognises in profit or loss the investor’s share
of the investee’s profit or loss instead of changes in the investment’s fair value
For a similar reason an investment in a consolidated subsidiary cannot be a
hedged item in a fair value hedge This is because consolidation recognises in
profit or loss the subsidiary’s profit or loss instead of changes in the
investment’s fair value A hedge of a net investment in a foreign operation is
different because it is a hedge of the foreign currency exposure not a fair value
hedge of the change in the value of the investment
B633 Paragraph 634 permits an entity to designate as hedged items aggregated
exposures that are a combination of an exposure and a derivative When
designating such a hedged item an entity assesses whether the aggregated
exposure combines an exposure with a derivative so that it creates a different
aggregated exposure that is managed as one exposure for a particular risk (or
risks) In that case the entity may designate the hedged item on the basis of the
aggregated exposure For example
(a) an entity may hedge a given quantity of highly probable coffee purchases
in 15 months’ time against price risk (based on US dollars) using a
15month futures contract for coffee The highly probable coffee
purchases and the futures contract for coffee in combination can be
viewed as a 15month fixedamount US dollar foreign currency risk
exposure for risk management purposes (ie like any fixedamount
US dollar cash outflow in 15 months’ time)
(b) an entity may hedge the foreign currency risk for the entire term of a
10year fixedrate debt denominated in a foreign currency However the
entity requires fixedrate exposure in its functional currency only for a
short to medium term (say two years) and floating rate exposure in its
functional currency for the remaining term to maturity At the end of
IFRS 9
IFRS FoundationA446each of the twoyear intervals (ie on a twoyear rolling basis) the entity
fixes the next two years’ interest rate exposure (if the interest level is
such that the entity wants to fix interest rates) In such a situation an
entity may enter into a 10year fixedtofloating crosscurrency interest
rate swap that swaps the fixedrate foreign currency debt into a
variablerate functional currency exposure This is overlaid with a
twoyear interest rate swap that—on the basis of the functional
currency—swaps variablerate debt into fixedrate debt In effect the
fixedrate foreign currency debt and the 10year fixedtofloating
crosscurrency interest rate swap in combination are viewed as a 10year
variablerate debt functional currency exposure for risk management
purposes
B634 When designating the hedged item on the basis of the aggregated exposure an
entity considers the combined effect of the items that constitute the aggregated
exposure for the purpose of assessing hedge effectiveness and measuring hedge
ineffectiveness However the items that constitute the aggregated exposure
remain accounted for separately This means that for example
(a) derivatives that are part of an aggregated exposure are recognised as
separate assets or liabilities measured at fair value and
(b) if a hedging relationship is designated between the items that constitute
the aggregated exposure the way in which a derivative is included as
part of an aggregated exposure must be consistent with the designation
of that derivative as the hedging instrument at the level of the
aggregated exposure For example if an entity excludes the forward
element of a derivative from its designation as the hedging instrument
for the hedging relationship between the items that constitute the
aggregated exposure it must also exclude the forward element when
including that derivative as a hedged item as part of the aggregated
exposure Otherwise the aggregated exposure shall include a derivative
either in its entirety or a proportion of it
B635 Paragraph 636 states that in consolidated financial statements the foreign
currency risk of a highly probable forecast intragroup transaction may qualify as
a hedged item in a cash flow hedge provided that the transaction is
denominated in a currency other than the functional currency of the entity
entering into that transaction and that the foreign currency risk will affect
consolidated profit or loss For this purpose an entity can be a parent
subsidiary associate joint arrangement or branch If the foreign currency risk
of a forecast intragroup transaction does not affect consolidated profit or loss
the intragroup transaction cannot qualify as a hedged item This is usually the
case for royalty payments interest payments or management charges between
members of the same group unless there is a related external transaction
However when the foreign currency risk of a forecast intragroup transaction
will affect consolidated profit or loss the intragroup transaction can qualify as a
hedged item An example is forecast sales or purchases of inventories between
members of the same group if there is an onward sale of the inventory to a party
external to the group Similarly a forecast intragroup sale of plant and
equipment from the group entity that manufactured it to a group entity that
IFRS 9
IFRS Foundation A447will use the plant and equipment in its operations may affect consolidated profit
or loss This could occur for example because the plant and equipment will be
depreciated by the purchasing entity and the amount initially recognised for the
plant and equipment may change if the forecast intragroup transaction is
denominated in a currency other than the functional currency of the
purchasing entity
B636 If a hedge of a forecast intragroup transaction qualifies for hedge accounting
any gain or loss is recognised in and taken out of other comprehensive income
in accordance with paragraph 6511 The relevant period or periods during
which the foreign currency risk of the hedged transaction affects profit or loss is
when it affects consolidated profit or loss
Designation of hedged items
B637 A component is a hedged item that is less than the entire item Consequently a
component reflects only some of the risks of the item of which it is a part or
reflects the risks only to some extent (for example when designating a
proportion of an item)
Risk components
B638 To be eligible for designation as a hedged item a risk component must be a
separately identifiable component of the financial or the nonfinancial item and
the changes in the cash flows or the fair value of the item attributable to
changes in that risk component must be reliably measurable
B639 When identifying what risk components qualify for designation as a hedged
item an entity assesses such risk components within the context of the
particular market structure to which the risk or risks relate and in which the
hedging activity takes place Such a determination requires an evaluation of the
relevant facts and circumstances which differ by risk and market
B6310 When designating risk components as hedged items an entity considers
whether the risk components are explicitly specified in a contract (contractually
specified risk components) or whether they are implicit in the fair value or the
cash flows of an item of which they are a part (noncontractually specified risk
components) Noncontractually specified risk components can relate to items
that are not a contract (for example forecast transactions) or contracts that do
not explicitly specify the component (for example a firm commitment that
includes only one single price instead of a pricing formula that references
different underlyings) For example
(a) Entity A has a longterm supply contract for natural gas that is priced
using a contractually specified formula that references commodities and
other factors (for example gas oil fuel oil and other components such as
transport charges) Entity A hedges the gas oil component in that supply
contract using a gas oil forward contract Because the gas oil component
is specified by the terms and conditions of the supply contract it is a
contractually specified risk component Hence because of the pricing
formula Entity A concludes that the gas oil price exposure is separately
identifiable At the same time there is a market for gas oil forward
contracts Hence Entity A concludes that the gas oil price exposure is
IFRS 9
IFRS FoundationA448reliably measurable Consequently the gas oil price exposure in the
supply contract is a risk component that is eligible for designation as a
hedged item
(b) Entity B hedges its future coffee purchases based on its production
forecast Hedging starts up to 15 months before delivery for part of the
forecast purchase volume Entity B increases the hedged volume over
time (as the delivery date approaches) Entity B uses two different types
of contracts to manage its coffee price risk
(i) exchangetraded coffee futures contracts and
(ii) coffee supply contracts for Arabica coffee from Colombia
delivered to a specific manufacturing site These contracts price
a tonne of coffee based on the exchangetraded coffee futures
contract price plus a fixed price differential plus a variable
logistics services charge using a pricing formula The coffee
supply contract is an executory contract in accordance with
which Entity B takes actual delivery of coffee
For deliveries that relate to the current harvest entering into the coffee
supply contracts allows Entity B to fix the price differential between the
actual coffee quality purchased (Arabica coffee from Colombia) and the
benchmark quality that is the underlying of the exchangetraded futures
contract However for deliveries that relate to the next harvest the
coffee supply contracts are not yet available so the price differential
cannot be fixed Entity B uses exchangetraded coffee futures contracts
to hedge the benchmark quality component of its coffee price risk for
deliveries that relate to the current harvest as well as the next harvest
Entity B determines that it is exposed to three different risks coffee price
risk reflecting the benchmark quality coffee price risk reflecting the
difference (spread) between the price for the benchmark quality coffee
and the particular Arabica coffee from Colombia that it actually receives
and the variable logistics costs For deliveries related to the current
harvest after Entity B enters into a coffee supply contract the coffee
price risk reflecting the benchmark quality is a contractually specified
risk component because the pricing formula includes an indexation to
the exchangetraded coffee futures contract price Entity B concludes
that this risk component is separately identifiable and reliably
measurable For deliveries related to the next harvest Entity B has not
yet entered into any coffee supply contracts (ie those deliveries are
forecast transactions) Hence the coffee price risk reflecting the
benchmark quality is a noncontractually specified risk component
Entity B’s analysis of the market structure takes into account how
eventual deliveries of the particular coffee that it receives are priced
Hence on the basis of this analysis of the market structure Entity B
concludes that the forecast transactions also involve the coffee price risk
that reflects the benchmark quality as a risk component that is
separately identifiable and reliably measurable even though it is not
contractually specified Consequently Entity B may designate hedging
IFRS 9
IFRS Foundation A449relationships on a risk components basis (for the coffee price risk that
reflects the benchmark quality) for coffee supply contracts as well as
forecast transactions
(c) Entity C hedges part of its future jet fuel purchases on the basis of its
consumption forecast up to 24 months before delivery and increases the
volume that it hedges over time Entity C hedges this exposure using
different types of contracts depending on the time horizon of the hedge
which affects the market liquidity of the derivatives For the longer time
horizons (12–24 months) Entity C uses crude oil contracts because only
these have sufficient market liquidity For time horizons of 6–12 months
Entity C uses gas oil derivatives because they are sufficiently liquid For
time horizons up to six months Entity C uses jet fuel contracts
Entity C’s analysis of the market structure for oil and oil products and its
evaluation of the relevant facts and circumstances is as follows
(i) Entity C operates in a geographical area in which Brent is the
crude oil benchmark Crude oil is a raw material benchmark that
affects the price of various refined oil products as their most
basic input Gas oil is a benchmark for refined oil products
which is used as a pricing reference for oil distillates more
generally This is also reflected in the types of derivative financial
instruments for the crude oil and refined oil products markets of
the environment in which Entity C operates such as
● the benchmark crude oil futures contract which is for
Brent crude oil
● the benchmark gas oil futures contract which is used as
the pricing reference for distillates—for example jet fuel
spread derivatives cover the price differential between jet
fuel and that benchmark gas oil and
● the benchmark gas oil crack spread derivative (ie the
derivative for the price differential between crude oil and
gas oil—a refining margin) which is indexed to Brent
crude oil
(ii) the pricing of refined oil products does not depend on which
particular crude oil is processed by a particular refinery because
those refined oil products (such as gas oil or jet fuel) are
standardised products
Hence Entity C concludes that the price risk of its jet fuel purchases
includes a crude oil price risk component based on Brent crude oil and a
gas oil price risk component even though crude oil and gas oil are not
specified in any contractual arrangement Entity C concludes that these
two risk components are separately identifiable and reliably measurable
even though they are not contractually specified Consequently Entity C
may designate hedging relationships for forecast jet fuel purchases on a
risk components basis (for crude oil or gas oil) This analysis also means
that if for example Entity C used crude oil derivatives based on West
IFRS 9
IFRS FoundationA450Texas Intermediate (WTI) crude oil changes in the price differential
between Brent crude oil and WTI crude oil would cause hedge
ineffectiveness
(d) Entity D holds a fixedrate debt instrument This instrument is issued in
an environment with a market in which a large variety of similar debt
instruments are compared by their spreads to a benchmark rate (for
example LIBOR) and variablerate instruments in that environment are
typically indexed to that benchmark rate Interest rate swaps are
frequently used to manage interest rate risk on the basis of that
benchmark rate irrespective of the spread of debt instruments to that
benchmark rate The price of fixedrate debt instruments varies directly
in response to changes in the benchmark rate as they happen Entity D
concludes that the benchmark rate is a component that can be
separately identified and reliably measured Consequently Entity D may
designate hedging relationships for the fixedrate debt instrument on a
risk component basis for the benchmark interest rate risk
B6311 When designating a risk component as a hedged item the hedge accounting
requirements apply to that risk component in the same way as they apply to
other hedged items that are not risk components For example the qualifying
criteria apply including that the hedging relationship must meet the hedge
effectiveness requirements and any hedge ineffectiveness must be measured
and recognised
B6312 An entity can also designate only changes in the cash flows or fair value of a
hedged item above or below a specified price or other variable (a onesided risk’)
The intrinsic value of a purchased option hedging instrument (assuming that it
has the same principal terms as the designated risk) but not its time value
reflects a onesided risk in a hedged item For example an entity can designate
the variability of future cash flow outcomes resulting from a price increase of a
forecast commodity purchase In such a situation the entity designates only
cash flow losses that result from an increase in the price above the specified
level The hedged risk does not include the time value of a purchased option
because the time value is not a component of the forecast transaction that
affects profit or loss
B6313 There is a rebuttable presumption that unless inflation risk is contractually
specified it is not separately identifiable and reliably measurable and hence
cannot be designated as a risk component of a financial instrument However
in limited cases it is possible to identify a risk component for inflation risk that
is separately identifiable and reliably measurable because of the particular
circumstances of the inflation environment and the relevant debt market
B6314 For example an entity issues debt in an environment in which inflationlinked
bonds have a volume and term structure that results in a sufficiently liquid
market that allows constructing a term structure of zerocoupon real interest
rates This means that for the respective currency inflation is a relevant factor
that is separately considered by the debt markets In those circumstances the
inflation risk component could be determined by discounting the cash flows of
the hedged debt instrument using the term structure of zerocoupon real
interest rates (ie in a manner similar to how a riskfree (nominal) interest rate
IFRS 9
IFRS Foundation A451component can be determined) Conversely in many cases an inflation risk
component is not separately identifiable and reliably measurable For example
an entity issues only nominal interest rate debt in an environment with a
market for inflationlinked bonds that is not sufficiently liquid to allow a term
structure of zerocoupon real interest rates to be constructed In this case the
analysis of the market structure and of the facts and circumstances does not
support the entity concluding that inflation is a relevant factor that is separately
considered by the debt markets Hence the entity cannot overcome the
rebuttable presumption that inflation risk that is not contractually specified is
not separately identifiable and reliably measurable Consequently an inflation
risk component would not be eligible for designation as the hedged item This
applies irrespective of any inflation hedging instrument that the entity has
actually entered into In particular the entity cannot simply impute the terms
and conditions of the actual inflation hedging instrument by projecting its
terms and conditions onto the nominal interest rate debt
B6315 A contractually specified inflation risk component of the cash flows of a
recognised inflationlinked bond (assuming that there is no requirement to
account for an embedded derivative separately) is separately identifiable and
reliably measurable as long as other cash flows of the instrument are not
affected by the inflation risk component
Components of a nominal amount
B6316 There are two types of components of nominal amounts that can be designated
as the hedged item in a hedging relationship a component that is a proportion
of an entire item or a layer component The type of component changes the
accounting outcome An entity shall designate the component for accounting
purposes consistently with its risk management objective
B6317 An example of a component that is a proportion is 50 per cent of the contractual
cash flows of a loan
B6318 A layer component may be specified from a defined but open population or
from a defined nominal amount Examples include
(a) part of a monetary transaction volume for example the next FC10 cash
flows from sales denominated in a foreign currency after the first FC20
in March 201X4
(b) a part of a physical volume for example the bottom layer measuring
5 million cubic metres of the natural gas stored in location XYZ
(c) a part of a physical or other transaction volume for example the first
100 barrels of the oil purchases in June 201X or the first 100 MWh of
electricity sales in June 201X or
(d) a layer from the nominal amount of the hedged item for example the
last CU80 million of a CU100 million firm commitment the bottom
layer of CU20 million of a CU100 million fixedrate bond or the top layer
4 In this Standard monetary amounts are denominated in currency units’ (CU) and foreign currency
units’ (FC)
IFRS 9
IFRS FoundationA452of CU30 million from a total amount of CU100 million of fixedrate debt
that can be prepaid at fair value (the defined nominal amount is
CU100 million)
B6319 If a layer component is designated in a fair value hedge an entity shall specify it
from a defined nominal amount To comply with the requirements for
qualifying fair value hedges an entity shall remeasure the hedged item for fair
value changes (ie remeasure the item for fair value changes attributable to the
hedged risk) The fair value hedge adjustment must be recognised in profit or
loss no later than when the item is derecognised Consequently it is necessary
to track the item to which the fair value hedge adjustment relates For a layer
component in a fair value hedge this requires an entity to track the nominal
amount from which it is defined For example in paragraph B6318(d) the total
defined nominal amount of CU100 million must be tracked in order to track the
bottom layer of CU20 million or the top layer of CU30 million
B6320 A layer component that includes a prepayment option is not eligible to be
designated as a hedged item in a fair value hedge if the prepayment option’s fair
value is affected by changes in the hedged risk unless the designated layer
includes the effect of the related prepayment option when determining the
change in the fair value of the hedged item
Relationship between components and the total cash flows of an item
B6321 If a component of the cash flows of a financial or a nonfinancial item is
designated as the hedged item that component must be less than or equal to the
total cash flows of the entire item However all of the cash flows of the entire
item may be designated as the hedged item and hedged for only one particular
risk (for example only for those changes that are attributable to changes in
LIBOR or a benchmark commodity price)
B6322 For example in the case of a financial liability whose effective interest rate is
below LIBOR an entity cannot designate
(a) a component of the liability equal to interest at LIBOR (plus the principal
amount in case of a fair value hedge) and
(b) a negative residual component
B6323 However in the case of a fixedrate financial liability whose effective interest
rate is (for example) 100 basis points below LIBOR an entity can designate as the
hedged item the change in the value of that entire liability (ie principal plus
interest at LIBOR minus 100 basis points) that is attributable to changes in
LIBOR If a fixedrate financial instrument is hedged some time after its
origination and interest rates have changed in the meantime the entity can
designate a risk component equal to a benchmark rate that is higher than the
contractual rate paid on the item The entity can do so provided that the
benchmark rate is less than the effective interest rate calculated on the
assumption that the entity had purchased the instrument on the day when it
first designates the hedged item For example assume that an entity originates
a fixedrate financial asset of CU100 that has an effective interest rate of 6 per
cent at a time when LIBOR is 4 per cent It begins to hedge that asset some time
later when LIBOR has increased to 8 per cent and the fair value of the asset has
IFRS 9
IFRS Foundation A453decreased to CU90 The entity calculates that if it had purchased the asset on the
date it first designates the related LIBOR interest rate risk as the hedged item
the effective yield of the asset based on its then fair value of CU90 would have
been 95 per cent Because LIBOR is less than this effective yield the entity can
designate a LIBOR component of 8 per cent that consists partly of the
contractual interest cash flows and partly of the difference between the current
fair value (ie CU90) and the amount repayable on maturity (ie CU100)
B6324 If a variablerate financial liability bears interest of (for example) threemonth
LIBOR minus 20 basis points (with a floor at zero basis points) an entity can
designate as the hedged item the change in the cash flows of that entire liability
(ie threemonth LIBOR minus 20 basis points—including the floor) that is
attributable to changes in LIBOR Hence as long as the threemonth LIBOR
forward curve for the remaining life of that liability does not fall below 20 basis
points the hedged item has the same cash flow variability as a liability that
bears interest at threemonth LIBOR with a zero or positive spread However if
the threemonth LIBOR forward curve for the remaining life of that liability (or a
part of it) falls below 20 basis points the hedged item has a lower cash flow
variability than a liability that bears interest at threemonth LIBOR with a zero
or positive spread
B6325 A similar example of a nonfinancial item is a specific type of crude oil from a
particular oil field that is priced off the relevant benchmark crude oil If an
entity sells that crude oil under a contract using a contractual pricing formula
that sets the price per barrel at the benchmark crude oil price minus CU10 with
a floor of CU15 the entity can designate as the hedged item the entire cash flow
variability under the sales contract that is attributable to the change in the
benchmark crude oil price However the entity cannot designate a component
that is equal to the full change in the benchmark crude oil price Hence as long
as the forward price (for each delivery) does not fall below CU25 the hedged
item has the same cash flow variability as a crude oil sale at the benchmark
crude oil price (or with a positive spread) However if the forward price for any
delivery falls below CU25 the hedged item has a lower cash flow variability than
a crude oil sale at the benchmark crude oil price (or with a positive spread)
Qualifying criteria for hedge accounting (Section 64)
Hedge effectiveness
B641 Hedge effectiveness is the extent to which changes in the fair value or the cash
flows of the hedging instrument offset changes in the fair value or the cash
flows of the hedged item (for example when the hedged item is a risk
component the relevant change in fair value or cash flows of an item is the one
that is attributable to the hedged risk) Hedge ineffectiveness is the extent to
which the changes in the fair value or the cash flows of the hedging instrument
are greater or less than those on the hedged item
B642 When designating a hedging relationship and on an ongoing basis an entity
shall analyse the sources of hedge ineffectiveness that are expected to affect the
hedging relationship during its term This analysis (including any updates in
IFRS 9
IFRS FoundationA454accordance with paragraph B6521 arising from rebalancing a hedging
relationship) is the basis for the entity’s assessment of meeting the hedge
effectiveness requirements
B643 For the avoidance of doubt the effects of replacing the original counterparty
with a clearing counterparty and making the associated changes as described in
paragraph 656 shall be reflected in the measurement of the hedging
instrument and therefore in the assessment of hedge effectiveness and the
measurement of hedge effectiveness
Economic relationship between the hedged item and the hedging
instrument
B644 The requirement that an economic relationship exists means that the hedging
instrument and the hedged item have values that generally move in the opposite
direction because of the same risk which is the hedged risk Hence there must
be an expectation that the value of the hedging instrument and the value of the
hedged item will systematically change in response to movements in either the
same underlying or underlyings that are economically related in such a way that
they respond in a similar way to the risk that is being hedged (for example Brent
and WTI crude oil)
B645 If the underlyings are not the same but are economically related there can be
situations in which the values of the hedging instrument and the hedged item
move in the same direction for example because the price differential between
the two related underlyings changes while the underlyings themselves do not
move significantly That is still consistent with an economic relationship
between the hedging instrument and the hedged item if the values of the
hedging instrument and the hedged item are still expected to typically move in
the opposite direction when the underlyings move
B646 The assessment of whether an economic relationship exists includes an analysis
of the possible behaviour of the hedging relationship during its term to
ascertain whether it can be expected to meet the risk management objective
The mere existence of a statistical correlation between two variables does not by
itself support a valid conclusion that an economic relationship exists
The effect of credit risk
B647 Because the hedge accounting model is based on a general notion of offset
between gains and losses on the hedging instrument and the hedged item
hedge effectiveness is determined not only by the economic relationship
between those items (ie the changes in their underlyings) but also by the effect of
credit risk on the value of both the hedging instrument and the hedged item
The effect of credit risk means that even if there is an economic relationship
between the hedging instrument and the hedged item the level of offset might
become erratic This can result from a change in the credit risk of either the
hedging instrument or the hedged item that is of such a magnitude that the
credit risk dominates the value changes that result from the economic
relationship (ie the effect of the changes in the underlyings) A level of
magnitude that gives rise to dominance is one that would result in the loss
(or gain) from credit risk frustrating the effect of changes in the underlyings on
IFRS 9
IFRS Foundation A455the value of the hedging instrument or the hedged item even if those changes
were significant Conversely if during a particular period there is little change
in the underlyings the fact that even small credit riskrelated changes in the
value of the hedging instrument or the hedged item might affect the value more
than the underlyings does not create dominance
B648 An example of credit risk dominating a hedging relationship is when an entity
hedges an exposure to commodity price risk using an uncollateralised
derivative If the counterparty to that derivative experiences a severe
deterioration in its credit standing the effect of the changes in the
counterparty’s credit standing might outweigh the effect of changes in the
commodity price on the fair value of the hedging instrument whereas changes
in the value of the hedged item depend largely on the commodity price changes
Hedge ratio
B649 In accordance with the hedge effectiveness requirements the hedge ratio of the
hedging relationship must be the same as that resulting from the quantity of the
hedged item that the entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that quantity of hedged item
Hence if an entity hedges less than 100 per cent of the exposure on an item
such as 85 per cent it shall designate the hedging relationship using a hedge
ratio that is the same as that resulting from 85 per cent of the exposure and the
quantity of the hedging instrument that the entity actually uses to hedge those
85 per cent Similarly if for example an entity hedges an exposure using a
nominal amount of 40 units of a financial instrument it shall designate the
hedging relationship using a hedge ratio that is the same as that resulting from
that quantity of 40 units (ie the entity must not use a hedge ratio based on a
higher quantity of units that it might hold in total or a lower quantity of units)
and the quantity of the hedged item that it actually hedges with those 40 units
B6410 However the designation of the hedging relationship using the same hedge
ratio as that resulting from the quantities of the hedged item and the hedging
instrument that the entity actually uses shall not reflect an imbalance between
the weightings of the hedged item and the hedging instrument that would in
turn create hedge ineffectiveness (irrespective of whether recognised or not) that
could result in an accounting outcome that would be inconsistent with the
purpose of hedge accounting Hence for the purpose of designating a hedging
relationship an entity must adjust the hedge ratio that results from the
quantities of the hedged item and the hedging instrument that the entity
actually uses if that is needed to avoid such an imbalance
B6411 Examples of relevant considerations in assessing whether an accounting
outcome is inconsistent with the purpose of hedge accounting are
(a) whether the intended hedge ratio is established to avoid recognising
hedge ineffectiveness for cash flow hedges or to achieve fair value hedge
adjustments for more hedged items with the aim of increasing the use of
fair value accounting but without offsetting fair value changes of the
hedging instrument and
IFRS 9
IFRS FoundationA456(b) whether there is a commercial reason for the particular weightings of
the hedged item and the hedging instrument even though that creates
hedge ineffectiveness For example an entity enters into and designates
a quantity of the hedging instrument that is not the quantity that it
determined as the best hedge of the hedged item because the standard
volume of the hedging instruments does not allow it to enter into that
exact quantity of hedging instrument (a lot size issue’) An example is
an entity that hedges 100 tonnes of coffee purchases with standard coffee
futures contracts that have a contract size of 37500 lbs (pounds) The
entity could only use either five or six contracts (equivalent to 850 and
1021 tonnes respectively) to hedge the purchase volume of 100 tonnes
In that case the entity designates the hedging relationship using the
hedge ratio that results from the number of coffee futures contracts that
it actually uses because the hedge ineffectiveness resulting from the
mismatch in the weightings of the hedged item and the hedging
instrument would not result in an accounting outcome that is
inconsistent with the purpose of hedge accounting
Frequency of assessing whether the hedge effectiveness
requirements are met
B6412 An entity shall assess at the inception of the hedging relationship and on an
ongoing basis whether a hedging relationship meets the hedge effectiveness
requirements At a minimum an entity shall perform the ongoing assessment
at each reporting date or upon a significant change in the circumstances
affecting the hedge effectiveness requirements whichever comes first The
assessment relates to expectations about hedge effectiveness and is therefore
only forwardlooking
Methods for assessing whether the hedge effectiveness
requirements are met
B6413 This Standard does not specify a method for assessing whether a hedging
relationship meets the hedge effectiveness requirements However an entity
shall use a method that captures the relevant characteristics of the hedging
relationship including the sources of hedge ineffectiveness Depending on those
factors the method can be a qualitative or a quantitative assessment
B6414 For example when the critical terms (such as the nominal amount maturity
and underlying) of the hedging instrument and the hedged item match or are
closely aligned it might be possible for an entity to conclude on the basis of a
qualitative assessment of those critical terms that the hedging instrument and
the hedged item have values that will generally move in the opposite direction
because of the same risk and hence that an economic relationship exists
between the hedged item and the hedging instrument (see paragraphs
B644–B646)
B6415 The fact that a derivative is in or out of the money when it is designated as a
hedging instrument does not in itself mean that a qualitative assessment is
inappropriate It depends on the circumstances whether hedge ineffectiveness
arising from that fact could have a magnitude that a qualitative assessment
would not adequately capture
IFRS 9
IFRS Foundation A457B6416 Conversely if the critical terms of the hedging instrument and the hedged item
are not closely aligned there is an increased level of uncertainty about the
extent of offset Consequently the hedge effectiveness during the term of the
hedging relationship is more difficult to predict In such a situation it might
only be possible for an entity to conclude on the basis of a quantitative
assessment that an economic relationship exists between the hedged item and
the hedging instrument (see paragraphs B644–B646) In some situations a
quantitative assessment might also be needed to assess whether the hedge ratio
used for designating the hedging relationship meets the hedge effectiveness
requirements (see paragraphs B649–B6411) An entity can use the same or
different methods for those two different purposes
B6417 If there are changes in circumstances that affect hedge effectiveness an entity
may have to change the method for assessing whether a hedging relationship
meets the hedge effectiveness requirements in order to ensure that the relevant
characteristics of the hedging relationship including the sources of hedge
ineffectiveness are still captured
B6418 An entity’s risk management is the main source of information to perform the
assessment of whether a hedging relationship meets the hedge effectiveness
requirements This means that the management information (or analysis) used
for decisionmaking purposes can be used as a basis for assessing whether a
hedging relationship meets the hedge effectiveness requirements
B6419 An entity’s documentation of the hedging relationship includes how it will
assess the hedge effectiveness requirements including the method or methods
used The documentation of the hedging relationship shall be updated for any
changes to the methods (see paragraph B6417)
Accounting for qualifying hedging relationships
(Section 65)
B651 An example of a fair value hedge is a hedge of exposure to changes in the fair
value of a fixedrate debt instrument arising from changes in interest rates
Such a hedge could be entered into by the issuer or by the holder
B652 The purpose of a cash flow hedge is to defer the gain or loss on the hedging
instrument to a period or periods in which the hedged expected future cash
flows affect profit or loss An example of a cash flow hedge is the use of a swap
to change floating rate debt (whether measured at amortised cost or fair value)
to fixedrate debt (ie a hedge of a future transaction in which the future cash
flows being hedged are the future interest payments) Conversely a forecast
purchase of an equity instrument that once acquired will be accounted for at
fair value through profit or loss is an example of an item that cannot be the
hedged item in a cash flow hedge because any gain or loss on the hedging
instrument that would be deferred could not be appropriately reclassified to
profit or loss during a period in which it would achieve offset For the same
reason a forecast purchase of an equity instrument that once acquired will be
accounted for at fair value with changes in fair value presented in other
comprehensive income also cannot be the hedged item in a cash flow hedge
B653 A hedge of a firm commitment (for example a hedge of the change in fuel price
relating to an unrecognised contractual commitment by an electric utility to
IFRS 9
IFRS FoundationA458purchase fuel at a fixed price) is a hedge of an exposure to a change in fair value
Accordingly such a hedge is a fair value hedge However in accordance with
paragraph 654 a hedge of the foreign currency risk of a firm commitment
could alternatively be accounted for as a cash flow hedge
Measurement of hedge ineffectiveness
B654 When measuring hedge ineffectiveness an entity shall consider the time value
of money Consequently the entity determines the value of the hedged item on
a present value basis and therefore the change in the value of the hedged item
also includes the effect of the time value of money
B655 To calculate the change in the value of the hedged item for the purpose of
measuring hedge ineffectiveness an entity may use a derivative that would have
terms that match the critical terms of the hedged item (this is commonly
referred to as a hypothetical derivative’) and for example for a hedge of a
forecast transaction would be calibrated using the hedged price (or rate) level
For example if the hedge was for a twosided risk at the current market level
the hypothetical derivative would represent a hypothetical forward contract
that is calibrated to a value of nil at the time of designation of the hedging
relationship If the hedge was for example for a onesided risk the hypothetical
derivative would represent the intrinsic value of a hypothetical option that at
the time of designation of the hedging relationship is at the money if the hedged
price level is the current market level or out of the money if the hedged price
level is above (or for a hedge of a long position below) the current market level
Using a hypothetical derivative is one possible way of calculating the change in
the value of the hedged item The hypothetical derivative replicates the hedged
item and hence results in the same outcome as if that change in value was
determined by a different approach Hence using a hypothetical derivative’ is
not a method in its own right but a mathematical expedient that can only be
used to calculate the value of the hedged item Consequently a hypothetical
derivative’ cannot be used to include features in the value of the hedged item
that only exist in the hedging instrument (but not in the hedged item) An
example is debt denominated in a foreign currency (irrespective of whether it is
fixedrate or variablerate debt) When using a hypothetical derivative to
calculate the change in the value of such debt or the present value of the
cumulative change in its cash flows the hypothetical derivative cannot simply
impute a charge for exchanging different currencies even though actual
derivatives under which different currencies are exchanged might include such
a charge (for example crosscurrency interest rate swaps)
B656 The change in the value of the hedged item determined using a hypothetical
derivative may also be used for the purpose of assessing whether a hedging
relationship meets the hedge effectiveness requirements
Rebalancing the hedging relationship and changes to the hedge
ratio
B657 Rebalancing refers to the adjustments made to the designated quantities of the
hedged item or the hedging instrument of an already existing hedging
relationship for the purpose of maintaining a hedge ratio that complies with the
hedge effectiveness requirements Changes to designated quantities of a hedged
IFRS 9
IFRS Foundation A459item or of a hedging instrument for a different purpose do not constitute
rebalancing for the purpose of this Standard
B658 Rebalancing is accounted for as a continuation of the hedging relationship in
accordance with paragraphs B659–B6521 On rebalancing the hedge
ineffectiveness of the hedging relationship is determined and recognised
immediately before adjusting the hedging relationship
B659 Adjusting the hedge ratio allows an entity to respond to changes in the
relationship between the hedging instrument and the hedged item that arise
from their underlyings or risk variables For example a hedging relationship in
which the hedging instrument and the hedged item have different but related
underlyings changes in response to a change in the relationship between those
two underlyings (for example different but related reference indices rates or
prices) Hence rebalancing allows the continuation of a hedging relationship in
situations in which the relationship between the hedging instrument and the
hedged item changes in a way that can be compensated for by adjusting the
hedge ratio
B6510 For example an entity hedges an exposure to Foreign Currency A using a
currency derivative that references Foreign Currency B and Foreign Currencies A
and B are pegged (ie their exchange rate is maintained within a band or at an
exchange rate set by a central bank or other authority) If the exchange rate
between Foreign Currency A and Foreign Currency B were changed (ie a new
band or rate was set) rebalancing the hedging relationship to reflect the new
exchange rate would ensure that the hedging relationship would continue to
meet the hedge effectiveness requirement for the hedge ratio in the new
circumstances In contrast if there was a default on the currency derivative
changing the hedge ratio could not ensure that the hedging relationship would
continue to meet that hedge effectiveness requirement Hence rebalancing does
not facilitate the continuation of a hedging relationship in situations in which
the relationship between the hedging instrument and the hedged item changes
in a way that cannot be compensated for by adjusting the hedge ratio
B6511 Not every change in the extent of offset between the changes in the fair value of
the hedging instrument and the hedged item’s fair value or cash flows
constitutes a change in the relationship between the hedging instrument and
the hedged item An entity analyses the sources of hedge ineffectiveness that it
expected to affect the hedging relationship during its term and evaluates
whether changes in the extent of offset are
(a) fluctuations around the hedge ratio which remains valid (ie continues
to appropriately reflect the relationship between the hedging
instrument and the hedged item) or
(b) an indication that the hedge ratio no longer appropriately reflects the
relationship between the hedging instrument and the hedged item
An entity performs this evaluation against the hedge effectiveness requirement
for the hedge ratio ie to ensure that the hedging relationship does not reflect an
imbalance between the weightings of the hedged item and the hedging
instrument that would create hedge ineffectiveness (irrespective of whether
IFRS 9
IFRS FoundationA460recognised or not) that could result in an accounting outcome that would be
inconsistent with the purpose of hedge accounting Hence this evaluation
requires judgement
B6512 Fluctuation around a constant hedge ratio (and hence the related hedge
ineffectiveness) cannot be reduced by adjusting the hedge ratio in response to
each particular outcome Hence in such circumstances the change in the
extent of offset is a matter of measuring and recognising hedge ineffectiveness
but does not require rebalancing
B6513 Conversely if changes in the extent of offset indicate that the fluctuation is
around a hedge ratio that is different from the hedge ratio that is currently used
for that hedging relationship or that there is a trend leading away from that
hedge ratio hedge ineffectiveness can be reduced by adjusting the hedge ratio
whereas retaining the hedge ratio would increasingly produce hedge
ineffectiveness Hence in such circumstances an entity must evaluate whether
the hedging relationship reflects an imbalance between the weightings of the
hedged item and the hedging instrument that would create hedge
ineffectiveness (irrespective of whether recognised or not) that could result in an
accounting outcome that would be inconsistent with the purpose of hedge
accounting If the hedge ratio is adjusted it also affects the measurement and
recognition of hedge ineffectiveness because on rebalancing the hedge
ineffectiveness of the hedging relationship must be determined and recognised
immediately before adjusting the hedging relationship in accordance with
paragraph B658
B6514 Rebalancing means that for hedge accounting purposes after the start of a
hedging relationship an entity adjusts the quantities of the hedging instrument
or the hedged item in response to changes in circumstances that affect the
hedge ratio of that hedging relationship Typically that adjustment should
reflect adjustments in the quantities of the hedging instrument and the hedged
item that it actually uses However an entity must adjust the hedge ratio that
results from the quantities of the hedged item or the hedging instrument that it
actually uses if
(a) the hedge ratio that results from changes to the quantities of the
hedging instrument or the hedged item that the entity actually uses
would reflect an imbalance that would create hedge ineffectiveness that
could result in an accounting outcome that would be inconsistent with
the purpose of hedge accounting or
(b) an entity would retain quantities of the hedging instrument and the
hedged item that it actually uses resulting in a hedge ratio that in new
circumstances would reflect an imbalance that would create hedge
ineffectiveness that could result in an accounting outcome that would be
inconsistent with the purpose of hedge accounting (ie an entity must not
create an imbalance by omitting to adjust the hedge ratio)
B6515 Rebalancing does not apply if the risk management objective for a hedging
relationship has changed Instead hedge accounting for that hedging
relationship shall be discontinued (despite that an entity might designate a new
IFRS 9
IFRS Foundation A461hedging relationship that involves the hedging instrument or hedged item of
the previous hedging relationship as described in paragraph B6528)
B6516 If a hedging relationship is rebalanced the adjustment to the hedge ratio can be
effected in different ways
(a) the weighting of the hedged item can be increased (which at the same
time reduces the weighting of the hedging instrument) by
(i) increasing the volume of the hedged item or
(ii) decreasing the volume of the hedging instrument
(b) the weighting of the hedging instrument can be increased (which at the
same time reduces the weighting of the hedged item) by
(i) increasing the volume of the hedging instrument or
(ii) decreasing the volume of the hedged item
Changes in volume refer to the quantities that are part of the hedging
relationship Hence decreases in volumes do not necessarily mean that the
items or transactions no longer exist or are no longer expected to occur but
that they are not part of the hedging relationship For example decreasing the
volume of the hedging instrument can result in the entity retaining a derivative
but only part of it might remain a hedging instrument of the hedging
relationship This could occur if the rebalancing could be effected only by
reducing the volume of the hedging instrument in the hedging relationship but
with the entity retaining the volume that is no longer needed In that case the
undesignated part of the derivative would be accounted for at fair value through
profit or loss (unless it was designated as a hedging instrument in a different
hedging relationship)
B6517 Adjusting the hedge ratio by increasing the volume of the hedged item does not
affect how the changes in the fair value of the hedging instrument are
measured The measurement of the changes in the value of the hedged item
related to the previously designated volume also remains unaffected However
from the date of rebalancing the changes in the value of the hedged item also
include the change in the value of the additional volume of the hedged item
These changes are measured starting from and by reference to the date of
rebalancing instead of the date on which the hedging relationship was
designated For example if an entity originally hedged a volume of 100 tonnes
of a commodity at a forward price of CU80 (the forward price at inception of the
hedging relationship) and added a volume of 10 tonnes on rebalancing when the
forward price was CU90 the hedged item after rebalancing would comprise two
layers 100 tonnes hedged at CU80 and 10 tonnes hedged at CU90
B6518 Adjusting the hedge ratio by decreasing the volume of the hedging instrument
does not affect how the changes in the value of the hedged item are measured
The measurement of the changes in the fair value of the hedging instrument
related to the volume that continues to be designated also remains unaffected
However from the date of rebalancing the volume by which the hedging
instrument was decreased is no longer part of the hedging relationship For
example if an entity originally hedged the price risk of a commodity using a
derivative volume of 100 tonnes as the hedging instrument and reduces that
IFRS 9
IFRS FoundationA462volume by 10 tonnes on rebalancing a nominal amount of 90 tonnes of the
hedging instrument volume would remain (see paragraph B6516 for the
consequences for the derivative volume (ie the 10 tonnes) that is no longer a part
of the hedging relationship)
B6519 Adjusting the hedge ratio by increasing the volume of the hedging instrument
does not affect how the changes in the value of the hedged item are measured
The measurement of the changes in the fair value of the hedging instrument
related to the previously designated volume also remains unaffected However
from the date of rebalancing the changes in the fair value of the hedging
instrument also include the changes in the value of the additional volume of the
hedging instrument The changes are measured starting from and by reference
to the date of rebalancing instead of the date on which the hedging relationship
was designated For example if an entity originally hedged the price risk of a
commodity using a derivative volume of 100 tonnes as the hedging instrument
and added a volume of 10 tonnes on rebalancing the hedging instrument after
rebalancing would comprise a total derivative volume of 110 tonnes The
change in the fair value of the hedging instrument is the total change in the fair
value of the derivatives that make up the total volume of 110 tonnes These
derivatives could (and probably would) have different critical terms such as
their forward rates because they were entered into at different points in time
(including the possibility of designating derivatives into hedging relationships
after their initial recognition)
B6520 Adjusting the hedge ratio by decreasing the volume of the hedged item does not
affect how the changes in the fair value of the hedging instrument are
measured The measurement of the changes in the value of the hedged item
related to the volume that continues to be designated also remains unaffected
However from the date of rebalancing the volume by which the hedged item
was decreased is no longer part of the hedging relationship For example if an
entity originally hedged a volume of 100 tonnes of a commodity at a forward
price of CU80 and reduces that volume by 10 tonnes on rebalancing the hedged
item after rebalancing would be 90 tonnes hedged at CU80 The 10 tonnes of the
hedged item that are no longer part of the hedging relationship would be
accounted for in accordance with the requirements for the discontinuation of
hedge accounting (see paragraphs 656–657 and B6522–B6528)
B6521 When rebalancing a hedging relationship an entity shall update its analysis of
the sources of hedge ineffectiveness that are expected to affect the hedging
relationship during its (remaining) term (see paragraph B642) The
documentation of the hedging relationship shall be updated accordingly
Discontinuation of hedge accounting
B6522 Discontinuation of hedge accounting applies prospectively from the date on
which the qualifying criteria are no longer met
B6523 An entity shall not dedesignate and thereby discontinue a hedging relationship
that
(a) still meets the risk management objective on the basis of which it
qualified for hedge accounting (ie the entity still pursues that risk
management objective) and
IFRS 9
IFRS Foundation A463(b) continues to meet all other qualifying criteria (after taking into account
any rebalancing of the hedging relationship if applicable)
B6524 For the purposes of this Standard an entity’s risk management strategy is
distinguished from its risk management objectives The risk management
strategy is established at the highest level at which an entity determines how it
manages its risk Risk management strategies typically identify the risks to
which the entity is exposed and set out how the entity responds to them A risk
management strategy is typically in place for a longer period and may include
some flexibility to react to changes in circumstances that occur while that
strategy is in place (for example different interest rate or commodity price levels
that result in a different extent of hedging) This is normally set out in a general
document that is cascaded down through an entity through policies containing
more specific guidelines In contrast the risk management objective for a
hedging relationship applies at the level of a particular hedging relationship It
relates to how the particular hedging instrument that has been designated is
used to hedge the particular exposure that has been designated as the hedged
item Hence a risk management strategy can involve many different hedging
relationships whose risk management objectives relate to executing that overall
risk management strategy For example
(a) an entity has a strategy of managing its interest rate exposure on debt
funding that sets ranges for the overall entity for the mix between
variablerate and fixedrate funding The strategy is to maintain between
20 per cent and 40 per cent of the debt at fixed rates The entity decides
from time to time how to execute this strategy (ie where it positions
itself within the 20 per cent to 40 per cent range for fixedrate interest
exposure) depending on the level of interest rates If interest rates are
low the entity fixes the interest for more debt than when interest rates
are high The entity’s debt is CU100 of variablerate debt of which CU30
is swapped into a fixedrate exposure The entity takes advantage of low
interest rates to issue an additional CU50 of debt to finance a major
investment which the entity does by issuing a fixedrate bond In the
light of the low interest rates the entity decides to set its fixed
interestrate exposure to 40 per cent of the total debt by reducing by
CU20 the extent to which it previously hedged its variablerate exposure
resulting in CU60 of fixedrate exposure In this situation the risk
management strategy itself remains unchanged However in contrast
the entity’s execution of that strategy has changed and this means that
for CU20 of variablerate exposure that was previously hedged the risk
management objective has changed (ie at the hedging relationship level)
Consequently in this situation hedge accounting must be discontinued
for CU20 of the previously hedged variablerate exposure This could
involve reducing the swap position by a CU20 nominal amount but
depending on the circumstances an entity might retain that swap
volume and for example use it for hedging a different exposure or it
might become part of a trading book Conversely if an entity instead
swapped a part of its new fixedrate debt into a variablerate exposure
hedge accounting would have to be continued for its previously hedged
variablerate exposure
IFRS 9
IFRS FoundationA464(b) some exposures result from positions that frequently change for
example the interest rate risk of an open portfolio of debt instruments
The addition of new debt instruments and the derecognition of debt
instruments continuously change that exposure (ie it is different from
simply running off a position that matures) This is a dynamic process in
which both the exposure and the hedging instruments used to manage it
do not remain the same for long Consequently an entity with such an
exposure frequently adjusts the hedging instruments used to manage
the interest rate risk as the exposure changes For example debt
instruments with 24 months’ remaining maturity are designated as the
hedged item for interest rate risk for 24 months The same procedure is
applied to other time buckets or maturity periods After a short period
of time the entity discontinues all some or a part of the previously
designated hedging relationships for maturity periods and designates
new hedging relationships for maturity periods on the basis of their size
and the hedging instruments that exist at that time The
discontinuation of hedge accounting in this situation reflects that those
hedging relationships are established in such a way that the entity looks
at a new hedging instrument and a new hedged item instead of the
hedging instrument and the hedged item that were designated
previously The risk management strategy remains the same but there is
no risk management objective that continues for those previously
designated hedging relationships which as such no longer exist In such
a situation the discontinuation of hedge accounting applies to the
extent to which the risk management objective has changed This
depends on the situation of an entity and could for example affect all or
only some hedging relationships of a maturity period or only part of a
hedging relationship
(c) an entity has a risk management strategy whereby it manages the
foreign currency risk of forecast sales and the resulting receivables
Within that strategy the entity manages the foreign currency risk as a
particular hedging relationship only up to the point of the recognition of
the receivable Thereafter the entity no longer manages the foreign
currency risk on the basis of that particular hedging relationship
Instead it manages together the foreign currency risk from receivables
payables and derivatives (that do not relate to forecast transactions that
are still pending) denominated in the same foreign currency For
accounting purposes this works as a natural’ hedge because the gains
and losses from the foreign currency risk on all of those items are
immediately recognised in profit or loss Consequently for accounting
purposes if the hedging relationship is designated for the period up to
the payment date it must be discontinued when the receivable is
recognised because the risk management objective of the original
hedging relationship no longer applies The foreign currency risk is now
managed within the same strategy but on a different basis Conversely if
an entity had a different risk management objective and managed the
foreign currency risk as one continuous hedging relationship specifically
for that forecast sales amount and the resulting receivable until the
settlement date hedge accounting would continue until that date
IFRS 9
IFRS Foundation A465B6525 The discontinuation of hedge accounting can affect
(a) a hedging relationship in its entirety or
(b) a part of a hedging relationship (which means that hedge accounting
continues for the remainder of the hedging relationship)
B6526 A hedging relationship is discontinued in its entirety when as a whole it ceases
to meet the qualifying criteria For example
(a) the hedging relationship no longer meets the risk management objective
on the basis of which it qualified for hedge accounting (ie the entity no
longer pursues that risk management objective)
(b) the hedging instrument or instruments have been sold or terminated (in
relation to the entire volume that was part of the hedging relationship)
or
(c) there is no longer an economic relationship between the hedged item
and the hedging instrument or the effect of credit risk starts to dominate
the value changes that result from that economic relationship
B6527 A part of a hedging relationship is discontinued (and hedge accounting
continues for its remainder) when only a part of the hedging relationship ceases
to meet the qualifying criteria For example
(a) on rebalancing of the hedging relationship the hedge ratio might be
adjusted in such a way that some of the volume of the hedged item is no
longer part of the hedging relationship (see paragraph B6520) hence
hedge accounting is discontinued only for the volume of the hedged
item that is no longer part of the hedging relationship or
(b) when the occurrence of some of the volume of the hedged item that is (or
is a component of) a forecast transaction is no longer highly probable
hedge accounting is discontinued only for the volume of the hedged
item whose occurrence is no longer highly probable However if an
entity has a history of having designated hedges of forecast transactions
and having subsequently determined that the forecast transactions are
no longer expected to occur the entity’s ability to predict forecast
transactions accurately is called into question when predicting similar
forecast transactions This affects the assessment of whether similar
forecast transactions are highly probable (see paragraph 633) and hence
whether they are eligible as hedged items
B6528 An entity can designate a new hedging relationship that involves the hedging
instrument or hedged item of a previous hedging relationship for which hedge
accounting was (in part or in its entirety) discontinued This does not constitute
a continuation of a hedging relationship but is a restart For example
(a) a hedging instrument experiences such a severe credit deterioration that
the entity replaces it with a new hedging instrument This means that
the original hedging relationship failed to achieve the risk management
objective and is hence discontinued in its entirety The new hedging
instrument is designated as the hedge of the same exposure that was
hedged previously and forms a new hedging relationship Hence the
IFRS 9
IFRS FoundationA466changes in the fair value or the cash flows of the hedged item are
measured starting from and by reference to the date of designation of
the new hedging relationship instead of the date on which the original
hedging relationship was designated
(b) a hedging relationship is discontinued before the end of its term The
hedging instrument in that hedging relationship can be designated as
the hedging instrument in another hedging relationship (for example
when adjusting the hedge ratio on rebalancing by increasing the volume
of the hedging instrument or when designating a whole new hedging
relationship)
Accounting for the time value of options
B6529 An option can be considered as being related to a time period because its time
value represents a charge for providing protection for the option holder over a
period of time However the relevant aspect for the purpose of assessing
whether an option hedges a transaction or timeperiod related hedged item are
the characteristics of that hedged item including how and when it affects profit
or loss Hence an entity shall assess the type of hedged item (see
paragraph 6515(a)) on the basis of the nature of the hedged item (regardless of
whether the hedging relationship is a cash flow hedge or a fair value hedge)
(a) the time value of an option relates to a transaction related hedged item if
the nature of the hedged item is a transaction for which the time value
has the character of costs of that transaction An example is when the
time value of an option relates to a hedged item that results in the
recognition of an item whose initial measurement includes transaction
costs (for example an entity hedges a commodity purchase whether it is
a forecast transaction or a firm commitment against the commodity
price risk and includes the transaction costs in the initial measurement
of the inventory) As a consequence of including the time value of the
option in the initial measurement of the particular hedged item the
time value affects profit or loss at the same time as that hedged item
Similarly an entity that hedges a sale of a commodity whether it is a
forecast transaction or a firm commitment would include the time
value of the option as part of the cost related to that sale (hence the time
value would be recognised in profit or loss in the same period as the
revenue from the hedged sale)
(b) the time value of an option relates to a timeperiod related hedged item
if the nature of the hedged item is such that the time value has the
character of a cost for obtaining protection against a risk over a
particular period of time (but the hedged item does not result in a
transaction that involves the notion of a transaction cost in accordance
with (a)) For example if commodity inventory is hedged against a fair
value decrease for six months using a commodity option with a
corresponding life the time value of the option would be allocated to
profit or loss (ie amortised on a systematic and rational basis) over that
sixmonth period Another example is a hedge of a net investment in a
IFRS 9
IFRS Foundation A467foreign operation that is hedged for 18 months using a foreignexchange
option which would result in allocating the time value of the option
over that 18month period
B6530 The characteristics of the hedged item including how and when the hedged
item affects profit or loss also affect the period over which the time value of an
option that hedges a timeperiod related hedged item is amortised which is
consistent with the period over which the option’s intrinsic value can affect
profit or loss in accordance with hedge accounting For example if an interest
rate option (a cap) is used to provide protection against increases in the interest
expense on a floating rate bond the time value of that cap is amortised to profit
or loss over the same period over which any intrinsic value of the cap would
affect profit or loss
(a) if the cap hedges increases in interest rates for the first three years out of
a total life of the floating rate bond of five years the time value of that
cap is amortised over the first three years or
(b) if the cap is a forward start option that hedges increases in interest rates
for years two and three out of a total life of the floating rate bond of five
years the time value of that cap is amortised during years two and three
B6531 The accounting for the time value of options in accordance with
paragraph 6515 also applies to a combination of a purchased and a written
option (one being a put option and one being a call option) that at the date of
designation as a hedging instrument has a net nil time value (commonly
referred to as a zerocost collar’) In that case an entity shall recognise any
changes in time value in other comprehensive income even though the
cumulative change in time value over the total period of the hedging
relationship is nil Hence if the time value of the option relates to
(a) a transaction related hedged item the amount of time value at the end
of the hedging relationship that adjusts the hedged item or that is
reclassified to profit or loss (see paragraph 6515(b)) would be nil
(b) a timeperiod related hedged item the amortisation expense related to
the time value is nil
B6532 The accounting for the time value of options in accordance with
paragraph 6515 applies only to the extent that the time value relates to the
hedged item (aligned time value) The time value of an option relates to the
hedged item if the critical terms of the option (such as the nominal amount life
and underlying) are aligned with the hedged item Hence if the critical terms of
the option and the hedged item are not fully aligned an entity shall determine
the aligned time value ie how much of the time value included in the premium
(actual time value) relates to the hedged item (and therefore should be treated in
accordance with paragraph 6515) An entity determines the aligned time value
using the valuation of the option that would have critical terms that perfectly
match the hedged item
B6533 If the actual time value and the aligned time value differ an entity shall
determine the amount that is accumulated in a separate component of equity in
accordance with paragraph 6515 as follows
IFRS 9
IFRS FoundationA468(a) if at inception of the hedging relationship the actual time value is
higher than the aligned time value the entity shall
(i) determine the amount that is accumulated in a separate
component of equity on the basis of the aligned time value and
(ii) account for the differences in the fair value changes between the
two time values in profit or loss
(b) if at inception of the hedging relationship the actual time value is lower
than the aligned time value the entity shall determine the amount that
is accumulated in a separate component of equity by reference to the
lower of the cumulative change in fair value of
(i) the actual time value and
(ii) the aligned time value
Any remainder of the change in fair value of the actual time value shall be
recognised in profit or loss
Accounting for the forward element of forward contracts and
foreign currency basis spreads of financial instruments
B6534 A forward contract can be considered as being related to a time period because
its forward element represents charges for a period of time (which is the tenor
for which it is determined) However the relevant aspect for the purpose of
assessing whether a hedging instrument hedges a transaction or timeperiod
related hedged item are the characteristics of that hedged item including how
and when it affects profit or loss Hence an entity shall assess the type of
hedged item (see paragraphs 6516 and 6515(a)) on the basis of the nature of
the hedged item (regardless of whether the hedging relationship is a cash flow
hedge or a fair value hedge)
(a) the forward element of a forward contract relates to a transaction related
hedged item if the nature of the hedged item is a transaction for which
the forward element has the character of costs of that transaction An
example is when the forward element relates to a hedged item that
results in the recognition of an item whose initial measurement includes
transaction costs (for example an entity hedges an inventory purchase
denominated in a foreign currency whether it is a forecast transaction
or a firm commitment against foreign currency risk and includes the
transaction costs in the initial measurement of the inventory) As a
consequence of including the forward element in the initial
measurement of the particular hedged item the forward element affects
profit or loss at the same time as that hedged item Similarly an entity
that hedges a sale of a commodity denominated in a foreign currency
against foreign currency risk whether it is a forecast transaction or a
firm commitment would include the forward element as part of the cost
that is related to that sale (hence the forward element would be
recognised in profit or loss in the same period as the revenue from the
hedged sale)
IFRS 9
IFRS Foundation A469(b) the forward element of a forward contract relates to a timeperiod
related hedged item if the nature of the hedged item is such that the
forward element has the character of a cost for obtaining protection
against a risk over a particular period of time (but the hedged item does
not result in a transaction that involves the notion of a transaction cost
in accordance with (a)) For example if commodity inventory is hedged
against changes in fair value for six months using a commodity forward
contract with a corresponding life the forward element of the forward
contract would be allocated to profit or loss (ie amortised on a systematic
and rational basis) over that sixmonth period Another example is a
hedge of a net investment in a foreign operation that is hedged for
18 months using a foreignexchange forward contract which would
result in allocating the forward element of the forward contract over
that 18month period
B6535 The characteristics of the hedged item including how and when the hedged
item affects profit or loss also affect the period over which the forward element
of a forward contract that hedges a timeperiod related hedged item is
amortised which is over the period to which the forward element relates For
example if a forward contract hedges the exposure to variability in threemonth
interest rates for a threemonth period that starts in six months’ time the
forward element is amortised during the period that spans months seven to
nine
B6536 The accounting for the forward element of a forward contract in accordance
with paragraph 6516 also applies if at the date on which the forward contract
is designated as a hedging instrument the forward element is nil In that case
an entity shall recognise any fair value changes attributable to the forward
element in other comprehensive income even though the cumulative fair value
change attributable to the forward element over the total period of the hedging
relationship is nil Hence if the forward element of a forward contract relates
to
(a) a transaction related hedged item the amount in respect of the forward
element at the end of the hedging relationship that adjusts the hedged
item or that is reclassified to profit or loss (see paragraphs 6515(b)
and 6516) would be nil
(b) a timeperiod related hedged item the amortisation amount related to
the forward element is nil
B6537 The accounting for the forward element of forward contracts in accordance with
paragraph 6516 applies only to the extent that the forward element relates to
the hedged item (aligned forward element) The forward element of a forward
contract relates to the hedged item if the critical terms of the forward contract
(such as the nominal amount life and underlying) are aligned with the hedged
item Hence if the critical terms of the forward contract and the hedged item
are not fully aligned an entity shall determine the aligned forward element
ie how much of the forward element included in the forward contract (actual
forward element) relates to the hedged item (and therefore should be treated in
accordance with paragraph 6516) An entity determines the aligned forward
IFRS 9
IFRS FoundationA470element using the valuation of the forward contract that would have critical
terms that perfectly match the hedged item
B6538 If the actual forward element and the aligned forward element differ an entity
shall determine the amount that is accumulated in a separate component of
equity in accordance with paragraph 6516 as follows
(a) if at inception of the hedging relationship the absolute amount of the
actual forward element is higher than that of the aligned forward
element the entity shall
(i) determine the amount that is accumulated in a separate
component of equity on the basis of the aligned forward element
and
(ii) account for the differences in the fair value changes between the
two forward elements in profit or loss
(b) if at inception of the hedging relationship the absolute amount of the
actual forward element is lower than that of the aligned forward
element the entity shall determine the amount that is accumulated in a
separate component of equity by reference to the lower of the
cumulative change in fair value of
(i) the absolute amount of the actual forward element and
(ii) the absolute amount of the aligned forward element
Any remainder of the change in fair value of the actual forward element shall be
recognised in profit or loss
B6539 When an entity separates the foreign currency basis spread from a financial
instrument and excludes it from the designation of that financial instrument as
the hedging instrument (see paragraph 624(b)) the application guidance in
paragraphs B6534–B6538 applies to the foreign currency basis spread in the
same manner as it is applied to the forward element of a forward contract
Hedge of a group of items (Section 66)
Hedge of a net position
Eligibility for hedge accounting and designation of a net position
B661 A net position is eligible for hedge accounting only if an entity hedges on a net
basis for risk management purposes Whether an entity hedges in this way is a
matter of fact (not merely of assertion or documentation) Hence an entity
cannot apply hedge accounting on a net basis solely to achieve a particular
accounting outcome if that would not reflect its risk management approach
Net position hedging must form part of an established risk management
strategy Normally this would be approved by key management personnel as
defined in IAS 24
B662 For example Entity A whose functional currency is its local currency has a firm
commitment to pay FC150000 for advertising expenses in nine months’ time
and a firm commitment to sell finished goods for FC150000 in 15 months’ time
Entity A enters into a foreign currency derivative that settles in nine months’
IFRS 9
IFRS Foundation A471time under which it receives FC100 and pays CU70 Entity A has no other
exposures to FC Entity A does not manage foreign currency risk on a net basis
Hence Entity A cannot apply hedge accounting for a hedging relationship
between the foreign currency derivative and a net position of FC100 (consisting
of FC150000 of the firm purchase commitment—ie advertising services—and
FC149900 (of the FC150000) of the firm sale commitment) for a ninemonth
period
B663 If Entity A did manage foreign currency risk on a net basis and did not enter into
the foreign currency derivative (because it increases its foreign currency risk
exposure instead of reducing it) then the entity would be in a natural hedged
position for nine months Normally this hedged position would not be reflected
in the financial statements because the transactions are recognised in different
reporting periods in the future The nil net position would be eligible for hedge
accounting only if the conditions in paragraph 666 are met
B664 When a group of items that constitute a net position is designated as a hedged
item an entity shall designate the overall group of items that includes the items
that can make up the net position An entity is not permitted to designate a
nonspecific abstract amount of a net position For example an entity has a
group of firm sale commitments in nine months’ time for FC100 and a group of
firm purchase commitments in 18 months’ time for FC120 The entity cannot
designate an abstract amount of a net position up to FC20 Instead it must
designate a gross amount of purchases and a gross amount of sales that together
give rise to the hedged net position An entity shall designate gross positions
that give rise to the net position so that the entity is able to comply with the
requirements for the accounting for qualifying hedging relationships
Application of the hedge effectiveness requirements to a hedge of a
net position
B665 When an entity determines whether the hedge effectiveness requirements of
paragraph 641(c) are met when it hedges a net position it shall consider the
changes in the value of the items in the net position that have a similar effect as
the hedging instrument in conjunction with the fair value change on the
hedging instrument For example an entity has a group of firm sale
commitments in nine months’ time for FC100 and a group of firm purchase
commitments in 18 months’ time for FC120 It hedges the foreign currency risk
of the net position of FC20 using a forward exchange contract for FC20 When
determining whether the hedge effectiveness requirements of paragraph 641(c)
are met the entity shall consider the relationship between
(a) the fair value change on the forward exchange contract together with
the foreign currency risk related changes in the value of the firm sale
commitments and
(b) the foreign currency risk related changes in the value of the firm
purchase commitments
B666 Similarly if in the example in paragraph B665 the entity had a nil net position
it would consider the relationship between the foreign currency risk related
changes in the value of the firm sale commitments and the foreign currency risk
IFRS 9
IFRS FoundationA472related changes in the value of the firm purchase commitments when
determining whether the hedge effectiveness requirements of paragraph 641(c)
are met
Cash flow hedges that constitute a net position
B667 When an entity hedges a group of items with offsetting risk positions (ie a net
position) the eligibility for hedge accounting depends on the type of hedge If
the hedge is a fair value hedge then the net position may be eligible as a hedged
item If however the hedge is a cash flow hedge then the net position can only
be eligible as a hedged item if it is a hedge of foreign currency risk and the
designation of that net position specifies the reporting period in which the
forecast transactions are expected to affect profit or loss and also specifies their
nature and volume
B668 For example an entity has a net position that consists of a bottom layer of FC100
of sales and a bottom layer of FC150 of purchases Both sales and purchases are
denominated in the same foreign currency In order to sufficiently specify the
designation of the hedged net position the entity specifies in the original
documentation of the hedging relationship that sales can be of Product A or
Product B and purchases can be of Machinery Type A Machinery Type B and Raw
Material A The entity also specifies the volumes of the transactions by each
nature The entity documents that the bottom layer of sales (FC100) is made up
of a forecast sales volume of the first FC70 of Product A and the first FC30 of
Product B If those sales volumes are expected to affect profit or loss in different
reporting periods the entity would include that in the documentation for
example the first FC70 from sales of Product A that are expected to affect profit
or loss in the first reporting period and the first FC30 from sales of Product B
that are expected to affect profit or loss in the second reporting period The
entity also documents that the bottom layer of the purchases (FC150) is made up
of purchases of the first FC60 of Machinery Type A the first FC40 of Machinery
Type B and the first FC50 of Raw Material A If those purchase volumes are
expected to affect profit or loss in different reporting periods the entity would
include in the documentation a disaggregation of the purchase volumes by the
reporting periods in which they are expected to affect profit or loss (similarly to
how it documents the sales volumes) For example the forecast transaction
would be specified as
(a) the first FC60 of purchases of Machinery Type A that are expected to
affect profit or loss from the third reporting period over the next
ten reporting periods
(b) the first FC40 of purchases of Machinery Type B that are expected to
affect profit or loss from the fourth reporting period over the next
20 reporting periods and
(c) the first FC50 of purchases of Raw Material A that are expected to be
received in the third reporting period and sold ie affect profit or loss in
that and the next reporting period
Specifying the nature of the forecast transaction volumes would include aspects
such as the depreciation pattern for items of property plant and equipment of
the same kind if the nature of those items is such that the depreciation pattern
IFRS 9
IFRS Foundation A473could vary depending on how the entity uses those items For example if the
entity uses items of Machinery Type A in two different production processes that
result in straightline depreciation over ten reporting periods and the units of
production method respectively its documentation of the forecast purchase
volume for Machinery Type A would disaggregate that volume by which of those
depreciation patterns will apply
B669 For a cash flow hedge of a net position the amounts determined in accordance
with paragraph 6511 shall include the changes in the value of the items in the
net position that have a similar effect as the hedging instrument in conjunction
with the fair value change on the hedging instrument However the changes in
the value of the items in the net position that have a similar effect as the
hedging instrument are recognised only once the transactions that they relate to
are recognised such as when a forecast sale is recognised as revenue For
example an entity has a group of highly probable forecast sales in nine months’
time for FC100 and a group of highly probable forecast purchases in 18 months’
time for FC120 It hedges the foreign currency risk of the net position of FC20
using a forward exchange contract for FC20 When determining the amounts
that are recognised in the cash flow hedge reserve in accordance with paragraph
6511(a)–6511(b) the entity compares
(a) the fair value change on the forward exchange contract together with
the foreign currency risk related changes in the value of the highly
probable forecast sales with
(b) the foreign currency risk related changes in the value of the highly
probable forecast purchases
However the entity recognises only amounts related to the forward exchange
contract until the highly probable forecast sales transactions are recognised in
the financial statements at which time the gains or losses on those forecast
transactions are recognised (ie the change in the value attributable to the
change in the foreign exchange rate between the designation of the hedging
relationship and the recognition of revenue)
B6610 Similarly if in the example the entity had a nil net position it would compare
the foreign currency risk related changes in the value of the highly probable
forecast sales with the foreign currency risk related changes in the value of the
highly probable forecast purchases However those amounts are recognised
only once the related forecast transactions are recognised in the financial
statements
Layers of groups of items designated as the hedged item
B6611 For the same reasons noted in paragraph B6319 designating layer components
of groups of existing items requires the specific identification of the nominal
amount of the group of items from which the hedged layer component is
defined
B6612 A hedging relationship can include layers from several different groups of items
For example in a hedge of a net position of a group of assets and a group of
IFRS 9
IFRS FoundationA474liabilities the hedging relationship can comprise in combination a layer
component of the group of assets and a layer component of the group of
liabilities
Presentation of hedging instrument gains or losses
B6613 If items are hedged together as a group in a cash flow hedge they might affect
different line items in the statement of profit or loss and other comprehensive
income The presentation of hedging gains or losses in that statement depends
on the group of items
B6614 If the group of items does not have any offsetting risk positions (for example a
group of foreign currency expenses that affect different line items in the
statement of profit or loss and other comprehensive income that are hedged for
foreign currency risk) then the reclassified hedging instrument gains or losses
shall be apportioned to the line items affected by the hedged items This
apportionment shall be done on a systematic and rational basis and shall not
result in the grossing up of the net gains or losses arising from a single hedging
instrument
B6615 If the group of items does have offsetting risk positions (for example a group of
sales and expenses denominated in a foreign currency hedged together for
foreign currency risk) then an entity shall present the hedging gains or losses in
a separate line item in the statement of profit or loss and other comprehensive
income Consider for example a hedge of the foreign currency risk of a net
position of foreign currency sales of FC100 and foreign currency expenses of
FC80 using a forward exchange contract for FC20 The gain or loss on the
forward exchange contract that is reclassified from the cash flow hedge reserve
to profit or loss (when the net position affects profit or loss) shall be presented in
a separate line item from the hedged sales and expenses Moreover if the sales
occur in an earlier period than the expenses the sales revenue is still measured
at the spot exchange rate in accordance with IAS 21 The related hedging gain or
loss is presented in a separate line item so that profit or loss reflects the effect of
hedging the net position with a corresponding adjustment to the cash flow
hedge reserve When the hedged expenses affect profit or loss in a later period
the hedging gain or loss previously recognised in the cash flow hedge reserve on
the sales is reclassified to profit or loss and presented as a separate line item
from those that include the hedged expenses which are measured at the spot
exchange rate in accordance with IAS 21
B6616 For some types of fair value hedges the objective of the hedge is not primarily to
offset the fair value change of the hedged item but instead to transform the cash
flows of the hedged item For example an entity hedges the fair value interest
rate risk of a fixedrate debt instrument using an interest rate swap The entity’s
hedge objective is to transform the fixedinterest cash flows into floating interest
cash flows This objective is reflected in the accounting for the hedging
relationship by accruing the net interest accrual on the interest rate swap in
profit or loss In the case of a hedge of a net position (for example a net position
of a fixedrate asset and a fixedrate liability) this net interest accrual must be
presented in a separate line item in the statement of profit or loss and other
comprehensive income This is to avoid the grossing up of a single instrument’s
net gains or losses into offsetting gross amounts and recognising them in
IFRS 9
IFRS Foundation A475different line items (for example this avoids grossing up a net interest receipt on
a single interest rate swap into gross interest revenue and gross interest
expense)
Effective date and transition (Chapter 7)
Transition (Section 72)
Financial assets held for trading
B721 At the date of initial application of this Standard an entity must determine
whether the objective of the entity’s business model for managing any of its
financial assets meets the condition in paragraph 412(a) or the condition in
paragraph 412A(a) or if a financial asset is eligible for the election in
paragraph 575 For that purpose an entity shall determine whether financial
assets meet the definition of held for trading as if the entity had purchased the
assets at the date of initial application
Impairment
B722 On transition an entity should seek to approximate the credit risk on initial
recognition by considering all reasonable and supportable information that is
available without undue cost or effort An entity is not required to undertake an
exhaustive search for information when determining at the date of transition
whether there have been significant increases in credit risk since initial
recognition If an entity is unable to make this determination without undue
cost or effort paragraph 7220 applies
B723 In order to determine the loss allowance on financial instruments initially
recognised (or loan commitments or financial guarantee contracts to which the
entity became a party to the contract) prior to the date of initial application
both on transition and until the derecognition of those items an entity shall
consider information that is relevant in determining or approximating the
credit risk at initial recognition In order to determine or approximate the
initial credit risk an entity may consider internal and external information
including portfolio information in accordance with paragraphs B551–B556
B724 An entity with little historical information may use information from internal
reports and statistics (that may have been generated when deciding whether to
launch a new product) information about similar products or peer group
experience for comparable financial instruments if relevant
Definitions (Appendix A)
Derivatives
BA1 Typical examples of derivatives are futures and forward swap and option
contracts A derivative usually has a notional amount which is an amount of
currency a number of shares a number of units of weight or volume or other
units specified in the contract However a derivative instrument does not
require the holder or writer to invest or receive the notional amount at the
inception of the contract Alternatively a derivative could require a fixed
IFRS 9
IFRS FoundationA476payment or payment of an amount that can change (but not proportionally with
a change in the underlying) as a result of some future event that is unrelated to
a notional amount For example a contract may require a fixed payment of
CU1000 if sixmonth LIBOR increases by 100 basis points Such a contract is a
derivative even though a notional amount is not specified
BA2 The definition of a derivative in this Standard includes contracts that are settled
gross by delivery of the underlying item (eg a forward contract to purchase a
fixed rate debt instrument) An entity may have a contract to buy or sell a
nonfinancial item that can be settled net in cash or another financial
instrument or by exchanging financial instruments (eg a contract to buy or sell a
commodity at a fixed price at a future date) Such a contract is within the scope
of this Standard unless it was entered into and continues to be held for the
purpose of delivery of a nonfinancial item in accordance with the entity’s
expected purchase sale or usage requirements However this Standard applies
to such contracts for an entity’s expected purchase sale or usage requirements if
the entity makes a designation in accordance with paragraph 25 (see
paragraphs 24–27)
BA3 One of the defining characteristics of a derivative is that it has an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors
An option contract meets that definition because the premium is less than the
investment that would be required to obtain the underlying financial
instrument to which the option is linked A currency swap that requires an
initial exchange of different currencies of equal fair values meets the definition
because it has a zero initial net investment
BA4 A regular way purchase or sale gives rise to a fixed price commitment between
trade date and settlement date that meets the definition of a derivative
However because of the short duration of the commitment it is not recognised
as a derivative financial instrument Instead this Standard provides for special
accounting for such regular way contracts (see paragraphs 312 and
B313–B316)
BA5 The definition of a derivative refers to nonfinancial variables that are not
specific to a party to the contract These include an index of earthquake losses
in a particular region and an index of temperatures in a particular city
Nonfinancial variables specific to a party to the contract include the occurrence
or nonoccurrence of a fire that damages or destroys an asset of a party to the
contract A change in the fair value of a nonfinancial asset is specific to the
owner if the fair value reflects not only changes in market prices for such assets
(a financial variable) but also the condition of the specific nonfinancial asset
held (a nonfinancial variable) For example if a guarantee of the residual value
of a specific car exposes the guarantor to the risk of changes in the car’s physical
condition the change in that residual value is specific to the owner of the car
Financial assets and liabilities held for trading
BA6 Trading generally reflects active and frequent buying and selling and financial
instruments held for trading generally are used with the objective of generating
a profit from shortterm fluctuations in price or dealer’s margin
IFRS 9
IFRS Foundation A477BA7 Financial liabilities held for trading include
(a) derivative liabilities that are not accounted for as hedging instruments
(b) obligations to deliver financial assets borrowed by a short seller (ie an
entity that sells financial assets it has borrowed and does not yet own)
(c) financial liabilities that are incurred with an intention to repurchase
them in the near term (eg a quoted debt instrument that the issuer may
buy back in the near term depending on changes in its fair value) and
(d) financial liabilities that are part of a portfolio of identified financial
instruments that are managed together and for which there is evidence
of a recent pattern of shortterm profittaking
BA8 The fact that a liability is used to fund trading activities does not in itself make
that liability one that is held for trading
IFRS 9
IFRS FoundationA478Appendix C
Amendments to other Standards
This appendix describes the amendments to other Standards that the IASB made when it finalised
IFRS 9 (2014) An entity shall apply the amendments for annual periods beginning on or after
1 January 2018 If an entity applies IFRS 9 for an earlier period these amendments shall be applied
for that earlier period
*****
The amendments contained in this appendix when this Standard was issued in 2014 have been
incorporated into the text of the relevant Standards included in this volume
IFRS 9
IFRS Foundation A479IFRS Standard 10
Consolidated Financial Statements
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 27
Consolidated Financial Statements and Accounting for Investments in Subsidiaries which had
originally been issued by the International Accounting Standards Committee in April 1989
IAS 27 replaced most of IAS 3 Consolidated Financial Statements (issued in June 1976)
In December 2003 the Board amended and renamed IAS 27 with a new title—Consolidated
and Separate Financial Statements The amended IAS 27 also incorporated the guidance
contained in two related Interpretations (SIC12 ConsolidationSpecial Purpose Entities and
SIC33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership Interests)
In May 2011 the Board issued IFRS 10 Consolidated Financial Statements to replace IAS 27
IFRS 12 Disclosure of Interests in Other Entities also issued in May 2011 replaced the disclosure
requirements in IAS 27 IFRS 10 incorporates the guidance contained in two related
Interpretations (SIC12 ConsolidationSpecial Purpose Entities and SIC33 Consolidation)
In June 2012 IFRS 10 was amended by Consolidated Financial Statements Joint Arrangements and
Disclosure of Interests in Other Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and
IFRS 12) These amendments clarified the transition guidance in IFRS 10 Furthermore
these amendments provided additional transition relief in IFRS 10 limiting the
requirement to present adjusted comparative information to only the annual period
immediately preceding the first annual period for which IFRS 10 is applied
In October 2012 IFRS 10 was amended by Investment Entities (Amendments to IFRS 10 IFRS 12
and IAS 27) which defined an investment entity and introduced an exception to
consolidating particular subsidiaries for investment entities It also introduced the
requirement that an investment entity measures those subsidiaries at fair value through
profit or loss in accordance with IFRS 9 Financial Instruments in its consolidated and
separate financial statements In addition the amendments introduced new disclosure
requirements for investment entities in IFRS 12 and IAS 27
In September 2014 IFRS 10 was amended by Sale or Contribution of Assets between an Investor and
its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) which addressed the
conflicting accounting requirements for the sale or contribution of assets to a joint venture
or associate The effective date of this amendment was deferred in December 2015 to a date
to be determine by Effective Date of Amendments to IFRS 10 and IAS 28
In December 2014 IFRS 10 was amended by Investment Entities Applying the Consolidation
Exception (Amendments to IFRS 10 IFRS 12 and IAS 28) These amendments clarified which
subsidiaries of an investment entity should be consolidated instead of being measured at
fair value through profit or loss The amendments also clarified that the exemption from
presenting consolidated financial statements continues to apply to subsidiaries of an
investment entity that are themselves parent entities This is so even if that subsidiary is
measured at fair value through profit or loss by the higher level investment entity parent
In December 2015 the mandatory effective date of the above amendments were indefinitely
deferred by the Change of Effective Date of Amendments to IFRS 10 and IAS 28
IFRS 10
IFRS Foundation A481CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 10
CONSOLIDATED FINANCIAL STATEMENTS
OBJECTIVE 1
Meeting the objective 2
SCOPE 4
CONTROL 5
Power 10
Returns 15
Link between power and returns 17
ACCOUNTING REQUIREMENTS 19
Noncontrolling interests 22
Loss of control 25
DETERMINING WHETHER AN ENTITY IS AN INVESTMENT ENTITY 27
INVESTMENT ENTITIES EXCEPTION TO CONSOLIDATION 31
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 10 ISSUED IN MAY 2011
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 10
Consolidated Financial Statements Joint Arrangements and Disclosure of
Interests in other Entities Transition Guidance (Amendments to IFRS 10
IFRS 11 and IFRS 12) issued in June 2012
Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in
October 2012
Sale or Contribution of Assets between an Investor and its Associate or Joint
Venture (Amendments to IFRS 10 and IAS 28) issued in September 2014
Investment Entities Applying the Consolidation Exception (Amendments to
IFRS 10 IFRS 12 and IAS 28) issued in December 2014
Effective Date of Amendments to IFRS 10 and IAS 28 issued in
December 2015
BASIS FOR CONCLUSIONS
APPENDICES
Previous Board approvals and dissenting opinions
IFRS 10
IFRS FoundationA482Amendments to the Basis for Conclusions on other IFRSs
AMENDMENTS TO THE GUIDANCE ON OTHER IFRSs
ILLUSTRATIVE EXAMPLES
IFRS 10
IFRS Foundation A483International Financial Reporting Standard 10 Consolidated Financial Statements (IFRS 10) is
set out in paragraphs 1–33 and Appendices A–D All the paragraphs have equal
authority Paragraphs in bold type state the main principles Terms defined in
Appendix A are in italics the first time they appear in the Standard Definitions of other
terms are given in the Glossary for International Financial Reporting Standards IFRS 10
should be read in the context of its objective and the Basis for Conclusions the Preface to
International Financial Reporting Standards and the Conceptual Framework for Financial
Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance
IFRS 10
IFRS FoundationA484Introduction
IN1 IFRS 10 Consolidated Financial Statements establishes principles for the presentation
and preparation of consolidated financial statements when an entity controls
one or more other entities
IN2 The IFRS supersedes IAS 27 Consolidated and Separate Financial Statements and SIC12
Consolidation—Special Purpose Entities and is effective for annual periods beginning
on or after 1 January 2013 Earlier application is permitted
Reasons for issuing the IFRS
IN3 The Board added a project on consolidation to its agenda to deal with divergence
in practice in applying IAS 27 and SIC12 For example entities varied in their
application of the control concept in circumstances in which a reporting entity
controls another entity but holds less than a majority of the voting rights of the
entity and in circumstances involving agency relationships
IN4 In addition a perceived conflict of emphasis between IAS 27 and SIC12 had led
to inconsistent application of the concept of control IAS 27 required the
consolidation of entities that are controlled by a reporting entity and it defined
control as the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities SIC12 which interpreted the
requirements of IAS 27 in the context of special purpose entities placed greater
emphasis on risks and rewards
IN5 The global financial crisis that started in 2007 highlighted the lack of
transparency about the risks to which investors were exposed from their
involvement with off balance sheet vehicles’ (such as securitisation vehicles)
including those that they had set up or sponsored As a result the G20 leaders
the Financial Stability Board and others asked the Board to review the
accounting and disclosure requirements for such off balance sheet vehicles’
Main features of the IFRS
IN6 The IFRS requires an entity that is a parent to present consolidated financial
statements A limited exemption is available to some entities
General requirements
IN7 The IFRS defines the principle of control and establishes control as the basis for
determining which entities are consolidated in the consolidated financial
statements The IFRS also sets out the accounting requirements for the
preparation of consolidated financial statements
IN7A Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 introduced an exception to the principle that all subsidiaries shall be
consolidated The amendments define an investment entity and require a
parent that is an investment entity to measure its investments in particular
subsidiaries at fair value through profit or loss in accordance with IFRS 9
IFRS 10
IFRS Foundation A485Financial Instruments1 instead of consolidating those subsidiaries in its
consolidated and separate financial statements In addition the amendments
introduce new disclosure requirements related to investment entities in IFRS 12
Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements
IN8 An investor controls an investee when it is exposed or has rights to variable
returns from its involvement with the investee and has the ability to affect those
returns through its power over the investee Thus the principle of control sets
out the following three elements of control
(a) power over the investee
(b) exposure or rights to variable returns from involvement with the
investee and
(c) the ability to use power over the investee to affect the amount of the
investor’s returns
IN9 The IFRS sets out requirements on how to apply the control principle
(a) in circumstances when voting rights or similar rights give an investor
power including situations where the investor holds less than a majority
of voting rights and in circumstances involving potential voting rights
(b) in circumstances when an investee is designed so that voting rights are
not the dominant factor in deciding who controls the investee such as
when any voting rights relate to administrative tasks only and the
relevant activities are directed by means of contractual arrangements
(c) in circumstances involving agency relationships
(d) in circumstances when the investor has control over specified assets of
an investee
IN10 The IFRS requires an investor to reassess whether it controls an investee if facts
and circumstances indicate that there are changes to one or more of the three
elements of control
IN11 When preparing consolidated financial statements an entity must use uniform
accounting policies for reporting like transactions and other events in similar
circumstances Intragroup balances and transactions must be eliminated
Noncontrolling interests in subsidiaries must be presented in the consolidated
statement of financial position within equity separately from the equity of the
owners of the parent
IN12 The disclosure requirements for interests in subsidiaries are specified in IFRS 12
1 Paragraph C7 of IFRS 10 Consolidated Financial Statements states If an entity applies this IFRS but does
not yet apply IFRS 9 any reference in this IFRS to IFRS 9 shall be read as a reference to IAS 39
Financial Instruments Recognition and Measurement
IFRS 10
IFRS FoundationA486International Financial Reporting Standard 10
Consolidated Financial Statements
Objective
1 The objective of this IFRS is to establish principles for the presentation and
preparation of consolidated financial statements when an entity controls one or
more other entities
Meeting the objective
2 To meet the objective in paragraph 1 this IFRS
(a) requires an entity (the parent) that controls one or more other entities
(subsidiaries) to present consolidated financial statements
(b) defines the principle of control and establishes control as the basis for
consolidation
(c) sets out how to apply the principle of control to identify whether an
investor controls an investee and therefore must consolidate the
investee
(d) sets out the accounting requirements for the preparation of consolidated
financial statements and
(e) defines an investment entity and sets out an exception to consolidating
particular subsidiaries of an investment entity
3 This IFRS does not deal with the accounting requirements for business
combinations and their effect on consolidation including goodwill arising on a
business combination (see IFRS 3 Business Combinations)
Scope
4 An entity that is a parent shall present consolidated financial statements This
IFRS applies to all entities except as follows
(a) a parent need not present consolidated financial statements if it meets
all the following conditions
(i) it is a whollyowned subsidiary or is a partiallyowned subsidiary
of another entity and all its other owners including those not
otherwise entitled to vote have been informed about and do not
object to the parent not presenting consolidated financial
statements
(ii) its debt or equity instruments are not traded in a public market
(a domestic or foreign stock exchange or an overthecounter
market including local and regional markets)
IFRS 10
IFRS Foundation A487(iii) it did not file nor is it in the process of filing its financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments
in a public market and
(iv) its ultimate or any intermediate parent produces financial
statements that are available for public use and comply with
IFRSs in which subsidiaries are consolidated or are measured at
fair value through profit or loss in accordance with this IFRS
(b) [deleted]
(c) [deleted]
4A This IFRS does not apply to postemployment benefit plans or other longterm
employee benefit plans to which IAS 19 Employee Benefits applies
4B A parent that is an investment entity shall not present consolidated financial
statements if it is required in accordance with paragraph 31 of this IFRS to
measure all of its subsidiaries at fair value through profit or loss
Control
5 An investor regardless of the nature of its involvement with an entity (the
investee) shall determine whether it is a parent by assessing whether it
controls the investee
6 An investor controls an investee when it is exposed or has rights to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee
7 Thus an investor controls an investee if and only if the investor has all
the following
(a) power over the investee (see paragraphs 10–14)
(b) exposure or rights to variable returns from its involvement with
the investee (see paragraphs 15 and 16) and
(c) the ability to use its power over the investee to affect the amount
of the investor’s returns (see paragraphs 17 and 18)
8 An investor shall consider all facts and circumstances when assessing whether it
controls an investee The investor shall reassess whether it controls an investee
if facts and circumstances indicate that there are changes to one or more of the
three elements of control listed in paragraph 7 (see paragraphs B80–B85)
9 Two or more investors collectively control an investee when they must act
together to direct the relevant activities In such cases because no investor can
direct the activities without the cooperation of the others no investor
individually controls the investee Each investor would account for its interest
in the investee in accordance with the relevant IFRSs such as IFRS 11 Joint
Arrangements IAS 28 Investments in Associates and Joint Ventures or IFRS 9 Financial
Instruments
IFRS 10
IFRS FoundationA488Power
10 An investor has power over an investee when the investor has existing rights
that give it the current ability to direct the relevant activities ie the activities that
significantly affect the investee’s returns
11 Power arises from rights Sometimes assessing power is straightforward such as
when power over an investee is obtained directly and solely from the voting
rights granted by equity instruments such as shares and can be assessed by
considering the voting rights from those shareholdings In other cases the
assessment will be more complex and require more than one factor to be
considered for example when power results from one or more contractual
arrangements
12 An investor with the current ability to direct the relevant activities has power
even if its rights to direct have yet to be exercised Evidence that the investor has
been directing relevant activities can help determine whether the investor has
power but such evidence is not in itself conclusive in determining whether the
investor has power over an investee
13 If two or more investors each have existing rights that give them the unilateral
ability to direct different relevant activities the investor that has the current
ability to direct the activities that most significantly affect the returns of the
investee has power over the investee
14 An investor can have power over an investee even if other entities have existing
rights that give them the current ability to participate in the direction of the
relevant activities for example when another entity has significant influence
However an investor that holds only protective rights does not have power over
an investee (see paragraphs B26–B28) and consequently does not control the
investee
Returns
15 An investor is exposed or has rights to variable returns from its involvement
with the investee when the investor’s returns from its involvement have the
potential to vary as a result of the investee’s performance The investor’s returns
can be only positive only negative or both positive and negative
16 Although only one investor can control an investee more than one party can
share in the returns of an investee For example holders of noncontrolling
interests can share in the profits or distributions of an investee
Link between power and returns
17 An investor controls an investee if the investor not only has power over the
investee and exposure or rights to variable returns from its involvement with
the investee but also has the ability to use its power to affect the investor’s
returns from its involvement with the investee
18 Thus an investor with decisionmaking rights shall determine whether it is a
principal or an agent An investor that is an agent in accordance with
paragraphs B58–B72 does not control an investee when it exercises
decisionmaking rights delegated to it
IFRS 10
IFRS Foundation A489Accounting requirements
19 A parent shall prepare consolidated financial statements using uniform
accounting policies for like transactions and other events in similar
circumstances
20 Consolidation of an investee shall begin from the date the investor obtains
control of the investee and cease when the investor loses control of the investee
21 Paragraphs B86–B93 set out guidance for the preparation of consolidated
financial statements
Noncontrolling interests
22 A parent shall present noncontrolling interests in the consolidated statement of
financial position within equity separately from the equity of the owners of the
parent
23 Changes in a parent’s ownership interest in a subsidiary that do not result in the
parent losing control of the subsidiary are equity transactions (ie transactions
with owners in their capacity as owners)
24 Paragraphs B94–B96 set out guidance for the accounting for noncontrolling
interests in consolidated financial statements
Loss of control
25 If a parent loses control of a subsidiary the parent
(a) derecognises the assets and liabilities of the former subsidiary from the
consolidated statement of financial position
(b) recognises any investment retained in the former subsidiary and
subsequently accounts for it and for any amounts owed by or to the
former subsidiary in accordance with relevant IFRSs That retained
interest is remeasured as described in paragraphs B98(b)(iii) and B99A
The remeasured value at the date that control is lost shall be regarded as
the fair value on initial recognition of a financial asset in accordance
with IFRS 9 or the cost on initial recognition of an investment in an
associate or joint venture if applicable
(c) recognises the gain or loss associated with the loss of control attributable
to the former controlling interest as specified in paragraphs B98–B99A
26 Paragraphs B97–B99A set out guidance for the accounting for the loss of control
of a subsidiary
Determining whether an entity is an investment entity
27 A parent shall determine whether it is an investment entity An
investment entity is an entity that
(a) obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management services
IFRS 10
IFRS FoundationA490(b) commits to its investor(s) that its business purpose is to invest
funds solely for returns from capital appreciation investment
income or both and
(c) measures and evaluates the performance of substantially all of its
investments on a fair value basis
Paragraphs B85A–B85M provide related application guidance
28 In assessing whether it meets the definition described in paragraph 27 an entity
shall consider whether it has the following typical characteristics of an
investment entity
(a) it has more than one investment (see paragraphs B85O–B85P)
(b) it has more than one investor (see paragraphs B85Q–B85S)
(c) it has investors that are not related parties of the entity (see paragraphs
B85T–B85U) and
(d) it has ownership interests in the form of equity or similar interests (see
paragraphs B85V–B85W)
The absence of any of these typical characteristics does not necessarily disqualify
an entity from being classified as an investment entity An investment entity
that does not have all of these typical characteristics provides additional
disclosure required by paragraph 9A of IFRS 12 Disclosure of Interests in Other
Entities
29 If facts and circumstances indicate that there are changes to one or more of the
three elements that make up the definition of an investment entity as described
in paragraph 27 or the typical characteristics of an investment entity as
described in paragraph 28 a parent shall reassess whether it is an investment
entity
30 A parent that either ceases to be an investment entity or becomes an investment
entity shall account for the change in its status prospectively from the date at
which the change in status occurred (see paragraphs B100–B101)
Investment entities exception to consolidation
31 Except as described in paragraph 32 an investment entity shall not
consolidate its subsidiaries or apply IFRS 3 when it obtains control of
another entity Instead an investment entity shall measure an
investment in a subsidiary at fair value through profit or loss in
accordance with IFRS 92
32 Notwithstanding the requirement in paragraph 31 if an investment entity has a
subsidiary that is not itself an investment entity and whose main purpose and
activities are providing services that relate to the investment entity’s investment
activities (see paragraphs B85C–B85E) it shall consolidate that subsidiary in
2 Paragraph C7 of IFRS 10 Consolidated Financial Statements states If an entity applies this IFRS but does
not yet apply IFRS 9 any reference in this IFRS to IFRS 9 shall be read as a reference to IAS 39
Financial Instruments Recognition and Measurement
IFRS 10
IFRS Foundation A491accordance with paragraphs 19–26 of this IFRS and apply the requirements of
IFRS 3 to the acquisition of any such subsidiary
33 A parent of an investment entity shall consolidate all entities that it controls
including those controlled through an investment entity subsidiary unless the
parent itself is an investment entity
IFRS 10
IFRS FoundationA492Appendix A
Defined terms
This appendix is an integral part of the IFRS
consolidated financial
statements
The financial statements of a group in which the assets
liabilities equity income expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic
entity
control of an investee An investor controls an investee when the investor is exposed or
has rights to variable returns from its involvement with the
investee and has the ability to affect those returns through its
power over the investee
decision maker An entity with decisionmaking rights that is either a principal or
an agent for other parties
group A parent and its subsidiaries
investment entity An entity that
(a) obtains funds from one or more investors for the purpose
of providing those investor(s) with investment
management services
(b) commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation
investment income or both and
(c) measures and evaluates the performance of substantially
all of its investments on a fair value basis
noncontrolling interest Equity in a subsidiary not attributable directly or indirectly to a
parent
parent An entity that controls one or more entities
power Existing rights that give the current ability to direct the relevant
activities
protective rights Rights designed to protect the interest of the party holding those
rights without giving that party power over the entity to which
those rights relate
relevant activities For the purpose of this IFRS relevant activities are activities of
the investee that significantly affect the investee’s returns
removal rights Rights to deprive the decision maker of its decisionmaking
authority
subsidiary An entity that is controlled by another entity
The following terms are defined in IFRS 11 IFRS 12 Disclosure of Interests in Other Entities
IAS 28 (as amended in 2011) or IAS 24 Related Party Disclosures and are used in this IFRS with
the meanings specified in those IFRSs
● associate
IFRS 10
IFRS Foundation A493● interest in another entity
● joint venture
● key management personnel
● related party
● significant influence
IFRS 10
IFRS FoundationA494Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–33 and
has the same authority as the other parts of the IFRS
B1 The examples in this appendix portray hypothetical situations Although some
aspects of the examples may be present in actual fact patterns all facts and
circumstances of a particular fact pattern would need to be evaluated when
applying IFRS 10
Assessing control
B2 To determine whether it controls an investee an investor shall assess whether it
has all the following
(a) power over the investee
(b) exposure or rights to variable returns from its involvement with the
investee and
(c) the ability to use its power over the investee to affect the amount of the
investor’s returns
B3 Consideration of the following factors may assist in making that determination
(a) the purpose and design of the investee (see paragraphs B5–B8)
(b) what the relevant activities are and how decisions about those activities
are made (see paragraphs B11–B13)
(c) whether the rights of the investor give it the current ability to direct the
relevant activities (see paragraphs B14–B54)
(d) whether the investor is exposed or has rights to variable returns from
its involvement with the investee (see paragraphs B55–B57) and
(e) whether the investor has the ability to use its power over the investee to
affect the amount of the investor’s returns (see paragraphs B58–B72)
B4 When assessing control of an investee an investor shall consider the nature of
its relationship with other parties (see paragraphs B73–B75)
Purpose and design of an investee
B5 When assessing control of an investee an investor shall consider the purpose
and design of the investee in order to identify the relevant activities how
decisions about the relevant activities are made who has the current ability to
direct those activities and who receives returns from those activities
B6 When an investee’s purpose and design are considered it may be clear that an
investee is controlled by means of equity instruments that give the holder
proportionate voting rights such as ordinary shares in the investee In this case
in the absence of any additional arrangements that alter decisionmaking the
assessment of control focuses on which party if any is able to exercise voting
rights sufficient to determine the investee’s operating and financing policies
IFRS 10
IFRS Foundation A495(see paragraphs B34–B50) In the most straightforward case the investor that
holds a majority of those voting rights in the absence of any other factors
controls the investee
B7 To determine whether an investor controls an investee in more complex cases it
may be necessary to consider some or all of the other factors in paragraph B3
B8 An investee may be designed so that voting rights are not the dominant factor in
deciding who controls the investee such as when any voting rights relate to
administrative tasks only and the relevant activities are directed by means of
contractual arrangements In such cases an investor’s consideration of the
purpose and design of the investee shall also include consideration of the risks
to which the investee was designed to be exposed the risks it was designed to
pass on to the parties involved with the investee and whether the investor is
exposed to some or all of those risks Consideration of the risks includes not
only the downside risk but also the potential for upside
Power
B9 To have power over an investee an investor must have existing rights that give it
the current ability to direct the relevant activities For the purpose of assessing
power only substantive rights and rights that are not protective shall be
considered (see paragraphs B22–B28)
B10 The determination about whether an investor has power depends on the
relevant activities the way decisions about the relevant activities are made and
the rights the investor and other parties have in relation to the investee
Relevant activities and direction of relevant activities
B11 For many investees a range of operating and financing activities significantly
affect their returns Examples of activities that depending on the
circumstances can be relevant activities include but are not limited to
(a) selling and purchasing of goods or services
(b) managing financial assets during their life (including upon default)
(c) selecting acquiring or disposing of assets
(d) researching and developing new products or processes and
(e) determining a funding structure or obtaining funding
B12 Examples of decisions about relevant activities include but are not limited to
(a) establishing operating and capital decisions of the investee including
budgets and
(b) appointing and remunerating an investee’s key management personnel
or service providers and terminating their services or employment
B13 In some situations activities both before and after a particular set of
circumstances arises or event occurs may be relevant activities When two or
more investors have the current ability to direct relevant activities and those
activities occur at different times the investors shall determine which investor
is able to direct the activities that most significantly affect those returns
IFRS 10
IFRS FoundationA496consistently with the treatment of concurrent decisionmaking rights (see
paragraph 13) The investors shall reconsider this assessment over time if
relevant facts or circumstances change
Application examples
Example 1
Two investors form an investee to develop and market a medical product
One investor is responsible for developing and obtaining regulatory approval
of the medical product—that responsibility includes having the unilateral
ability to make all decisions relating to the development of the product and
to obtaining regulatory approval Once the regulator has approved the
product the other investor will manufacture and market it—this investor has
the unilateral ability to make all decisions about the manufacture and
marketing of the product If all the activities—developing and obtaining
regulatory approval as well as manufacturing and marketing of the medical
product—are relevant activities each investor needs to determine whether it
is able to direct the activities that most significantly affect the investee’s
returns Accordingly each investor needs to consider whether developing
and obtaining regulatory approval or the manufacturing and marketing of
the medical product is the activity that most significantly affects the
investee’s returns and whether it is able to direct that activity In
determining which investor has power the investors would consider
(a) the purpose and design of the investee
(b) the factors that determine the profit margin revenue and value of
the investee as well as the value of the medical product
(c) the effect on the investee’s returns resulting from each investor’s
decisionmaking authority with respect to the factors in (b) and
(d) the investors’ exposure to variability of returns
In this particular example the investors would also consider
(e) the uncertainty of and effort required in obtaining regulatory
approval (considering the investor’s record of successfully developing
and obtaining regulatory approval of medical products) and
(f) which investor controls the medical product once the development
phase is successful
continued
IFRS 10
IFRS Foundation A497continued
Application examples
Example 2
An investment vehicle (the investee) is created and financed with a debt
instrument held by an investor (the debt investor) and equity instruments
held by a number of other investors The equity tranche is designed to
absorb the first losses and to receive any residual return from the investee
One of the equity investors who holds 30 per cent of the equity is also the
asset manager The investee uses its proceeds to purchase a portfolio of
financial assets exposing the investee to the credit risk associated with the
possible default of principal and interest payments of the assets The
transaction is marketed to the debt investor as an investment with minimal
exposure to the credit risk associated with the possible default of the assets
in the portfolio because of the nature of these assets and because the equity
tranche is designed to absorb the first losses of the investee The returns of
the investee are significantly affected by the management of the investee’s
asset portfolio which includes decisions about the selection acquisition and
disposal of the assets within portfolio guidelines and the management upon
default of any portfolio assets All those activities are managed by the asset
manager until defaults reach a specified proportion of the portfolio value
(ie when the value of the portfolio is such that the equity tranche of the
investee has been consumed) From that time a thirdparty trustee manages
the assets according to the instructions of the debt investor Managing the
investee’s asset portfolio is the relevant activity of the investee The asset
manager has the ability to direct the relevant activities until defaulted assets
reach the specified proportion of the portfolio value the debt investor has
the ability to direct the relevant activities when the value of defaulted assets
surpasses that specified proportion of the portfolio value The asset manager
and the debt investor each need to determine whether they are able to direct
the activities that most significantly affect the investee’s returns including
considering the purpose and design of the investee as well as each party’s
exposure to variability of returns
Rights that give an investor power over an investee
B14 Power arises from rights To have power over an investee an investor must have
existing rights that give the investor the current ability to direct the relevant
activities The rights that may give an investor power can differ between
investees
B15 Examples of rights that either individually or in combination can give an
investor power include but are not limited to
(a) rights in the form of voting rights (or potential voting rights) of an
investee (see paragraphs B34–B50)
(b) rights to appoint reassign or remove members of an investee’s key
management personnel who have the ability to direct the relevant
activities
IFRS 10
IFRS FoundationA498(c) rights to appoint or remove another entity that directs the relevant
activities
(d) rights to direct the investee to enter into or veto any changes to
transactions for the benefit of the investor and
(e) other rights (such as decisionmaking rights specified in a management
contract) that give the holder the ability to direct the relevant activities
B16 Generally when an investee has a range of operating and financing activities
that significantly affect the investee’s returns and when substantive
decisionmaking with respect to these activities is required continuously it will
be voting or similar rights that give an investor power either individually or in
combination with other arrangements
B17 When voting rights cannot have a significant effect on an investee’s returns
such as when voting rights relate to administrative tasks only and contractual
arrangements determine the direction of the relevant activities the investor
needs to assess those contractual arrangements in order to determine whether it
has rights sufficient to give it power over the investee To determine whether an
investor has rights sufficient to give it power the investor shall consider the
purpose and design of the investee (see paragraphs B5–B8) and the requirements
in paragraphs B51–B54 together with paragraphs B18–B20
B18 In some circumstances it may be difficult to determine whether an investor’s
rights are sufficient to give it power over an investee In such cases to enable
the assessment of power to be made the investor shall consider evidence of
whether it has the practical ability to direct the relevant activities unilaterally
Consideration is given but is not limited to the following which when
considered together with its rights and the indicators in paragraphs B19 and
B20 may provide evidence that the investor’s rights are sufficient to give it
power over the investee
(a) The investor can without having the contractual right to do so appoint
or approve the investee’s key management personnel who have the
ability to direct the relevant activities
(b) The investor can without having the contractual right to do so direct
the investee to enter into or can veto any changes to significant
transactions for the benefit of the investor
(c) The investor can dominate either the nominations process for electing
members of the investee’s governing body or the obtaining of proxies
from other holders of voting rights
(d) The investee’s key management personnel are related parties of the
investor (for example the chief executive officer of the investee and the
chief executive officer of the investor are the same person)
(e) The majority of the members of the investee’s governing body are related
parties of the investor
B19 Sometimes there will be indications that the investor has a special relationship
with the investee which suggests that the investor has more than a passive
interest in the investee The existence of any individual indicator or a
IFRS 10
IFRS Foundation A499particular combination of indicators does not necessarily mean that the power
criterion is met However having more than a passive interest in the investee
may indicate that the investor has other related rights sufficient to give it power
or provide evidence of existing power over an investee For example the
following suggests that the investor has more than a passive interest in the
investee and in combination with other rights may indicate power
(a) The investee’s key management personnel who have the ability to direct
the relevant activities are current or previous employees of the investor
(b) The investee’s operations are dependent on the investor such as in the
following situations
(i) The investee depends on the investor to fund a significant
portion of its operations
(ii) The investor guarantees a significant portion of the investee’s
obligations
(iii) The investee depends on the investor for critical services
technology supplies or raw materials
(iv) The investor controls assets such as licences or trademarks that
are critical to the investee’s operations
(v) The investee depends on the investor for key management
personnel such as when the investor’s personnel have specialised
knowledge of the investee’s operations
(c) A significant portion of the investee’s activities either involve or are
conducted on behalf of the investor
(d) The investor’s exposure or rights to returns from its involvement with
the investee is disproportionately greater than its voting or other similar
rights For example there may be a situation in which an investor is
entitled or exposed to more than half of the returns of the investee but
holds less than half of the voting rights of the investee
B20 The greater an investor’s exposure or rights to variability of returns from its
involvement with an investee the greater is the incentive for the investor to
obtain rights sufficient to give it power Therefore having a large exposure to
variability of returns is an indicator that the investor may have power However
the extent of the investor’s exposure does not in itself determine whether an
investor has power over the investee
B21 When the factors set out in paragraph B18 and the indicators set out in
paragraphs B19 and B20 are considered together with an investor’s rights
greater weight shall be given to the evidence of power described in
paragraph B18
Substantive rights
B22 An investor in assessing whether it has power considers only substantive rights
relating to an investee (held by the investor and others) For a right to be
substantive the holder must have the practical ability to exercise that right
IFRS 10
IFRS FoundationA500B23 Determining whether rights are substantive requires judgement taking into
account all facts and circumstances Factors to consider in making that
determination include but are not limited to
(a) Whether there are any barriers (economic or otherwise) that prevent the
holder (or holders) from exercising the rights Examples of such barriers
include but are not limited to
(i) financial penalties and incentives that would prevent (or deter)
the holder from exercising its rights
(ii) an exercise or conversion price that creates a financial barrier
that would prevent (or deter) the holder from exercising its
rights
(iii) terms and conditions that make it unlikely that the rights would
be exercised for example conditions that narrowly limit the
timing of their exercise
(iv) the absence of an explicit reasonable mechanism in the
founding documents of an investee or in applicable laws or
regulations that would allow the holder to exercise its rights
(v) the inability of the holder of the rights to obtain the information
necessary to exercise its rights
(vi) operational barriers or incentives that would prevent (or deter)
the holder from exercising its rights (eg the absence of other
managers willing or able to provide specialised services or
provide the services and take on other interests held by the
incumbent manager)
(vii) legal or regulatory requirements that prevent the holder from
exercising its rights (eg where a foreign investor is prohibited
from exercising its rights)
(b) When the exercise of rights requires the agreement of more than one
party or when the rights are held by more than one party whether a
mechanism is in place that provides those parties with the practical
ability to exercise their rights collectively if they choose to do so The
lack of such a mechanism is an indicator that the rights may not be
substantive The more parties that are required to agree to exercise the
rights the less likely it is that those rights are substantive However a
board of directors whose members are independent of the decision
maker may serve as a mechanism for numerous investors to act
collectively in exercising their rights Therefore removal rights
exercisable by an independent board of directors are more likely to be
substantive than if the same rights were exercisable individually by a
large number of investors
(c) Whether the party or parties that hold the rights would benefit from the
exercise of those rights For example the holder of potential voting
rights in an investee (see paragraphs B47–B50) shall consider the exercise
or conversion price of the instrument The terms and conditions of
potential voting rights are more likely to be substantive when the
IFRS 10
IFRS Foundation A501instrument is in the money or the investor would benefit for other
reasons (eg by realising synergies between the investor and the investee)
from the exercise or conversion of the instrument
B24 To be substantive rights also need to be exercisable when decisions about the
direction of the relevant activities need to be made Usually to be substantive
the rights need to be currently exercisable However sometimes rights can be
substantive even though the rights are not currently exercisable
Application examples
Example 3
The investee has annual shareholder meetings at which decisions to direct
the relevant activities are made The next scheduled shareholders’ meeting is
in eight months However shareholders that individually or collectively
hold at least 5 per cent of the voting rights can call a special meeting to
change the existing policies over the relevant activities but a requirement to
give notice to the other shareholders means that such a meeting cannot be
held for at least 30 days Policies over the relevant activities can be changed
only at special or scheduled shareholders’ meetings This includes the
approval of material sales of assets as well as the making or disposing of
significant investments
The above fact pattern applies to examples 3A–3D described below Each
example is considered in isolation
Example 3A
An investor holds a majority of the voting rights in the investee The
investor’s voting rights are substantive because the investor is able to make
decisions about the direction of the relevant activities when they need to be
made The fact that it takes 30 days before the investor can exercise its
voting rights does not stop the investor from having the current ability to
direct the relevant activities from the moment the investor acquires the
shareholding
Example 3B
An investor is party to a forward contract to acquire the majority of shares in
the investee The forward contract’s settlement date is in 25 days The
existing shareholders are unable to change the existing policies over the
relevant activities because a special meeting cannot be held for at least
30 days at which point the forward contract will have been settled Thus
the investor has rights that are essentially equivalent to the majority
shareholder in example 3A above (ie the investor holding the forward
contract can make decisions about the direction of the relevant activities
when they need to be made) The investor’s forward contract is a substantive
right that gives the investor the current ability to direct the relevant
activities even before the forward contract is settled
continued
IFRS 10
IFRS FoundationA502continued
Application examples
Example 3C
An investor holds a substantive option to acquire the majority of shares in
the investee that is exercisable in 25 days and is deeply in the money The
same conclusion would be reached as in example 3B
Example 3D
An investor is party to a forward contract to acquire the majority of shares in
the investee with no other related rights over the investee The forward
contract’s settlement date is in six months In contrast to the examples
above the investor does not have the current ability to direct the relevant
activities The existing shareholders have the current ability to direct the
relevant activities because they can change the existing policies over the
relevant activities before the forward contract is settled
B25 Substantive rights exercisable by other parties can prevent an investor from
controlling the investee to which those rights relate Such substantive rights do
not require the holders to have the ability to initiate decisions As long as the
rights are not merely protective (see paragraphs B26–B28) substantive rights
held by other parties may prevent the investor from controlling the investee
even if the rights give the holders only the current ability to approve or block
decisions that relate to the relevant activities
Protective rights
B26 In evaluating whether rights give an investor power over an investee the
investor shall assess whether its rights and rights held by others are protective
rights Protective rights relate to fundamental changes to the activities of an
investee or apply in exceptional circumstances However not all rights that
apply in exceptional circumstances or are contingent on events are protective
(see paragraphs B13 and B53)
B27 Because protective rights are designed to protect the interests of their holder
without giving that party power over the investee to which those rights relate
an investor that holds only protective rights cannot have power or prevent
another party from having power over an investee (see paragraph 14)
B28 Examples of protective rights include but are not limited to
(a) a lender’s right to restrict a borrower from undertaking activities that
could significantly change the credit risk of the borrower to the
detriment of the lender
(b) the right of a party holding a noncontrolling interest in an investee to
approve capital expenditure greater than that required in the ordinary
course of business or to approve the issue of equity or debt instruments
(c) the right of a lender to seize the assets of a borrower if the borrower fails
to meet specified loan repayment conditions
IFRS 10
IFRS Foundation A503Franchises
B29 A franchise agreement for which the investee is the franchisee often gives the
franchisor rights that are designed to protect the franchise brand Franchise
agreements typically give franchisors some decisionmaking rights with respect
to the operations of the franchisee
B30 Generally franchisors’ rights do not restrict the ability of parties other than the
franchisor to make decisions that have a significant effect on the franchisee’s
returns Nor do the rights of the franchisor in franchise agreements necessarily
give the franchisor the current ability to direct the activities that significantly
affect the franchisee’s returns
B31 It is necessary to distinguish between having the current ability to make
decisions that significantly affect the franchisee’s returns and having the ability
to make decisions that protect the franchise brand The franchisor does not
have power over the franchisee if other parties have existing rights that give
them the current ability to direct the relevant activities of the franchisee
B32 By entering into the franchise agreement the franchisee has made a unilateral
decision to operate its business in accordance with the terms of the franchise
agreement but for its own account
B33 Control over such fundamental decisions as the legal form of the franchisee and
its funding structure may be determined by parties other than the franchisor
and may significantly affect the returns of the franchisee The lower the level of
financial support provided by the franchisor and the lower the franchisor’s
exposure to variability of returns from the franchisee the more likely it is that
the franchisor has only protective rights
Voting rights
B34 Often an investor has the current ability through voting or similar rights to
direct the relevant activities An investor considers the requirements in this
section (paragraphs B35–B50) if the relevant activities of an investee are directed
through voting rights
Power with a majority of the voting rights
B35 An investor that holds more than half of the voting rights of an investee has
power in the following situations unless paragraph B36 or paragraph B37
applies
(a) the relevant activities are directed by a vote of the holder of the majority
of the voting rights or
(b) a majority of the members of the governing body that directs the
relevant activities are appointed by a vote of the holder of the majority of
the voting rights
Majority of the voting rights but no power
B36 For an investor that holds more than half of the voting rights of an investee to
have power over an investee the investor’s voting rights must be substantive in
accordance with paragraphs B22–B25 and must provide the investor with the
IFRS 10
IFRS FoundationA504current ability to direct the relevant activities which often will be through
determining operating and financing policies If another entity has existing
rights that provide that entity with the right to direct the relevant activities and
that entity is not an agent of the investor the investor does not have power over
the investee
B37 An investor does not have power over an investee even though the investor
holds the majority of the voting rights in the investee when those voting rights
are not substantive For example an investor that has more than half of the
voting rights in an investee cannot have power if the relevant activities are
subject to direction by a government court administrator receiver liquidator
or regulator
Power without a majority of the voting rights
B38 An investor can have power even if it holds less than a majority of the voting
rights of an investee An investor can have power with less than a majority of
the voting rights of an investee for example through
(a) a contractual arrangement between the investor and other vote holders
(see paragraph B39)
(b) rights arising from other contractual arrangements (see paragraph B40)
(c) the investor’s voting rights (see paragraphs B41–B45)
(d) potential voting rights (see paragraphs B47–B50) or
(e) a combination of (a)–(d)
Contractual arrangement with other vote holders
B39 A contractual arrangement between an investor and other vote holders can give
the investor the right to exercise voting rights sufficient to give the investor
power even if the investor does not have voting rights sufficient to give it power
without the contractual arrangement However a contractual arrangement
might ensure that the investor can direct enough other vote holders on how to
vote to enable the investor to make decisions about the relevant activities
Rights from other contractual arrangements
B40 Other decisionmaking rights in combination with voting rights can give an
investor the current ability to direct the relevant activities For example the
rights specified in a contractual arrangement in combination with voting rights
may be sufficient to give an investor the current ability to direct the
manufacturing processes of an investee or to direct other operating or financing
activities of an investee that significantly affect the investee’s returns However
in the absence of any other rights economic dependence of an investee on the
investor (such as relations of a supplier with its main customer) does not lead to
the investor having power over the investee
The investor’s voting rights
B41 An investor with less than a majority of the voting rights has rights that are
sufficient to give it power when the investor has the practical ability to direct
the relevant activities unilaterally
IFRS 10
IFRS Foundation A505B42 When assessing whether an investor’s voting rights are sufficient to give it
power an investor considers all facts and circumstances including
(a) the size of the investor’s holding of voting rights relative to the size and
dispersion of holdings of the other vote holders noting that
(i) the more voting rights an investor holds the more likely the
investor is to have existing rights that give it the current ability
to direct the relevant activities
(ii) the more voting rights an investor holds relative to other vote
holders the more likely the investor is to have existing rights
that give it the current ability to direct the relevant activities
(iii) the more parties that would need to act together to outvote the
investor the more likely the investor is to have existing rights
that give it the current ability to direct the relevant activities
(b) potential voting rights held by the investor other vote holders or other
parties (see paragraphs B47–B50)
(c) rights arising from other contractual arrangements (see paragraph B40)
and
(d) any additional facts and circumstances that indicate the investor has or
does not have the current ability to direct the relevant activities at the
time that decisions need to be made including voting patterns at
previous shareholders’ meetings
B43 When the direction of relevant activities is determined by majority vote and an
investor holds significantly more voting rights than any other vote holder or
organised group of vote holders and the other shareholdings are widely
dispersed it may be clear after considering the factors listed in paragraph
B42(a)–(c) alone that the investor has power over the investee
Application examples
Example 4
An investor acquires 48 per cent of the voting rights of an investee The
remaining voting rights are held by thousands of shareholders none
individually holding more than 1 per cent of the voting rights None of the
shareholders has any arrangements to consult any of the others or make
collective decisions When assessing the proportion of voting rights to
acquire on the basis of the relative size of the other shareholdings the
investor determined that a 48 per cent interest would be sufficient to give it
control In this case on the basis of the absolute size of its holding and the
relative size of the other shareholdings the investor concludes that it has a
sufficiently dominant voting interest to meet the power criterion without the
need to consider any other evidence of power
continued
IFRS 10
IFRS FoundationA506continued
Application examples
Example 5
Investor A holds 40 per cent of the voting rights of an investee and twelve
other investors each hold 5 per cent of the voting rights of the investee A
shareholder agreement grants investor A the right to appoint remove and
set the remuneration of management responsible for directing the relevant
activities To change the agreement a twothirds majority vote of the
shareholders is required In this case investor A concludes that the absolute
size of the investor’s holding and the relative size of the other shareholdings
alone are not conclusive in determining whether the investor has rights
sufficient to give it power However investor A determines that its
contractual right to appoint remove and set the remuneration of
management is sufficient to conclude that it has power over the investee
The fact that investor A might not have exercised this right or the likelihood
of investor A exercising its right to select appoint or remove management
shall not be considered when assessing whether investor A has power
B44 In other situations it may be clear after considering the factors listed in
paragraph B42(a)–(c) alone that an investor does not have power
Application example
Example 6
Investor A holds 45 per cent of the voting rights of an investee Two other
investors each hold 26 per cent of the voting rights of the investee The
remaining voting rights are held by three other shareholders each holding
1 per cent There are no other arrangements that affect decisionmaking In
this case the size of investor A’s voting interest and its size relative to the
other shareholdings are sufficient to conclude that investor A does not have
power Only two other investors would need to cooperate to be able to
prevent investor A from directing the relevant activities of the investee
B45 However the factors listed in paragraph B42(a)–(c) alone may not be conclusive
If an investor having considered those factors is unclear whether it has power
it shall consider additional facts and circumstances such as whether other
shareholders are passive in nature as demonstrated by voting patterns at
previous shareholders’ meetings This includes the assessment of the factors set
out in paragraph B18 and the indicators in paragraphs B19 and B20 The fewer
voting rights the investor holds and the fewer parties that would need to act
together to outvote the investor the more reliance would be placed on the
additional facts and circumstances to assess whether the investor’s rights are
sufficient to give it power When the facts and circumstances in paragraphs
B18–B20 are considered together with the investor’s rights greater weight shall
be given to the evidence of power in paragraph B18 than to the indicators of
power in paragraphs B19 and B20
IFRS 10
IFRS Foundation A507Application examples
Example 7
An investor holds 45 per cent of the voting rights of an investee Eleven
other shareholders each hold 5 per cent of the voting rights of the investee
None of the shareholders has contractual arrangements to consult any of the
others or make collective decisions In this case the absolute size of the
investor’s holding and the relative size of the other shareholdings alone are
not conclusive in determining whether the investor has rights sufficient to
give it power over the investee Additional facts and circumstances that may
provide evidence that the investor has or does not have power shall be
considered
Example 8
An investor holds 35 per cent of the voting rights of an investee Three other
shareholders each hold 5 per cent of the voting rights of the investee The
remaining voting rights are held by numerous other shareholders none
individually holding more than 1 per cent of the voting rights None of the
shareholders has arrangements to consult any of the others or make
collective decisions Decisions about the relevant activities of the investee
require the approval of a majority of votes cast at relevant shareholders’
meetings—75 per cent of the voting rights of the investee have been cast at
recent relevant shareholders’ meetings In this case the active participation
of the other shareholders at recent shareholders’ meetings indicates that the
investor would not have the practical ability to direct the relevant activities
unilaterally regardless of whether the investor has directed the relevant
activities because a sufficient number of other shareholders voted in the
same way as the investor
B46 If it is not clear having considered the factors listed in paragraph B42(a)–(d) that
the investor has power the investor does not control the investee
Potential voting rights
B47 When assessing control an investor considers its potential voting rights as well
as potential voting rights held by other parties to determine whether it has
power Potential voting rights are rights to obtain voting rights of an investee
such as those arising from convertible instruments or options including
forward contracts Those potential voting rights are considered only if the rights
are substantive (see paragraphs B22–B25)
B48 When considering potential voting rights an investor shall consider the purpose
and design of the instrument as well as the purpose and design of any other
involvement the investor has with the investee This includes an assessment of
the various terms and conditions of the instrument as well as the investor’s
apparent expectations motives and reasons for agreeing to those terms and
conditions
B49 If the investor also has voting or other decisionmaking rights relating to the
investee’s activities the investor assesses whether those rights in combination
with potential voting rights give the investor power
IFRS 10
IFRS FoundationA508B50 Substantive potential voting rights alone or in combination with other rights
can give an investor the current ability to direct the relevant activities For
example this is likely to be the case when an investor holds 40 per cent of the
voting rights of an investee and in accordance with paragraph B23 holds
substantive rights arising from options to acquire a further 20 per cent of the
voting rights
Application examples
Example 9
Investor A holds 70 per cent of the voting rights of an investee Investor B
has 30 per cent of the voting rights of the investee as well as an option to
acquire half of investor A’s voting rights The option is exercisable for the
next two years at a fixed price that is deeply out of the money (and is
expected to remain so for that twoyear period) Investor A has been
exercising its votes and is actively directing the relevant activities of the
investee In such a case investor A is likely to meet the power criterion
because it appears to have the current ability to direct the relevant activities
Although investor B has currently exercisable options to purchase additional
voting rights (that if exercised would give it a majority of the voting rights
in the investee) the terms and conditions associated with those options are
such that the options are not considered substantive
Example 10
Investor A and two other investors each hold a third of the voting rights of
an investee The investee’s business activity is closely related to investor A
In addition to its equity instruments investor A also holds debt instruments
that are convertible into ordinary shares of the investee at any time for a
fixed price that is out of the money (but not deeply out of the money) If the
debt were converted investor A would hold 60 per cent of the voting rights
of the investee Investor A would benefit from realising synergies if the debt
instruments were converted into ordinary shares Investor A has power over
the investee because it holds voting rights of the investee together with
substantive potential voting rights that give it the current ability to direct
the relevant activities
Power when voting or similar rights do not have a significant
effect on the investee’s returns
B51 In assessing the purpose and design of an investee (see paragraphs B5–B8) an
investor shall consider the involvement and decisions made at the investee’s
inception as part of its design and evaluate whether the transaction terms and
features of the involvement provide the investor with rights that are sufficient
to give it power Being involved in the design of an investee alone is not
sufficient to give an investor control However involvement in the design may
indicate that the investor had the opportunity to obtain rights that are sufficient
to give it power over the investee
B52 In addition an investor shall consider contractual arrangements such as call
rights put rights and liquidation rights established at the investee’s inception
IFRS 10
IFRS Foundation A509When these contractual arrangements involve activities that are closely related
to the investee then these activities are in substance an integral part of the
investee’s overall activities even though they may occur outside the legal
boundaries of the investee Therefore explicit or implicit decisionmaking
rights embedded in contractual arrangements that are closely related to the
investee need to be considered as relevant activities when determining power
over the investee
B53 For some investees relevant activities occur only when particular circumstances
arise or events occur The investee may be designed so that the direction of its
activities and its returns are predetermined unless and until those particular
circumstances arise or events occur In this case only the decisions about the
investee’s activities when those circumstances or events occur can significantly
affect its returns and thus be relevant activities The circumstances or events
need not have occurred for an investor with the ability to make those decisions
to have power The fact that the right to make decisions is contingent on
circumstances arising or an event occurring does not in itself make those rights
protective
Application examples
Example 11
An investee’s only business activity as specified in its founding documents is
to purchase receivables and service them on a daytoday basis for its
investors The servicing on a daytoday basis includes the collection and
passing on of principal and interest payments as they fall due Upon default
of a receivable the investee automatically puts the receivable to an investor
as agreed separately in a put agreement between the investor and the
investee The only relevant activity is managing the receivables upon default
because it is the only activity that can significantly affect the investee’s
returns Managing the receivables before default is not a relevant activity
because it does not require substantive decisions to be made that could
significantly affect the investee’s returns—the activities before default are
predetermined and amount only to collecting cash flows as they fall due and
passing them on to investors Therefore only the investor’s right to manage
the assets upon default should be considered when assessing the overall
activities of the investee that significantly affect the investee’s returns
In this example the design of the investee ensures that the investor has
decisionmaking authority over the activities that significantly affect the
returns at the only time that such decisionmaking authority is required
The terms of the put agreement are integral to the overall transaction and
the establishment of the investee Therefore the terms of the put agreement
together with the founding documents of the investee lead to the conclusion
that the investor has power over the investee even though the investor takes
ownership of the receivables only upon default and manages the defaulted
receivables outside the legal boundaries of the investee
continued
IFRS 10
IFRS FoundationA510continued
Application examples
Example 12
The only assets of an investee are receivables When the purpose and design
of the investee are considered it is determined that the only relevant activity
is managing the receivables upon default The party that has the ability to
manage the defaulting receivables has power over the investee irrespective
of whether any of the borrowers have defaulted
B54 An investor may have an explicit or implicit commitment to ensure that an
investee continues to operate as designed Such a commitment may increase the
investor’s exposure to variability of returns and thus increase the incentive for
the investor to obtain rights sufficient to give it power Therefore a commitment
to ensure that an investee operates as designed may be an indicator that the
investor has power but does not by itself give an investor power nor does it
prevent another party from having power
Exposure or rights to variable returns from an investee
B55 When assessing whether an investor has control of an investee the investor
determines whether it is exposed or has rights to variable returns from its
involvement with the investee
B56 Variable returns are returns that are not fixed and have the potential to vary as
a result of the performance of an investee Variable returns can be only positive
only negative or both positive and negative (see paragraph 15) An investor
assesses whether returns from an investee are variable and how variable those
returns are on the basis of the substance of the arrangement and regardless of
the legal form of the returns For example an investor can hold a bond with
fixed interest payments The fixed interest payments are variable returns for the
purpose of this IFRS because they are subject to default risk and they expose the
investor to the credit risk of the issuer of the bond The amount of variability
(ie how variable those returns are) depends on the credit risk of the bond
Similarly fixed performance fees for managing an investee’s assets are variable
returns because they expose the investor to the performance risk of the investee
The amount of variability depends on the investee’s ability to generate sufficient
income to pay the fee
B57 Examples of returns include
(a) dividends other distributions of economic benefits from an investee (eg
interest from debt securities issued by the investee) and changes in the
value of the investor’s investment in that investee
(b) remuneration for servicing an investee’s assets or liabilities fees and
exposure to loss from providing credit or liquidity support residual
interests in the investee’s assets and liabilities on liquidation of that
investee tax benefits and access to future liquidity that an investor has
from its involvement with an investee
IFRS 10
IFRS Foundation A511(c) returns that are not available to other interest holders For example an
investor might use its assets in combination with the assets of the
investee such as combining operating functions to achieve economies of
scale cost savings sourcing scarce products gaining access to
proprietary knowledge or limiting some operations or assets to enhance
the value of the investor’s other assets
Link between power and returns
Delegated power
B58 When an investor with decisionmaking rights (a decision maker) assesses
whether it controls an investee it shall determine whether it is a principal or an
agent An investor shall also determine whether another entity with
decisionmaking rights is acting as an agent for the investor An agent is a party
primarily engaged to act on behalf and for the benefit of another party or parties
(the principal(s)) and therefore does not control the investee when it exercises its
decisionmaking authority (see paragraphs 17 and 18) Thus sometimes a
principal’s power may be held and exercisable by an agent but on behalf of the
principal A decision maker is not an agent simply because other parties can
benefit from the decisions that it makes
B59 An investor may delegate its decisionmaking authority to an agent on some
specific issues or on all relevant activities When assessing whether it controls
an investee the investor shall treat the decisionmaking rights delegated to its
agent as held by the investor directly In situations where there is more than
one principal each of the principals shall assess whether it has power over the
investee by considering the requirements in paragraphs B5–B54 Paragraphs
B60–B72 provide guidance on determining whether a decision maker is an agent
or a principal
B60 A decision maker shall consider the overall relationship between itself the
investee being managed and other parties involved with the investee in
particular all the factors below in determining whether it is an agent
(a) the scope of its decisionmaking authority over the investee (paragraphs
B62 and B63)
(b) the rights held by other parties (paragraphs B64–B67)
(c) the remuneration to which it is entitled in accordance with the
remuneration agreement(s) (paragraphs B68–B70)
(d) the decision maker’s exposure to variability of returns from other
interests that it holds in the investee (paragraphs B71 and B72)
Different weightings shall be applied to each of the factors on the basis of
particular facts and circumstances
B61 Determining whether a decision maker is an agent requires an evaluation of all
the factors listed in paragraph B60 unless a single party holds substantive rights
to remove the decision maker (removal rights) and can remove the decision
maker without cause (see paragraph B65)
IFRS 10
IFRS FoundationA512The scope of the decisionmaking authority
B62 The scope of a decision maker’s decisionmaking authority is evaluated by
considering
(a) the activities that are permitted according to the decisionmaking
agreement(s) and specified by law and
(b) the discretion that the decision maker has when making decisions about
those activities
B63 A decision maker shall consider the purpose and design of the investee the risks
to which the investee was designed to be exposed the risks it was designed to
pass on to the parties involved and the level of involvement the decision maker
had in the design of an investee For example if a decision maker is significantly
involved in the design of the investee (including in determining the scope of
decisionmaking authority) that involvement may indicate that the decision
maker had the opportunity and incentive to obtain rights that result in the
decision maker having the ability to direct the relevant activities
Rights held by other parties
B64 Substantive rights held by other parties may affect the decision maker’s ability
to direct the relevant activities of an investee Substantive removal or other
rights may indicate that the decision maker is an agent
B65 When a single party holds substantive removal rights and can remove the
decision maker without cause this in isolation is sufficient to conclude that
the decision maker is an agent If more than one party holds such rights (and no
individual party can remove the decision maker without the agreement of other
parties) those rights are not in isolation conclusive in determining that a
decision maker acts primarily on behalf and for the benefit of others In
addition the greater the number of parties required to act together to exercise
rights to remove a decision maker and the greater the magnitude of and
variability associated with the decision maker’s other economic interests
(ie remuneration and other interests) the less the weighting that shall be placed
on this factor
B66 Substantive rights held by other parties that restrict a decision maker’s
discretion shall be considered in a similar manner to removal rights when
evaluating whether the decision maker is an agent For example a decision
maker that is required to obtain approval from a small number of other parties
for its actions is generally an agent (See paragraphs B22–B25 for additional
guidance on rights and whether they are substantive)
B67 Consideration of the rights held by other parties shall include an assessment of
any rights exercisable by an investee’s board of directors (or other governing
body) and their effect on the decisionmaking authority (see paragraph B23(b))
Remuneration
B68 The greater the magnitude of and variability associated with the decision
maker’s remuneration relative to the returns expected from the activities of the
investee the more likely the decision maker is a principal
IFRS 10
IFRS Foundation A513B69 In determining whether it is a principal or an agent the decision maker shall
also consider whether the following conditions exist
(a) The remuneration of the decision maker is commensurate with the
services provided
(b) The remuneration agreement includes only terms conditions or
amounts that are customarily present in arrangements for similar
services and level of skills negotiated on an arm’s length basis
B70 A decision maker cannot be an agent unless the conditions set out in
paragraph B69(a) and (b) are present However meeting those conditions in
isolation is not sufficient to conclude that a decision maker is an agent
Exposure to variability of returns from other interests
B71 A decision maker that holds other interests in an investee (eg investments in the
investee or provides guarantees with respect to the performance of the investee)
shall consider its exposure to variability of returns from those interests in
assessing whether it is an agent Holding other interests in an investee indicates
that the decision maker may be a principal
B72 In evaluating its exposure to variability of returns from other interests in the
investee a decision maker shall consider the following
(a) the greater the magnitude of and variability associated with its
economic interests considering its remuneration and other interests in
aggregate the more likely the decision maker is a principal
(b) whether its exposure to variability of returns is different from that of the
other investors and if so whether this might influence its actions For
example this might be the case when a decision maker holds
subordinated interests in or provides other forms of credit enhancement
to an investee
The decision maker shall evaluate its exposure relative to the total variability of
returns of the investee This evaluation is made primarily on the basis of returns
expected from the activities of the investee but shall not ignore the decision
maker’s maximum exposure to variability of returns of the investee through
other interests that the decision maker holds
IFRS 10
IFRS FoundationA514Application examples
Example 13
A decision maker (fund manager) establishes markets and manages a
publicly traded regulated fund according to narrowly defined parameters set
out in the investment mandate as required by its local laws and regulations
The fund was marketed to investors as an investment in a diversified
portfolio of equity securities of publicly traded entities Within the defined
parameters the fund manager has discretion about the assets in which to
invest The fund manager has made a 10 per cent pro rata investment in the
fund and receives a marketbased fee for its services equal to 1 per cent of the
net asset value of the fund The fees are commensurate with the services
provided The fund manager does not have any obligation to fund losses
beyond its 10 per cent investment The fund is not required to establish and
has not established an independent board of directors The investors do not
hold any substantive rights that would affect the decisionmaking authority
of the fund manager but can redeem their interests within particular limits
set by the fund
Although operating within the parameters set out in the investment
mandate and in accordance with the regulatory requirements the fund
manager has decisionmaking rights that give it the current ability to direct
the relevant activities of the fund—the investors do not hold substantive
rights that could affect the fund manager’s decisionmaking authority The
fund manager receives a marketbased fee for its services that is
commensurate with the services provided and has also made a pro rata
investment in the fund The remuneration and its investment expose the
fund manager to variability of returns from the activities of the fund without
creating exposure that is of such significance that it indicates that the fund
manager is a principal
In this example consideration of the fund manager’s exposure to variability
of returns from the fund together with its decisionmaking authority within
restricted parameters indicates that the fund manager is an agent Thus the
fund manager concludes that it does not control the fund
Example 14
A decision maker establishes markets and manages a fund that provides
investment opportunities to a number of investors The decision maker
(fund manager) must make decisions in the best interests of all investors and
in accordance with the fund’s governing agreements Nonetheless the fund
manager has wide decisionmaking discretion The fund manager receives a
marketbased fee for its services equal to 1 per cent of assets under
management and 20 per cent of all the fund’s profits if a specified profit
level is achieved The fees are commensurate with the services provided
continued
IFRS 10
IFRS Foundation A515continued
Application examples
Although it must make decisions in the best interests of all investors the
fund manager has extensive decisionmaking authority to direct the relevant
activities of the fund The fund manager is paid fixed and
performancerelated fees that are commensurate with the services provided
In addition the remuneration aligns the interests of the fund manager with
those of the other investors to increase the value of the fund without
creating exposure to variability of returns from the activities of the fund that
is of such significance that the remuneration when considered in isolation
indicates that the fund manager is a principal
The above fact pattern and analysis applies to examples 14A–14C described
below Each example is considered in isolation
Example 14A
The fund manager also has a 2 per cent investment in the fund that aligns
its interests with those of the other investors The fund manager does not
have any obligation to fund losses beyond its 2 per cent investment The
investors can remove the fund manager by a simple majority vote but only
for breach of contract
The fund manager’s 2 per cent investment increases its exposure to
variability of returns from the activities of the fund without creating
exposure that is of such significance that it indicates that the fund manager
is a principal The other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for
breach of contract In this example although the fund manager has
extensive decisionmaking authority and is exposed to variability of returns
from its interest and remuneration the fund manager’s exposure indicates
that the fund manager is an agent Thus the fund manager concludes that
it does not control the fund
Example 14B
The fund manager has a more substantial pro rata investment in the fund
but does not have any obligation to fund losses beyond that investment The
investors can remove the fund manager by a simple majority vote but only
for breach of contract
continued
IFRS 10
IFRS FoundationA516continued
Application examples
In this example the other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for
breach of contract Although the fund manager is paid fixed and
performancerelated fees that are commensurate with the services provided
the combination of the fund manager’s investment together with its
remuneration could create exposure to variability of returns from the
activities of the fund that is of such significance that it indicates that the
fund manager is a principal The greater the magnitude of and variability
associated with the fund manager’s economic interests (considering its
remuneration and other interests in aggregate) the more emphasis the fund
manager would place on those economic interests in the analysis and the
more likely the fund manager is a principal
For example having considered its remuneration and the other factors the
fund manager might consider a 20 per cent investment to be sufficient to
conclude that it controls the fund However in different circumstances (ie if
the remuneration or other factors are different) control may arise when the
level of investment is different
Example 14C
The fund manager has a 20 per cent pro rata investment in the fund but
does not have any obligation to fund losses beyond its 20 per cent
investment The fund has a board of directors all of whose members are
independent of the fund manager and are appointed by the other investors
The board appoints the fund manager annually If the board decided not to
renew the fund manager’s contract the services performed by the fund
manager could be performed by other managers in the industry
Although the fund manager is paid fixed and performancerelated fees that
are commensurate with the services provided the combination of the fund
manager’s 20 per cent investment together with its remuneration creates
exposure to variability of returns from the activities of the fund that is of
such significance that it indicates that the fund manager is a principal
However the investors have substantive rights to remove the fund
manager—the board of directors provides a mechanism to ensure that the
investors can remove the fund manager if they decide to do so
In this example the fund manager places greater emphasis on the
substantive removal rights in the analysis Thus although the fund manager
has extensive decisionmaking authority and is exposed to variability of
returns of the fund from its remuneration and investment the substantive
rights held by the other investors indicate that the fund manager is an agent
Thus the fund manager concludes that it does not control the fund
continued
IFRS 10
IFRS Foundation A517continued
Application examples
Example 15
An investee is created to purchase a portfolio of fixed rate assetbacked
securities funded by fixed rate debt instruments and equity instruments
The equity instruments are designed to provide first loss protection to the
debt investors and receive any residual returns of the investee The
transaction was marketed to potential debt investors as an investment in a
portfolio of assetbacked securities with exposure to the credit risk associated
with the possible default of the issuers of the assetbacked securities in the
portfolio and to the interest rate risk associated with the management of the
portfolio On formation the equity instruments represent 10 per cent of the
value of the assets purchased A decision maker (the asset manager) manages
the active asset portfolio by making investment decisions within the
parameters set out in the investee’s prospectus For those services the asset
manager receives a marketbased fixed fee (ie 1 per cent of assets under
management) and performancerelated fees (ie 10 per cent of profits) if the
investee’s profits exceed a specified level The fees are commensurate with
the services provided The asset manager holds 35 per cent of the equity in
the investee The remaining 65 per cent of the equity and all the debt
instruments are held by a large number of widely dispersed unrelated third
party investors The asset manager can be removed without cause by a
simple majority decision of the other investors
The asset manager is paid fixed and performancerelated fees that are
commensurate with the services provided The remuneration aligns the
interests of the fund manager with those of the other investors to increase
the value of the fund The asset manager has exposure to variability of
returns from the activities of the fund because it holds 35 per cent of the
equity and from its remuneration
Although operating within the parameters set out in the investee’s
prospectus the asset manager has the current ability to make investment
decisions that significantly affect the investee’s returns—the removal rights
held by the other investors receive little weighting in the analysis because
those rights are held by a large number of widely dispersed investors In this
example the asset manager places greater emphasis on its exposure to
variability of returns of the fund from its equity interest which is
subordinate to the debt instruments Holding 35 per cent of the equity
creates subordinated exposure to losses and rights to returns of the investee
which are of such significance that it indicates that the asset manager is a
principal Thus the asset manager concludes that it controls the investee
continued
IFRS 10
IFRS FoundationA518continued
Application examples
Example 16
A decision maker (the sponsor) sponsors a multiseller conduit which issues
shortterm debt instruments to unrelated third party investors The
transaction was marketed to potential investors as an investment in a
portfolio of highly rated mediumterm assets with minimal exposure to the
credit risk associated with the possible default by the issuers of the assets in
the portfolio Various transferors sell high quality mediumterm asset
portfolios to the conduit Each transferor services the portfolio of assets that
it sells to the conduit and manages receivables on default for a marketbased
servicing fee Each transferor also provides first loss protection against credit
losses from its asset portfolio through overcollateralisation of the assets
transferred to the conduit The sponsor establishes the terms of the conduit
and manages the operations of the conduit for a marketbased fee The fee is
commensurate with the services provided The sponsor approves the sellers
permitted to sell to the conduit approves the assets to be purchased by the
conduit and makes decisions about the funding of the conduit The sponsor
must act in the best interests of all investors
The sponsor is entitled to any residual return of the conduit and also
provides credit enhancement and liquidity facilities to the conduit The
credit enhancement provided by the sponsor absorbs losses of up to 5 per
cent of all of the conduit’s assets after losses are absorbed by the transferors
The liquidity facilities are not advanced against defaulted assets The
investors do not hold substantive rights that could affect the decisionmaking
authority of the sponsor
Even though the sponsor is paid a marketbased fee for its services that is
commensurate with the services provided the sponsor has exposure to
variability of returns from the activities of the conduit because of its rights
to any residual returns of the conduit and the provision of credit
enhancement and liquidity facilities (ie the conduit is exposed to liquidity
risk by using shortterm debt instruments to fund mediumterm assets) Even
though each of the transferors has decisionmaking rights that affect the
value of the assets of the conduit the sponsor has extensive decisionmaking
authority that gives it the current ability to direct the activities that most
significantly affect the conduit’s returns (ie the sponsor established the terms
of the conduit has the right to make decisions about the assets (approving
the assets purchased and the transferors of those assets) and the funding of
the conduit (for which new investment must be found on a regular basis))
The right to residual returns of the conduit and the provision of credit
enhancement and liquidity facilities expose the sponsor to variability of
returns from the activities of the conduit that is different from that of the
other investors Accordingly that exposure indicates that the sponsor is a
principal and thus the sponsor concludes that it controls the conduit The
sponsor’s obligation to act in the best interest of all investors does not
prevent the sponsor from being a principal
IFRS 10
IFRS Foundation A519Relationship with other parties
B73 When assessing control an investor shall consider the nature of its relationship
with other parties and whether those other parties are acting on the investor’s
behalf (ie they are de facto agents’) The determination of whether other parties
are acting as de facto agents requires judgement considering not only the
nature of the relationship but also how those parties interact with each other
and the investor
B74 Such a relationship need not involve a contractual arrangement A party is a de
facto agent when the investor has or those that direct the activities of the
investor have the ability to direct that party to act on the investor’s behalf In
these circumstances the investor shall consider its de facto agent’s
decisionmaking rights and its indirect exposure or rights to variable returns
through the de facto agent together with its own when assessing control of an
investee
B75 The following are examples of such other parties that by the nature of their
relationship might act as de facto agents for the investor
(a) the investor’s related parties
(b) a party that received its interest in the investee as a contribution or loan
from the investor
(c) a party that has agreed not to sell transfer or encumber its interests in
the investee without the investor’s prior approval (except for situations
in which the investor and the other party have the right of prior
approval and the rights are based on mutually agreed terms by willing
independent parties)
(d) a party that cannot finance its operations without subordinated
financial support from the investor
(e) an investee for which the majority of the members of its governing body
or for which its key management personnel are the same as those of the
investor
(f) a party that has a close business relationship with the investor such as
the relationship between a professional service provider and one of its
significant clients
Control of specified assets
B76 An investor shall consider whether it treats a portion of an investee as a deemed
separate entity and if so whether it controls the deemed separate entity
B77 An investor shall treat a portion of an investee as a deemed separate entity if and
only if the following condition is satisfied
Specified assets of the investee (and related credit enhancements if any)
are the only source of payment for specified liabilities of or specified
other interests in the investee Parties other than those with the
specified liability do not have rights or obligations related to the
specified assets or to residual cash flows from those assets In substance
none of the returns from the specified assets can be used by the
IFRS 10
IFRS FoundationA520remaining investee and none of the liabilities of the deemed separate
entity are payable from the assets of the remaining investee Thus in
substance all the assets liabilities and equity of that deemed separate
entity are ringfenced from the overall investee Such a deemed separate
entity is often called a silo’
B78 When the condition in paragraph B77 is satisfied an investor shall identify the
activities that significantly affect the returns of the deemed separate entity and
how those activities are directed in order to assess whether it has power over
that portion of the investee When assessing control of the deemed separate
entity the investor shall also consider whether it has exposure or rights to
variable returns from its involvement with that deemed separate entity and the
ability to use its power over that portion of the investee to affect the amount of
the investor’s returns
B79 If the investor controls the deemed separate entity the investor shall consolidate
that portion of the investee In that case other parties exclude that portion of
the investee when assessing control of and in consolidating the investee
Continuous assessment
B80 An investor shall reassess whether it controls an investee if facts and
circumstances indicate that there are changes to one or more of the three
elements of control listed in paragraph 7
B81 If there is a change in how power over an investee can be exercised that change
must be reflected in how an investor assesses its power over an investee For
example changes to decisionmaking rights can mean that the relevant
activities are no longer directed through voting rights but instead other
agreements such as contracts give another party or parties the current ability
to direct the relevant activities
B82 An event can cause an investor to gain or lose power over an investee without
the investor being involved in that event For example an investor can gain
power over an investee because decisionmaking rights held by another party or
parties that previously prevented the investor from controlling an investee have
lapsed
B83 An investor also considers changes affecting its exposure or rights to variable
returns from its involvement with an investee For example an investor that has
power over an investee can lose control of an investee if the investor ceases to be
entitled to receive returns or to be exposed to obligations because the investor
would fail to satisfy paragraph 7(b) (eg if a contract to receive
performancerelated fees is terminated)
B84 An investor shall consider whether its assessment that it acts as an agent or a
principal has changed Changes in the overall relationship between the investor
and other parties can mean that an investor no longer acts as an agent even
though it has previously acted as an agent and vice versa For example if
changes to the rights of the investor or of other parties occur the investor shall
reconsider its status as a principal or an agent
B85 An investor’s initial assessment of control or its status as a principal or an agent
would not change simply because of a change in market conditions (eg a change
IFRS 10
IFRS Foundation A521in the investee’s returns driven by market conditions) unless the change in
market conditions changes one or more of the three elements of control listed in
paragraph 7 or changes the overall relationship between a principal and an
agent
Determining whether an entity is an investment entity
B85A An entity shall consider all facts and circumstances when assessing whether it is
an investment entity including its purpose and design An entity that possesses
the three elements of the definition of an investment entity set out in
paragraph 27 is an investment entity Paragraphs B85B–B85M describe the
elements of the definition in more detail
Business purpose
B85B The definition of an investment entity requires that the purpose of the entity is
to invest solely for capital appreciation investment income (such as dividends
interest or rental income) or both Documents that indicate what the entity’s
investment objectives are such as the entity’s offering memorandum
publications distributed by the entity and other corporate or partnership
documents will typically provide evidence of an investment entity’s business
purpose Further evidence may include the manner in which the entity presents
itself to other parties (such as potential investors or potential investees) for
example an entity may present its business as providing mediumterm
investment for capital appreciation In contrast an entity that presents itself as
an investor whose objective is to jointly develop produce or market products
with its investees has a business purpose that is inconsistent with the business
purpose of an investment entity because the entity will earn returns from the
development production or marketing activity as well as from its investments
(see paragraph B85I)
B85C An investment entity may provide investmentrelated services (eg investment
advisory services investment management investment support and
administrative services) either directly or through a subsidiary to third parties
as well as to its investors even if those activities are substantial to the entity
subject to the entity continuing to meet the definition of an investment entity
B85D An investment entity may also participate in the following investmentrelated
activities either directly or through a subsidiary if these activities are
undertaken to maximise the investment return (capital appreciation or
investment income) from its investees and do not represent a separate
substantial business activity or a separate substantial source of income to the
investment entity
(a) providing management services and strategic advice to an investee and
(b) providing financial support to an investee such as a loan capital
commitment or guarantee
B85E If an investment entity has a subsidiary that is not itself an investment entity
and whose main purpose and activities are providing investmentrelated services
or activities that relate to the investment entity’s investment activities such as
those described in paragraphs B85C–B85D to the entity or other parties it shall
IFRS 10
IFRS FoundationA522consolidate that subsidiary in accordance with paragraph 32 If the subsidiary
that provides the investmentrelated services or activities is itself an investment
entity the investment entity parent shall measure that subsidiary at fair value
through profit or loss in accordance with paragraph 31
Exit strategies
B85F An entity’s investment plans also provide evidence of its business purpose One
feature that differentiates an investment entity from other entities is that an
investment entity does not plan to hold its investments indefinitely it holds
them for a limited period Because equity investments and nonfinancial asset
investments have the potential to be held indefinitely an investment entity
shall have an exit strategy documenting how the entity plans to realise capital
appreciation from substantially all of its equity investments and nonfinancial
asset investments An investment entity shall also have an exit strategy for any
debt instruments that have the potential to be held indefinitely for example
perpetual debt investments The entity need not document specific exit
strategies for each individual investment but shall identify different potential
strategies for different types or portfolios of investments including a
substantive time frame for exiting the investments Exit mechanisms that are
only put in place for default events such as a breach of contract or
nonperformance are not considered exit strategies for the purpose of this
assessment
B85G Exit strategies can vary by type of investment For investments in private equity
securities examples of exit strategies include an initial public offering a private
placement a trade sale of a business distributions (to investors) of ownership
interests in investees and sales of assets (including the sale of an investee’s assets
followed by a liquidation of the investee) For equity investments that are traded
in a public market examples of exit strategies include selling the investment in
a private placement or in a public market For real estate investments an
example of an exit strategy includes the sale of the real estate through
specialised property dealers or the open market
B85H An investment entity may have an investment in another investment entity that
is formed in connection with the entity for legal regulatory tax or similar
business reasons In this case the investment entity investor need not have an
exit strategy for that investment provided that the investment entity investee
has appropriate exit strategies for its investments
Earnings from investments
B85I An entity is not investing solely for capital appreciation investment income or
both if the entity or another member of the group containing the entity (ie the
group that is controlled by the investment entity’s ultimate parent) obtains or
has the objective of obtaining other benefits from the entity’s investments that
are not available to other parties that are not related to the investee Such
benefits include
(a) the acquisition use exchange or exploitation of the processes assets or
technology of an investee This would include the entity or another
group member having disproportionate or exclusive rights to acquire
IFRS 10
IFRS Foundation A523assets technology products or services of any investee for example by
holding an option to purchase an asset from an investee if the asset’s
development is deemed successful
(b) joint arrangements (as defined in IFRS 11) or other agreements between
the entity or another group member and an investee to develop
produce market or provide products or services
(c) financial guarantees or assets provided by an investee to serve as
collateral for borrowing arrangements of the entity or another group
member (however an investment entity would still be able to use an
investment in an investee as collateral for any of its borrowings)
(d) an option held by a related party of the entity to purchase from that
entity or another group member an ownership interest in an investee of
the entity
(e) except as described in paragraph B85J transactions between the entity or
another group member and an investee that
(i) are on terms that are unavailable to entities that are not related
parties of either the entity another group member or the
investee
(ii) are not at fair value or
(iii) represent a substantial portion of the investee’s or the entity’s
business activity including business activities of other group
entities
B85J An investment entity may have a strategy to invest in more than one investee in
the same industry market or geographical area in order to benefit from
synergies that increase the capital appreciation and investment income from
those investees Notwithstanding paragraph B85I(e) an entity is not disqualified
from being classified as an investment entity merely because such investees
trade with each other
Fair value measurement
B85K An essential element of the definition of an investment entity is that it measures
and evaluates the performance of substantially all of its investments on a fair
value basis because using fair value results in more relevant information than
for example consolidating its subsidiaries or using the equity method for its
interests in associates or joint ventures In order to demonstrate that it meets
this element of the definition an investment entity
(a) provides investors with fair value information and measures
substantially all of its investments at fair value in its financial statements
whenever fair value is required or permitted in accordance with IFRSs
and
(b) reports fair value information internally to the entity’s key management
personnel (as defined in IAS 24) who use fair value as the primary
measurement attribute to evaluate the performance of substantially all
of its investments and to make investment decisions
IFRS 10
IFRS FoundationA524B85L In order to meet the requirement in B85K(a) an investment entity would
(a) elect to account for any investment property using the fair value model
in IAS 40 Investment Property
(b) elect the exemption from applying the equity method in IAS 28 for its
investments in associates and joint ventures and
(c) measure its financial assets at fair value using the requirements in
IFRS 9
B85M An investment entity may have some noninvestment assets such as a head
office property and related equipment and may also have financial liabilities
The fair value measurement element of the definition of an investment entity in
paragraph 27(c) applies to an investment entity’s investments Accordingly an
investment entity need not measure its noninvestment assets or its liabilities at
fair value
Typical characteristics of an investment entity
B85N In determining whether it meets the definition of an investment entity an
entity shall consider whether it displays the typical characteristics of one (see
paragraph 28) The absence of one or more of these typical characteristics does
not necessarily disqualify an entity from being classified as an investment entity
but indicates that additional judgement is required in determining whether the
entity is an investment entity
More than one investment
B85O An investment entity typically holds several investments to diversify its risk and
maximise its returns An entity may hold a portfolio of investments directly or
indirectly for example by holding a single investment in another investment
entity that itself holds several investments
B85P There may be times when the entity holds a single investment However
holding a single investment does not necessarily prevent an entity from meeting
the definition of an investment entity For example an investment entity may
hold only a single investment when the entity
(a) is in its startup period and has not yet identified suitable investments
and therefore has not yet executed its investment plan to acquire
several investments
(b) has not yet made other investments to replace those it has disposed of
(c) is established to pool investors’ funds to invest in a single investment
when that investment is unobtainable by individual investors (eg when
the required minimum investment is too high for an individual
investor) or
(d) is in the process of liquidation
More than one investor
B85Q Typically an investment entity would have several investors who pool their
funds to gain access to investment management services and investment
opportunities that they might not have had access to individually Having
IFRS 10
IFRS Foundation A525several investors would make it less likely that the entity or other members of
the group containing the entity would obtain benefits other than capital
appreciation or investment income (see paragraph B85I)
B85R Alternatively an investment entity may be formed by or for a single investor
that represents or supports the interests of a wider group of investors (eg a
pension fund government investment fund or family trust)
B85S There may also be times when the entity temporarily has a single investor For
example an investment entity may have only a single investor when the entity
(a) is within its initial offering period which has not expired and the entity
is actively identifying suitable investors
(b) has not yet identified suitable investors to replace ownership interests
that have been redeemed or
(c) is in the process of liquidation
Unrelated investors
B85T Typically an investment entity has several investors that are not related parties
(as defined in IAS 24) of the entity or other members of the group containing the
entity Having unrelated investors would make it less likely that the entity or
other members of the group containing the entity would obtain benefits other
than capital appreciation or investment income (see paragraph B85I)
B85U However an entity may still qualify as an investment entity even though its
investors are related to the entity For example an investment entity may set up
a separate parallel’ fund for a group of its employees (such as key management
personnel) or other related party investor(s) which mirrors the investments of
the entity’s main investment fund This parallel’ fund may qualify as an
investment entity even though all of its investors are related parties
Ownership interests
B85V An investment entity is typically but is not required to be a separate legal
entity Ownership interests in an investment entity are typically in the form of
equity or similar interests (eg partnership interests) to which proportionate
shares of the net assets of the investment entity are attributed However having
different classes of investors some of which have rights only to a specific
investment or groups of investments or which have different proportionate
shares of the net assets does not preclude an entity from being an investment
entity
B85W In addition an entity that has significant ownership interests in the form of
debt that in accordance with other applicable IFRSs does not meet the
definition of equity may still qualify as an investment entity provided that the
debt holders are exposed to variable returns from changes in the fair value of the
entity’s net assets
IFRS 10
IFRS FoundationA526Accounting requirements
Consolidation procedures
B86 Consolidated financial statements
(a) combine like items of assets liabilities equity income expenses and
cash flows of the parent with those of its subsidiaries
(b) offset (eliminate) the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary (IFRS 3
explains how to account for any related goodwill)
(c) eliminate in full intragroup assets and liabilities equity income
expenses and cash flows relating to transactions between entities of the
group (profits or losses resulting from intragroup transactions that are
recognised in assets such as inventory and fixed assets are eliminated in
full) Intragroup losses may indicate an impairment that requires
recognition in the consolidated financial statements IAS 12 Income Taxes
applies to temporary differences that arise from the elimination of
profits and losses resulting from intragroup transactions
Uniform accounting policies
B87 If a member of the group uses accounting policies other than those adopted in
the consolidated financial statements for like transactions and events in similar
circumstances appropriate adjustments are made to that group member’s
financial statements in preparing the consolidated financial statements to
ensure conformity with the group’s accounting policies
Measurement
B88 An entity includes the income and expenses of a subsidiary in the consolidated
financial statements from the date it gains control until the date when the
entity ceases to control the subsidiary Income and expenses of the subsidiary
are based on the amounts of the assets and liabilities recognised in the
consolidated financial statements at the acquisition date For example
depreciation expense recognised in the consolidated statement of
comprehensive income after the acquisition date is based on the fair values of
the related depreciable assets recognised in the consolidated financial
statements at the acquisition date
Potential voting rights
B89 When potential voting rights or other derivatives containing potential voting
rights exist the proportion of profit or loss and changes in equity allocated to
the parent and noncontrolling interests in preparing consolidated financial
statements is determined solely on the basis of existing ownership interests and
does not reflect the possible exercise or conversion of potential voting rights and
other derivatives unless paragraph B90 applies
B90 In some circumstances an entity has in substance an existing ownership
interest as a result of a transaction that currently gives the entity access to the
returns associated with an ownership interest In such circumstances the
IFRS 10
IFRS Foundation A527proportion allocated to the parent and noncontrolling interests in preparing
consolidated financial statements is determined by taking into account the
eventual exercise of those potential voting rights and other derivatives that
currently give the entity access to the returns
B91 IFRS 9 does not apply to interests in subsidiaries that are consolidated When
instruments containing potential voting rights in substance currently give
access to the returns associated with an ownership interest in a subsidiary the
instruments are not subject to the requirements of IFRS 9 In all other cases
instruments containing potential voting rights in a subsidiary are accounted for
in accordance with IFRS 9
Reporting date
B92 The financial statements of the parent and its subsidiaries used in the
preparation of the consolidated financial statements shall have the same
reporting date When the end of the reporting period of the parent is different
from that of a subsidiary the subsidiary prepares for consolidation purposes
additional financial information as of the same date as the financial statements
of the parent to enable the parent to consolidate the financial information of the
subsidiary unless it is impracticable to do so
B93 If it is impracticable to do so the parent shall consolidate the financial
information of the subsidiary using the most recent financial statements of the
subsidiary adjusted for the effects of significant transactions or events that occur
between the date of those financial statements and the date of the consolidated
financial statements In any case the difference between the date of the
subsidiary’s financial statements and that of the consolidated financial
statements shall be no more than three months and the length of the reporting
periods and any difference between the dates of the financial statements shall be
the same from period to period
Noncontrolling interests
B94 An entity shall attribute the profit or loss and each component of other
comprehensive income to the owners of the parent and to the noncontrolling
interests The entity shall also attribute total comprehensive income to the
owners of the parent and to the noncontrolling interests even if this results in
the noncontrolling interests having a deficit balance
B95 If a subsidiary has outstanding cumulative preference shares that are classified
as equity and are held by noncontrolling interests the entity shall compute its
share of profit or loss after adjusting for the dividends on such shares whether
or not such dividends have been declared
Changes in the proportion held by noncontrolling interests
B96 When the proportion of the equity held by noncontrolling interests changes an
entity shall adjust the carrying amounts of the controlling and noncontrolling
interests to reflect the changes in their relative interests in the subsidiary The
entity shall recognise directly in equity any difference between the amount by
which the noncontrolling interests are adjusted and the fair value of the
consideration paid or received and attribute it to the owners of the parent
IFRS 10
IFRS FoundationA528Loss of control
B97 A parent might lose control of a subsidiary in two or more arrangements
(transactions) However sometimes circumstances indicate that the multiple
arrangements should be accounted for as a single transaction In determining
whether to account for the arrangements as a single transaction a parent shall
consider all the terms and conditions of the arrangements and their economic
effects One or more of the following indicate that the parent should account
for the multiple arrangements as a single transaction
(a) They are entered into at the same time or in contemplation of each
other
(b) They form a single transaction designed to achieve an overall
commercial effect
(c) The occurrence of one arrangement is dependent on the occurrence of at
least one other arrangement
(d) One arrangement considered on its own is not economically justified
but it is economically justified when considered together with other
arrangements An example is when a disposal of shares is priced below
market and is compensated for by a subsequent disposal priced above
market
B98 If a parent loses control of a subsidiary it shall
(a) derecognise
(i) the assets (including any goodwill) and liabilities of the
subsidiary at their carrying amounts at the date when control is
lost and
(ii) the carrying amount of any noncontrolling interests in the
former subsidiary at the date when control is lost (including any
components of other comprehensive income attributable to
them)
(b) recognise
(i) the fair value of the consideration received if any from the
transaction event or circumstances that resulted in the loss of
control
(ii) if the transaction event or circumstances that resulted in the loss
of control involves a distribution of shares of the subsidiary to
owners in their capacity as owners that distribution and
(iii) any investment retained in the former subsidiary at its fair value
at the date when control is lost
(c) reclassify to profit or loss or transfer directly to retained earnings if
required by other IFRSs the amounts recognised in other comprehensive
income in relation to the subsidiary on the basis described in
paragraph B99
(d) recognise any resulting difference as a gain or loss in profit or loss
attributable to the parent
IFRS 10
IFRS Foundation A529B99 If a parent loses control of a subsidiary the parent shall account for all amounts
previously recognised in other comprehensive income in relation to that
subsidiary on the same basis as would be required if the parent had directly
disposed of the related assets or liabilities Therefore if a gain or loss previously
recognised in other comprehensive income would be reclassified to profit or loss
on the disposal of the related assets or liabilities the parent shall reclassify the
gain or loss from equity to profit or loss (as a reclassification adjustment) when
it loses control of the subsidiary If a revaluation surplus previously recognised
in other comprehensive income would be transferred directly to retained
earnings on the disposal of the asset the parent shall transfer the revaluation
surplus directly to retained earnings when it loses control of the subsidiary
B99A If a parent loses control of a subsidiary that does not contain a business as
defined in IFRS 3 as a result of a transaction involving an associate or a joint
venture that is accounted for using the equity method the parent determines
the gain or loss in accordance with paragraphs B98–B99 The gain or loss
resulting from the transaction (including the amounts previously recognised in
other comprehensive income that would be reclassified to profit or loss in
accordance with paragraph B99) is recognised in the parent’s profit or loss only
to the extent of the unrelated investors’ interests in that associate or joint
venture The remaining part of the gain is eliminated against the carrying
amount of the investment in that associate or joint venture In addition if the
parent retains an investment in the former subsidiary and the former subsidiary
is now an associate or a joint venture that is accounted for using the equity
method the parent recognises the part of the gain or loss resulting from the
remeasurement at fair value of the investment retained in that former
subsidiary in its profit or loss only to the extent of the unrelated investors’
interests in the new associate or joint venture The remaining part of that gain
is eliminated against the carrying amount of the investment retained in the
former subsidiary If the parent retains an investment in the former subsidiary
that is now accounted for in accordance with IFRS 9 the part of the gain or loss
resulting from the remeasurement at fair value of the investment retained in
the former subsidiary is recognised in full in the parent’s profit or loss
IFRS 10
IFRS FoundationA530Application examples
Example 17
A parent has a 100 per cent interest in a subsidiary that does not contain a business
The parent sells 70 per cent of its interest in the subsidiary to an associate in which it
has a 20 per cent interest As a consequence of this transaction the parent loses control
of the subsidiary The carrying amount of the net assets of the subsidiary is CU100 and
the carrying amount of the interest sold is CU70 (CU70 CU100 × 70) The fair value
of the consideration received is CU210 which is also the fair value of the interest sold
The investment retained in the former subsidiary is an associate accounted for using the
equity method and its fair value is CU90 The gain determined in accordance with
paragraphs B98–B99 before the elimination required by paragraph B99A is CU200
(CU200 CU210 + CU90 – CU100) This gain comprises two parts
(a) the gain (CU140) resulting from the sale of the 70 per cent interest in the
subsidiary to the associate This gain is the difference between the fair value of
the consideration received (CU210) and the carrying amount of the interest sold
(CU70) According to paragraph B99A the parent recognises in its profit or loss
the amount of the gain attributable to the unrelated investors’ interests in the
existing associate This is 80 per cent of this gain that is CU112 (CU112 CU140
× 80) The remaining 20 per cent of the gain (CU28 CU140 × 20) is
eliminated against the carrying amount of the investment in the existing
associate
(b) the gain (CU60) resulting from the remeasurement at fair value of the
investment directly retained in the former subsidiary This gain is the difference
between the fair value of the investment retained in the former subsidiary
(CU90) and 30 per cent of the carrying amount of the net assets of the subsidiary
(CU30 CU100 × 30) According to paragraph B99A the parent recognises in
its profit or loss the amount of the gain attributable to the unrelated investors’
interests in the new associate This is 56 per cent (70 × 80) of the gain that is
CU34 (CU34 CU60 × 56) The remaining 44 per cent of the gain CU26 (CU26
CU60 × 44) is eliminated against the carrying amount of the investment
retained in the former subsidiary
Accounting for a change in investment entity status
B100 When an entity ceases to be an investment entity it shall apply IFRS 3 to any
subsidiary that was previously measured at fair value through profit or loss in
accordance with paragraph 31 The date of the change of status shall be the
deemed acquisition date The fair value of the subsidiary at the deemed
acquisition date shall represent the transferred deemed consideration when
measuring any goodwill or gain from a bargain purchase that arises from the
deemed acquisition All subsidiaries shall be consolidated in accordance with
paragraphs 19–24 of this IFRS from the date of change of status
B101 When an entity becomes an investment entity it shall cease to consolidate its
subsidiaries at the date of the change in status except for any subsidiary that
shall continue to be consolidated in accordance with paragraph 32 The
IFRS 10
IFRS Foundation A531investment entity shall apply the requirements of paragraphs 25 and 26 to those
subsidiaries that it ceases to consolidate as though the investment entity had
lost control of those subsidiaries at that date
IFRS 10
IFRS FoundationA532Appendix C
Effective date and transition
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
Effective date
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted If an entity applies this IFRS
earlier it shall disclose that fact and apply IFRS 11 IFRS 12 IAS 27 Separate
Financial Statements and IAS 28 (as amended in 2011) at the same time
C1A Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 amended paragraphs C2–C6 and added paragraphs C2A–C2B
C4A–C4C C5A and C6A–C6B An entity shall apply those amendments for
annual periods beginning on or after 1 January 2013 If an entity applies IFRS 10
for an earlier period it shall apply those amendments for that earlier period
C1B Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraphs 2 4 C2A C6A and Appendix A and added
paragraphs 27–33 B85A–B85W B100–B101 and C3A–C3F An entity shall apply
those amendments for annual periods beginning on or after 1 January 2014
Early application is permitted If an entity applies those amendments earlier it
shall disclose that fact and apply all amendments included in Investment Entities
at the same time
C1C Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
(Amendments to IFRS 10 and IAS 28) issued in September 2014 amended
paragraphs 25–26 and added paragraph B99A An entity shall apply those
amendments prospectively to transactions occurring in annual periods
beginning on or after a date to be determined by the IASB Earlier application is
permitted If an entity applies those amendments earlier it shall disclose that
fact
C1D Investment Entities Applying the Consolidation Exception (Amendments to IFRS 10
IFRS 12 and IAS 28) issued in December 2014 amended paragraphs 4 32 B85C
B85E and C2A and added paragraphs 4A–4B An entity shall apply those
amendments for annual periods beginning on or after 1 January 2016 Earlier
application is permitted If an entity applies those amendments for an earlier
period it shall disclose that fact
Transition
C2 An entity shall apply this IFRS retrospectively in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors except as specified in
paragraphs C2A–C6
C2A Notwithstanding the requirements of paragraph 28 of IAS 8 when this IFRS is
first applied and if later when the Investment Entities and Investment Entities
Applying the Consolidation Exception amendments to this IFRS are first applied an
IFRS 10
IFRS Foundation A533entity need only present the quantitative information required by
paragraph 28(f) of IAS 8 for the annual period immediately preceding the date of
initial application of this IFRS (the immediately preceding period’) An entity
may also present this information for the current period or for earlier
comparative periods but is not required to do so
C2B For the purposes of this IFRS the date of initial application is the beginning of
the annual reporting period for which this IFRS is applied for the first time
C3 At the date of initial application an entity is not required to make adjustments
to the previous accounting for its involvement with either
(a) entities that would be consolidated at that date in accordance with
IAS 27 Consolidated and Separate Financial Statements and SIC12
Consolidation—Special Purpose Entities and are still consolidated in
accordance with this IFRS or
(b) entities that would not be consolidated at that date in accordance with
IAS 27 and SIC12 and are not consolidated in accordance with this IFRS
C3A At the date of initial application an entity shall assess whether it is an
investment entity on the basis of the facts and circumstances that exist at that
date If at the date of initial application an entity concludes that it is an
investment entity it shall apply the requirements of paragraphs C3B–C3F
instead of paragraphs C5–C5A
C3B Except for any subsidiary that is consolidated in accordance with paragraph 32
(to which paragraphs C3 and C6 or paragraphs C4–C4C whichever is relevant
apply) an investment entity shall measure its investment in each subsidiary at
fair value through profit or loss as if the requirements of this IFRS had always
been effective The investment entity shall retrospectively adjust both the
annual period that immediately precedes the date of initial application and
equity at the beginning of the immediately preceding period for any difference
between
(a) the previous carrying amount of the subsidiary and
(b) the fair value of the investment entity’s investment in the subsidiary
The cumulative amount of any fair value adjustments previously recognised in
other comprehensive income shall be transferred to retained earnings at the
beginning of the annual period immediately preceding the date of initial
application
C3C Before the date that IFRS 13 Fair Value Measurement is adopted an investment
entity shall use the fair value amounts that were previously reported to investors
or to management if those amounts represent the amount for which the
investment could have been exchanged between knowledgeable willing parties
in an arm’s length transaction at the date of the valuation
C3D If measuring an investment in a subsidiary in accordance with paragraphs
C3B–C3C is impracticable (as defined in IAS 8) an investment entity shall apply
the requirements of this IFRS at the beginning of the earliest period for which
application of paragraphs C3B–C3C is practicable which may be the current
period The investor shall retrospectively adjust the annual period that
IFRS 10
IFRS FoundationA534immediately precedes the date of initial application unless the beginning of the
earliest period for which application of this paragraph is practicable is the
current period If this is the case the adjustment to equity shall be recognised at
the beginning of the current period
C3E If an investment entity has disposed of or has lost control of an investment in a
subsidiary before the date of initial application of this IFRS the investment
entity is not required to make adjustments to the previous accounting for that
subsidiary
C3F If an entity applies the Investment Entities amendments for a period later than
when it applies IFRS 10 for the first time references to the date of initial
application’ in paragraphs C3A–C3E shall be read as the beginning of the
annual reporting period for which the amendments in Investment Entities
(Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October 2012 are applied
for the first time’
C4 If at the date of initial application an investor concludes that it shall
consolidate an investee that was not consolidated in accordance with IAS 27 and
SIC12 the investor shall
(a) if the investee is a business (as defined in IFRS 3 Business Combinations)
measure the assets liabilities and noncontrolling interests in that
previously unconsolidated investee as if that investee had been
consolidated (and thus had applied acquisition accounting in accordance
with IFRS 3) from the date when the investor obtained control of that
investee on the basis of the requirements of this IFRS The investor shall
adjust retrospectively the annual period immediately preceding the date
of initial application When the date that control was obtained is earlier
than the beginning of the immediately preceding period the investor
shall recognise as an adjustment to equity at the beginning of the
immediately preceding period any difference between
(i) the amount of assets liabilities and noncontrolling interests
recognised and
(ii) the previous carrying amount of the investor’s involvement with
the investee
(b) if the investee is not a business (as defined in IFRS 3) measure the assets
liabilities and noncontrolling interests in that previously
unconsolidated investee as if that investee had been consolidated
(applying the acquisition method as described in IFRS 3 but without
recognising any goodwill for the investee) from the date when the
investor obtained control of that investee on the basis of the
requirements of this IFRS The investor shall adjust retrospectively the
annual period immediately preceding the date of initial application
When the date that control was obtained is earlier than the beginning of
the immediately preceding period the investor shall recognise as an
adjustment to equity at the beginning of the immediately preceding
period any difference between
(i) the amount of assets liabilities and noncontrolling interests
recognised and
IFRS 10
IFRS Foundation A535(ii) the previous carrying amount of the investor’s involvement with
the investee
C4A If measuring an investee’s assets liabilities and noncontrolling interests in
accordance with paragraph C4(a) or (b) is impracticable (as defined in IAS 8) an
investor shall
(a) if the investee is a business apply the requirements of IFRS 3 as of the
deemed acquisition date The deemed acquisition date shall be the
beginning of the earliest period for which application of paragraph C4(a)
is practicable which may be the current period
(b) if the investee is not a business apply the acquisition method as
described in IFRS 3 but without recognising any goodwill for the investee
as of the deemed acquisition date The deemed acquisition date shall be
the beginning of the earliest period for which the application of
paragraph C4(b) is practicable which may be the current period
The investor shall adjust retrospectively the annual period immediately
preceding the date of initial application unless the beginning of the earliest
period for which application of this paragraph is practicable is the current
period When the deemed acquisition date is earlier than the beginning of the
immediately preceding period the investor shall recognise as an adjustment to
equity at the beginning of the immediately preceding period any difference
between
(c) the amount of assets liabilities and noncontrolling interests recognised
and
(d) the previous carrying amount of the investor’s involvement with the
investee
If the earliest period for which application of this paragraph is practicable is the
current period the adjustment to equity shall be recognised at the beginning of
the current period
C4B When an investor applies paragraphs C4–C4A and the date that control was
obtained in accordance with this IFRS is later than the effective date of IFRS 3 as
revised in 2008 (IFRS 3 (2008)) the reference to IFRS 3 in paragraphs C4 and C4A
shall be to IFRS 3 (2008) If control was obtained before the effective date of
IFRS 3 (2008) an investor shall apply either IFRS 3 (2008) or IFRS 3 (issued in
2004)
C4C When an investor applies paragraphs C4–C4A and the date that control was
obtained in accordance with this IFRS is later than the effective date of IAS 27 as
revised in 2008 (IAS 27 (2008)) an investor shall apply the requirements of this
IFRS for all periods that the investee is retrospectively consolidated in
accordance with paragraphs C4–C4A If control was obtained before the
effective date of IAS 27 (2008) an investor shall apply either
(a) the requirements of this IFRS for all periods that the investee is
retrospectively consolidated in accordance with paragraphs C4–C4A or
IFRS 10
IFRS FoundationA536(b) the requirements of the version of IAS 27 issued in 2003 (IAS 27 (2003))
for those periods prior to the effective date of IAS 27 (2008) and
thereafter the requirements of this IFRS for subsequent periods
C5 If at the date of initial application an investor concludes that it will no longer
consolidate an investee that was consolidated in accordance with IAS 27 and
SIC12 the investor shall measure its interest in the investee at the amount at
which it would have been measured if the requirements of this IFRS had been
effective when the investor became involved with (but did not obtain control in
accordance with this IFRS) or lost control of the investee The investor shall
adjust retrospectively the annual period immediately preceding the date of
initial application When the date that the investor became involved with (but
did not obtain control in accordance with this IFRS) or lost control of the
investee is earlier than the beginning of the immediately preceding period the
investor shall recognise as an adjustment to equity at the beginning of the
immediately preceding period any difference between
(a) the previous carrying amount of the assets liabilities and
noncontrolling interests and
(b) the recognised amount of the investor’s interest in the investee
C5A If measuring the interest in the investee in accordance with paragraph C5 is
impracticable (as defined in IAS 8) an investor shall apply the requirements of
this IFRS at the beginning of the earliest period for which application of
paragraph C5 is practicable which may be the current period The investor shall
adjust retrospectively the annual period immediately preceding the date of
initial application unless the beginning of the earliest period for which
application of this paragraph is practicable is the current period When the date
that the investor became involved with (but did not obtain control in accordance
with this IFRS) or lost control of the investee is earlier than the beginning of the
immediately preceding period the investor shall recognise as an adjustment to
equity at the beginning of the immediately preceding period any difference
between
(a) the previous carrying amount of the assets liabilities and
noncontrolling interests and
(b) the recognised amount of the investor’s interest in the investee
If the earliest period for which application of this paragraph is practicable is the
current period the adjustment to equity shall be recognised at the beginning of
the current period
C6 Paragraphs 23 25 B94 and B96–B99 were amendments to IAS 27 made in 2008
that were carried forward into IFRS 10 Except when an entity applies
paragraph C3 or is required to apply paragraphs C4–C5A the entity shall apply
the requirements in those paragraphs as follows
(a) An entity shall not restate any profit or loss attribution for reporting
periods before it applied the amendment in paragraph B94 for the first
time
IFRS 10
IFRS Foundation A537(b) The requirements in paragraphs 23 and B96 for accounting for changes
in ownership interests in a subsidiary after control is obtained do not
apply to changes that occurred before an entity applied these
amendments for the first time
(c) An entity shall not restate the carrying amount of an investment in a
former subsidiary if control was lost before it applied the amendments in
paragraphs 25 and B97–B99 for the first time In addition an entity shall
not recalculate any gain or loss on the loss of control of a subsidiary that
occurred before the amendments in paragraphs 25 and B97–B99 were
applied for the first time
References to the immediately preceding period’
C6A Notwithstanding the references to the annual period immediately preceding the
date of initial application (the immediately preceding period’) in paragraphs
C3B–C5A an entity may also present adjusted comparative information for any
earlier periods presented but is not required to do so If an entity does present
adjusted comparative information for any earlier periods all references to the
immediately preceding period’ in paragraphs C3B–C5A shall be read as the
earliest adjusted comparative period presented’
C6B If an entity presents unadjusted comparative information for any earlier
periods it shall clearly identify the information that has not been adjusted state
that it has been prepared on a different basis and explain that basis
References to IFRS 9
C7 If an entity applies this IFRS but does not yet apply IFRS 9 any reference in this
IFRS to IFRS 9 shall be read as a reference to IAS 39 Financial Instruments
Recognition and Measurement
Withdrawal of other IFRSs
C8 This IFRS supersedes the requirements relating to consolidated financial
statements in IAS 27 (as amended in 2008)
C9 This IFRS also supersedes SIC12 Consolidation—Special Purpose Entities
IFRS 10
IFRS FoundationA538Appendix D
Amendments to other IFRSs
This appendix sets out the amendments to other IFRSs that are a consequence of the Board issuing
this IFRS An entity shall apply the amendments for annual periods beginning on or after
1 January 2013 If an entity applies this IFRS for an earlier period it shall apply these amendments
for that earlier period Amended paragraphs are shown with new text underlined and deleted text
struck through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 10
IFRS Foundation A539IFRS Standard 11
Joint Arrangements
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 31
Financial Reporting of Interests in Joint Ventures which had originally been issued by the
International Accounting Standards Committee in December 1990
In December 2003 the Board amended and renamed IAS 31 with a new title—Interests in Joint
Ventures This amendment was done in conjunction with amendments to IAS 27 Consolidated
Financial Statements and Accounting for Investments in Subsidiaries and IAS 28 Accounting for
Investments in Associates
In May 2011 the Board issued IFRS 11 Joint Arrangements to replace IAS 31 IFRS 12 Disclosure
of Interests in Other Entities also issued in May 2011 replaced the disclosure requirements in
IAS 31 IFRS 11 incorporated the guidance contained in a related Interpretation (SIC13
Jointly Controlled EntitiesNonMonetary Contributions by Venturers)
In June 2012 IFRS 11 was amended by Consolidated Financial Statements Joint Arrangements and
Disclosure of Interests in Other Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and
IFRS 12) These amendments provided additional transition relief to IFRS 11 limiting the
requirement to present adjusted comparative information to only the annual period
immediately preceding the first annual period for which IFRS 11 is applied
In May 2014 the Board amended IFRS 11 to provide guidance on the accounting for
acquisitions of interests in joint operations in which the activity constitutes a business
IFRS 11
IFRS Foundation A541CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 11
JOINT ARRANGEMENTS
OBJECTIVE 1
Meeting the objective 2
SCOPE 3
JOINT ARRANGEMENTS 4
Joint control 7
Types of joint arrangement 14
FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT 20
Joint operations 20
Joint ventures 24
SEPARATE FINANCIAL STATEMENTS 26
APPENDICES
A Defined terms
B Application guidance
C Effective date transition and withdrawal of other IFRSs
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 11 ISSUED IN MAY 2011
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 11
Consolidated Financial Statements Joint Arrangements and Disclosure of
Interests in Other Entities Transition Guidance (Amendments to IFRS 10
IFRS 11 and IFRS 12) issued in June 2012
Accounting for Acquisitions of Interests in Joint Operations (Amendments to
IFRS 11) issued in May 2014
BASIS FOR CONCLUSION
APPENDIX
Amendments to the Basis for Conclusions on other IFRSs
ILLUSTRATIVE EXAMPLES
IFRS 11
IFRS FoundationA542International Financial Reporting Standard 11 Joint Arrangements (IFRS 11) is set out in
paragraphs 1–27 and Appendices A–D All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the Standard Definitions of other terms are given in
the Glossary for International Financial Reporting Standards IFRS 11 should be read in
the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 11
IFRS Foundation A543Introduction
Overview
IN1 International Financial Reporting Standard 11 Joint Arrangements establishes
principles for financial reporting by parties to a joint arrangement
IN2 The IFRS supersedes IAS 31 Interests in Joint Ventures and SIC13 Jointly Controlled
Entities—NonMonetary Contributions by Venturers and is effective for annual periods
beginning on or after 1 January 2013 Earlier application is permitted
Reasons for issuing the IFRS
IN3 The IFRS is concerned principally with addressing two aspects of IAS 31 first
that the structure of the arrangement was the only determinant of the
accounting and second that an entity had a choice of accounting treatment for
interests in jointly controlled entities
IN4 IFRS 11 improves on IAS 31 by establishing principles that are applicable to the
accounting for all joint arrangements
Reasons for amending IFRS 11 in May 2014
IN4A In May 2014 the International Accounting Standards Board amended IFRS 11 to
provide guidance on the accounting for acquisitions of interests in joint
operations in which the activity constitutes a business
Main features of the IFRS
IN5 The IFRS requires a party to a joint arrangement to determine the type of joint
arrangement in which it is involved by assessing its rights and obligations
arising from the arrangement
General requirements
IN6 The IFRS is to be applied by all entities that are a party to a joint arrangement A
joint arrangement is an arrangement of which two or more parties have joint
control The IFRS defines joint control as the contractually agreed sharing of
control of an arrangement which exists only when decisions about the relevant
activities (ie activities that significantly affect the returns of the arrangement)
require the unanimous consent of the parties sharing control
IN7 The IFRS classifies joint arrangements into two types—joint operations and joint
ventures A joint operation is a joint arrangement whereby the parties that have
joint control of the arrangement (ie joint operators) have rights to the assets
and obligations for the liabilities relating to the arrangement A joint venture is
a joint arrangement whereby the parties that have joint control of the
arrangement (ie joint venturers) have rights to the net assets of the
arrangement
IFRS 11
IFRS FoundationA544IN8 An entity determines the type of joint arrangement in which it is involved by
considering its rights and obligations An entity assesses its rights and
obligations by considering the structure and legal form of the arrangement the
contractual terms agreed to by the parties to the arrangement and when
relevant other facts and circumstances
IN9 The IFRS requires a joint operator to recognise and measure the assets and
liabilities (and recognise the related revenues and expenses) in relation to its
interest in the arrangement in accordance with relevant IFRSs applicable to the
particular assets liabilities revenues and expenses
IN9A This IFRS requires the acquirer of an interest in a joint operation in which the
activity constitutes a business as defined in IFRS 3 Business Combinations to apply
all of the principles on business combinations accounting in IFRS 3 and other
IFRSs except for those principles that conflict with the guidance in this IFRS In
addition the acquirer shall disclose the information required by IFRS 3 and
other IFRSs for business combinations
IN10 The IFRS requires a joint venturer to recognise an investment and to account for
that investment using the equity method in accordance with IAS 28 Investments in
Associates and Joint Ventures unless the entity is exempted from applying the
equity method as specified in that standard
IN11 The disclosure requirements for parties with joint control of a joint
arrangement are specified in IFRS 12 Disclosure of Interests in Other Entities
IFRS 11
IFRS Foundation A545International Financial Reporting Standard 11
Joint Arrangements
Objective
1 The objective of this IFRS is to establish principles for financial reporting
by entities that have an interest in arrangements that are controlled
jointly (ie joint arrangements)
Meeting the objective
2 To meet the objective in paragraph 1 this IFRS defines joint control and requires
an entity that is a party to a joint arrangement to determine the type of joint
arrangement in which it is involved by assessing its rights and obligations and to
account for those rights and obligations in accordance with that type of joint
arrangement
Scope
3 This IFRS shall be applied by all entities that are a party to a joint
arrangement
Joint arrangements
4 A joint arrangement is an arrangement of which two or more parties
have joint control
5 A joint arrangement has the following characteristics
(a) The parties are bound by a contractual arrangement (see
paragraphs B2–B4)
(b) The contractual arrangement gives two or more of those parties
joint control of the arrangement (see paragraphs 7–13)
6 A joint arrangement is either a joint operation or a joint venture
Joint control
7 Joint control is the contractually agreed sharing of control of an
arrangement which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control
8 An entity that is a party to an arrangement shall assess whether the contractual
arrangement gives all the parties or a group of the parties control of the
arrangement collectively All the parties or a group of the parties control the
arrangement collectively when they must act together to direct the activities
that significantly affect the returns of the arrangement (ie the relevant
activities)
IFRS 11
IFRS FoundationA5469 Once it has been determined that all the parties or a group of the parties
control the arrangement collectively joint control exists only when decisions
about the relevant activities require the unanimous consent of the parties that
control the arrangement collectively
10 In a joint arrangement no single party controls the arrangement on its own A
party with joint control of an arrangement can prevent any of the other parties
or a group of the parties from controlling the arrangement
11 An arrangement can be a joint arrangement even though not all of its parties
have joint control of the arrangement This IFRS distinguishes between parties
that have joint control of a joint arrangement (joint operators or joint venturers) and
parties that participate in but do not have joint control of a joint arrangement
12 An entity will need to apply judgement when assessing whether all the parties
or a group of the parties have joint control of an arrangement An entity shall
make this assessment by considering all facts and circumstances (see paragraphs
B5–B11)
13 If facts and circumstances change an entity shall reassess whether it still has
joint control of the arrangement
Types of joint arrangement
14 An entity shall determine the type of joint arrangement in which it is
involved The classification of a joint arrangement as a joint operation or
a joint venture depends upon the rights and obligations of the parties to
the arrangement
15 A joint operation is a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the assets and
obligations for the liabilities relating to the arrangement Those parties
are called joint operators
16 A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the
arrangement Those parties are called joint venturers
17 An entity applies judgement when assessing whether a joint arrangement is a
joint operation or a joint venture An entity shall determine the type of joint
arrangement in which it is involved by considering its rights and obligations
arising from the arrangement An entity assesses its rights and obligations by
considering the structure and legal form of the arrangement the terms agreed
by the parties in the contractual arrangement and when relevant other facts
and circumstances (see paragraphs B12–B33)
18 Sometimes the parties are bound by a framework agreement that sets up the
general contractual terms for undertaking one or more activities The
framework agreement might set out that the parties establish different joint
arrangements to deal with specific activities that form part of the agreement
Even though those joint arrangements are related to the same framework
agreement their type might be different if the parties’ rights and obligations
differ when undertaking the different activities dealt with in the framework
IFRS 11
IFRS Foundation A547agreement Consequently joint operations and joint ventures can coexist when
the parties undertake different activities that form part of the same framework
agreement
19 If facts and circumstances change an entity shall reassess whether the type of
joint arrangement in which it is involved has changed
Financial statements of parties to a joint arrangement
Joint operations
20 A joint operator shall recognise in relation to its interest in a joint
operation
(a) its assets including its share of any assets held jointly
(b) its liabilities including its share of any liabilities incurred jointly
(c) its revenue from the sale of its share of the output arising from the
joint operation
(d) its share of the revenue from the sale of the output by the joint
operation and
(e) its expenses including its share of any expenses incurred jointly
21 A joint operator shall account for the assets liabilities revenues and expenses
relating to its interest in a joint operation in accordance with the IFRSs
applicable to the particular assets liabilities revenues and expenses
21A When an entity acquires an interest in a joint operation in which the activity of
the joint operation constitutes a business as defined in IFRS 3 Business
Combinations it shall apply to the extent of its share in accordance with
paragraph 20 all of the principles on business combinations accounting in
IFRS 3 and other IFRSs that do not conflict with the guidance in this IFRS and
disclose the information that is required in those IFRSs in relation to business
combinations This applies to the acquisition of both the initial interest and
additional interests in a joint operation in which the activity of the joint
operation constitutes a business The accounting for the acquisition of an
interest in such a joint operation is specified in paragraphs B33A–B33D
22 The accounting for transactions such as the sale contribution or purchase of
assets between an entity and a joint operation in which it is a joint operator is
specified in paragraphs B34–B37
23 A party that participates in but does not have joint control of a joint operation
shall also account for its interest in the arrangement in accordance with
paragraphs 20–22 if that party has rights to the assets and obligations for the
liabilities relating to the joint operation If a party that participates in but does
not have joint control of a joint operation does not have rights to the assets and
obligations for the liabilities relating to that joint operation it shall account for
its interest in the joint operation in accordance with the IFRSs applicable to that
interest
IFRS 11
IFRS FoundationA548Joint ventures
24 A joint venturer shall recognise its interest in a joint venture as an
investment and shall account for that investment using the equity
method in accordance with IAS 28 Investments in Associates and Joint
Ventures unless the entity is exempted from applying the equity method
as specified in that standard
25 A party that participates in but does not have joint control of a joint venture
shall account for its interest in the arrangement in accordance with IFRS 9
Financial Instruments unless it has significant influence over the joint venture in
which case it shall account for it in accordance with IAS 28 (as amended in
2011)
Separate financial statements
26 In its separate financial statements a joint operator or joint venturer
shall account for its interest in
(a) a joint operation in accordance with paragraphs 20–22
(b) a joint venture in accordance with paragraph 10 of IAS 27 Separate
Financial Statements
27 In its separate financial statements a party that participates in but does
not have joint control of a joint arrangement shall account for its
interest in
(a) a joint operation in accordance with paragraph 23
(b) a joint venture in accordance with IFRS 9 unless the entity has
significant influence over the joint venture in which case it shall
apply paragraph 10 of IAS 27 (as amended in 2011)
IFRS 11
IFRS Foundation A549Appendix A
Defined terms
This appendix is an integral part of the IFRS
joint arrangement An arrangement of which two or more parties have joint control
joint control The contractually agreed sharing of control of an arrangement
which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control
joint operation A joint arrangement whereby the parties that have joint control
of the arrangement have rights to the assets and obligations for
the liabilities relating to the arrangement
joint operator A party to a joint operation that has joint control of that joint
operation
joint venture A joint arrangement whereby the parties that have joint control
of the arrangement have rights to the net assets of the
arrangement
joint venturer A party to a joint venture that has joint control of that joint
venture
party to a joint
arrangement
An entity that participates in a joint arrangement regardless of
whether that entity has joint control of the arrangement
separate vehicle A separately identifiable financial structure including separate
legal entities or entities recognised by statute regardless of
whether those entities have a legal personality
The following terms are defined in IAS 27 (as amended in 2011) IAS 28 (as amended in 2011)
or IFRS 10 Consolidated Financial Statements and are used in this IFRS with the meanings
specified in those IFRSs
● control of an investee
● equity method
● power
● protective rights
● relevant activities
● separate financial statements
● significant influence
IFRS 11
IFRS FoundationA550Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–27 and
has the same authority as the other parts of the IFRS
B1 The examples in this appendix portray hypothetical situations Although some
aspects of the examples may be present in actual fact patterns all relevant facts
and circumstances of a particular fact pattern would need to be evaluated when
applying IFRS 11
Joint arrangements
Contractual arrangement (paragraph 5)
B2 Contractual arrangements can be evidenced in several ways An enforceable
contractual arrangement is often but not always in writing usually in the form
of a contract or documented discussions between the parties Statutory
mechanisms can also create enforceable arrangements either on their own or in
conjunction with contracts between the parties
B3 When joint arrangements are structured through a separate vehicle (see
paragraphs B19–B33) the contractual arrangement or some aspects of the
contractual arrangement will in some cases be incorporated in the articles
charter or bylaws of the separate vehicle
B4 The contractual arrangement sets out the terms upon which the parties
participate in the activity that is the subject of the arrangement The
contractual arrangement generally deals with such matters as
(a) the purpose activity and duration of the joint arrangement
(b) how the members of the board of directors or equivalent governing
body of the joint arrangement are appointed
(c) the decisionmaking process the matters requiring decisions from the
parties the voting rights of the parties and the required level of support
for those matters The decisionmaking process reflected in the
contractual arrangement establishes joint control of the arrangement
(see paragraphs B5–B11)
(d) the capital or other contributions required of the parties
(e) how the parties share assets liabilities revenues expenses or profit or
loss relating to the joint arrangement
Joint control (paragraphs 7–13)
B5 In assessing whether an entity has joint control of an arrangement an entity
shall assess first whether all the parties or a group of the parties control the
arrangement IFRS 10 defines control and shall be used to determine whether
all the parties or a group of the parties are exposed or have rights to variable
returns from their involvement with the arrangement and have the ability to
affect those returns through their power over the arrangement When all the
parties or a group of the parties considered collectively are able to direct the
IFRS 11
IFRS Foundation A551activities that significantly affect the returns of the arrangement (ie the relevant
activities) the parties control the arrangement collectively
B6 After concluding that all the parties or a group of the parties control the
arrangement collectively an entity shall assess whether it has joint control of
the arrangement Joint control exists only when decisions about the relevant
activities require the unanimous consent of the parties that collectively control
the arrangement Assessing whether the arrangement is jointly controlled by all
of its parties or by a group of the parties or controlled by one of its parties alone
can require judgement
B7 Sometimes the decisionmaking process that is agreed upon by the parties in
their contractual arrangement implicitly leads to joint control For example
assume two parties establish an arrangement in which each has 50 per cent of
the voting rights and the contractual arrangement between them specifies that
at least 51 per cent of the voting rights are required to make decisions about the
relevant activities In this case the parties have implicitly agreed that they have
joint control of the arrangement because decisions about the relevant activities
cannot be made without both parties agreeing
B8 In other circumstances the contractual arrangement requires a minimum
proportion of the voting rights to make decisions about the relevant activities
When that minimum required proportion of the voting rights can be achieved
by more than one combination of the parties agreeing together that
arrangement is not a joint arrangement unless the contractual arrangement
specifies which parties (or combination of parties) are required to agree
unanimously to decisions about the relevant activities of the arrangement
Application examples
Example 1
Assume that three parties establish an arrangement A has 50 per cent of the
voting rights in the arrangement B has 30 per cent and C has 20 per cent
The contractual arrangement between A B and C specifies that at least
75 per cent of the voting rights are required to make decisions about the
relevant activities of the arrangement Even though A can block any
decision it does not control the arrangement because it needs the agreement
of B The terms of their contractual arrangement requiring at least 75 per
cent of the voting rights to make decisions about the relevant activities imply
that A and B have joint control of the arrangement because decisions about
the relevant activities of the arrangement cannot be made without both A
and B agreeing
continued
IFRS 11
IFRS FoundationA552continued
Application examples
Example 2
Assume an arrangement has three parties A has 50 per cent of the voting
rights in the arrangement and B and C each have 25 per cent The
contractual arrangement between A B and C specifies that at least 75 per
cent of the voting rights are required to make decisions about the relevant
activities of the arrangement Even though A can block any decision it does
not control the arrangement because it needs the agreement of either B or C
In this example A B and C collectively control the arrangement However
there is more than one combination of parties that can agree to reach 75 per
cent of the voting rights (ie either A and B or A and C) In such a situation
to be a joint arrangement the contractual arrangement between the parties
would need to specify which combination of the parties is required to agree
unanimously to decisions about the relevant activities of the arrangement
Example 3
Assume an arrangement in which A and B each have 35 per cent of the
voting rights in the arrangement with the remaining 30 per cent being
widely dispersed Decisions about the relevant activities require approval by
a majority of the voting rights A and B have joint control of the
arrangement only if the contractual arrangement specifies that decisions
about the relevant activities of the arrangement require both A and B
agreeing
B9 The requirement for unanimous consent means that any party with joint
control of the arrangement can prevent any of the other parties or a group of
the parties from making unilateral decisions (about the relevant activities)
without its consent If the requirement for unanimous consent relates only to
decisions that give a party protective rights and not to decisions about the
relevant activities of an arrangement that party is not a party with joint control
of the arrangement
B10 A contractual arrangement might include clauses on the resolution of disputes
such as arbitration These provisions may allow for decisions to be made in the
absence of unanimous consent among the parties that have joint control The
existence of such provisions does not prevent the arrangement from being
jointly controlled and consequently from being a joint arrangement
IFRS 11
IFRS Foundation A553B11 When an arrangement is outside the scope of IFRS 11 an entity accounts for its
interest in the arrangement in accordance with relevant IFRSs such as IFRS 10
IAS 28 (as amended in 2011) or IFRS 9
Types of joint arrangement (paragraphs 14–19)
B12 Joint arrangements are established for a variety of purposes (eg as a way for
parties to share costs and risks or as a way to provide the parties with access to
new technology or new markets) and can be established using different
structures and legal forms
B13 Some arrangements do not require the activity that is the subject of the
arrangement to be undertaken in a separate vehicle However other
arrangements involve the establishment of a separate vehicle
B14 The classification of joint arrangements required by this IFRS depends upon the
parties’ rights and obligations arising from the arrangement in the normal
course of business This IFRS classifies joint arrangements as either joint
operations or joint ventures When an entity has rights to the assets and
obligations for the liabilities relating to the arrangement the arrangement is a
joint operation When an entity has rights to the net assets of the arrangement
the arrangement is a joint venture Paragraphs B16–B33 set out the assessment
an entity carries out to determine whether it has an interest in a joint operation
or an interest in a joint venture
Classification of a joint arrangement
B15 As stated in paragraph B14 the classification of joint arrangements requires the
parties to assess their rights and obligations arising from the arrangement
When making that assessment an entity shall consider the following
(a) the structure of the joint arrangement (see paragraphs B16–B21)
(b) when the joint arrangement is structured through a separate vehicle
IFRS 11
IFRS FoundationA554(i) the legal form of the separate vehicle (see paragraphs B22–B24)
(ii) the terms of the contractual arrangement (see paragraphs
B25–B28) and
(iii) when relevant other facts and circumstances (see paragraphs
B29–B33)
Structure of the joint arrangement
Joint arrangements not structured through a separate vehicle
B16 A joint arrangement that is not structured through a separate vehicle is a joint
operation In such cases the contractual arrangement establishes the parties’
rights to the assets and obligations for the liabilities relating to the
arrangement and the parties’ rights to the corresponding revenues and
obligations for the corresponding expenses
B17 The contractual arrangement often describes the nature of the activities that are
the subject of the arrangement and how the parties intend to undertake those
activities together For example the parties to a joint arrangement could agree
to manufacture a product together with each party being responsible for a
specific task and each using its own assets and incurring its own liabilities The
contractual arrangement could also specify how the revenues and expenses that
are common to the parties are to be shared among them In such a case each
joint operator recognises in its financial statements the assets and liabilities
used for the specific task and recognises its share of the revenues and expenses
in accordance with the contractual arrangement
B18 In other cases the parties to a joint arrangement might agree for example to
share and operate an asset together In such a case the contractual
arrangement establishes the parties’ rights to the asset that is operated jointly
and how output or revenue from the asset and operating costs are shared among
the parties Each joint operator accounts for its share of the joint asset and its
agreed share of any liabilities and recognises its share of the output revenues
and expenses in accordance with the contractual arrangement
Joint arrangements structured through a separate vehicle
B19 A joint arrangement in which the assets and liabilities relating to the
arrangement are held in a separate vehicle can be either a joint venture or a
joint operation
B20 Whether a party is a joint operator or a joint venturer depends on the party’s
rights to the assets and obligations for the liabilities relating to the
arrangement that are held in the separate vehicle
B21 As stated in paragraph B15 when the parties have structured a joint
arrangement in a separate vehicle the parties need to assess whether the legal
form of the separate vehicle the terms of the contractual arrangement and
when relevant any other facts and circumstances give them
(a) rights to the assets and obligations for the liabilities relating to the
arrangement (ie the arrangement is a joint operation) or
IFRS 11
IFRS Foundation A555(b) rights to the net assets of the arrangement (ie the arrangement is a joint
venture)
The legal form of the separate vehicle
B22 The legal form of the separate vehicle is relevant when assessing the type of joint
arrangement The legal form assists in the initial assessment of the parties’
rights to the assets and obligations for the liabilities held in the separate vehicle
such as whether the parties have interests in the assets held in the separate
vehicle and whether they are liable for the liabilities held in the separate vehicle
B23 For example the parties might conduct the joint arrangement through a
separate vehicle whose legal form causes the separate vehicle to be considered
in its own right (ie the assets and liabilities held in the separate vehicle are the
assets and liabilities of the separate vehicle and not the assets and liabilities of
the parties) In such a case the assessment of the rights and obligations
conferred upon the parties by the legal form of the separate vehicle indicates
that the arrangement is a joint venture However the terms agreed by the
parties in their contractual arrangement (see paragraphs B25–B28) and when
relevant other facts and circumstances (see paragraphs B29–B33) can override
the assessment of the rights and obligations conferred upon the parties by the
legal form of the separate vehicle
B24 The assessment of the rights and obligations conferred upon the parties by the
legal form of the separate vehicle is sufficient to conclude that the arrangement
is a joint operation only if the parties conduct the joint arrangement in a
separate vehicle whose legal form does not confer separation between the
parties and the separate vehicle (ie the assets and liabilities held in the separate
vehicle are the parties’ assets and liabilities)
IFRS 11
IFRS FoundationA556Assessing the terms of the contractual arrangement
B25 In many cases the rights and obligations agreed to by the parties in their
contractual arrangements are consistent or do not conflict with the rights and
obligations conferred on the parties by the legal form of the separate vehicle in
which the arrangement has been structured
B26 In other cases the parties use the contractual arrangement to reverse or modify
the rights and obligations conferred by the legal form of the separate vehicle in
which the arrangement has been structured
Application example
Example 4
Assume that two parties structure a joint arrangement in an incorporated
entity Each party has a 50 per cent ownership interest in the incorporated
entity The incorporation enables the separation of the entity from its
owners and as a consequence the assets and liabilities held in the entity are
the assets and liabilities of the incorporated entity In such a case the
assessment of the rights and obligations conferred upon the parties by the
legal form of the separate vehicle indicates that the parties have rights to the
net assets of the arrangement
However the parties modify the features of the corporation through their
contractual arrangement so that each has an interest in the assets of the
incorporated entity and each is liable for the liabilities of the incorporated
entity in a specified proportion Such contractual modifications to the
features of a corporation can cause an arrangement to be a joint operation
B27 The following table compares common terms in contractual arrangements of
parties to a joint operation and common terms in contractual arrangements of
parties to a joint venture The examples of the contractual terms provided in the
following table are not exhaustive
Assessing the terms of the contractual arrangement
Joint operation Joint venture
The terms of the
contractual
arrangement
The contractual
arrangement provides the
parties to the joint
arrangement with rights
to the assets and
obligations for the
liabilities relating to the
arrangement
The contractual
arrangement provides the
parties to the joint
arrangement with rights
to the net assets of the
arrangement (ie it is the
separate vehicle not the
parties that has rights to
the assets and
obligations for the
liabilities relating to the
arrangement)
continued
IFRS 11
IFRS Foundation A557continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Rights to assets The contractual
arrangement establishes
that the parties to the
joint arrangement share
all interests (eg rights
title or ownership) in the
assets relating to the
arrangement in a
specified proportion
(eg in proportion to the
parties’ ownership
interest in the
arrangement or in
proportion to the activity
carried out through the
arrangement that is
directly attributed to
them)
The contractual
arrangement establishes
that the assets brought
into the arrangement or
subsequently acquired by
the joint arrangement are
the arrangement’s assets
The parties have no
interests (ie no rights
title or ownership) in the
assets of the
arrangement
continued
IFRS 11
IFRS FoundationA558continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Obligations for
liabilities
The contractual
arrangement establishes
that the parties to the
joint arrangement share
all liabilities obligations
costs and expenses in a
specified proportion
(eg in proportion to the
parties’ ownership
interest in the
arrangement or in
proportion to the activity
carried out through the
arrangement that is
directly attributed to
them)
The contractual
arrangement establishes
that the joint
arrangement is liable for
the debts and obligations
of the arrangement
The contractual
arrangement establishes
that the parties to the
joint arrangement are
liable to the arrangement
only to the extent of their
respective investments in
the arrangement or to
their respective
obligations to contribute
any unpaid or additional
capital to the
arrangement or both
The contractual
arrangement establishes
that the parties to the
joint arrangement are
liable for claims raised by
third parties
The contractual
arrangement states that
creditors of the joint
arrangement do not have
rights of recourse against
any party with respect to
debts or obligations of
the arrangement
continued
IFRS 11
IFRS Foundation A559continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Revenues expenses
profit or loss
The contractual
arrangement establishes
the allocation of revenues
and expenses on the basis
of the relative
performance of each
party to the joint
arrangement For
example the contractual
arrangement might
establish that revenues
and expenses are
allocated on the basis of
the capacity that each
party uses in a plant
operated jointly which
could differ from their
ownership interest in the
joint arrangement In
other instances the
parties might have agreed
to share the profit or loss
relating to the
arrangement on the basis
of a specified proportion
such as the parties’
ownership interest in the
arrangement This would
not prevent the
arrangement from being
a joint operation if the
parties have rights to the
assets and obligations for
the liabilities relating to
the arrangement
The contractual
arrangement establishes
each party’s share in the
profit or loss relating to
the activities of the
arrangement
continued
IFRS 11
IFRS FoundationA560continued
Assessing the terms of the contractual arrangement
Joint operation Joint venture
Guarantees The parties to joint arrangements are often required
to provide guarantees to third parties that for
example receive a service from or provide financing
to the joint arrangement The provision of such
guarantees or the commitment by the parties to
provide them does not by itself determine that the
joint arrangement is a joint operation The feature
that determines whether the joint arrangement is a
joint operation or a joint venture is whether the
parties have obligations for the liabilities relating to
the arrangement (for some of which the parties
might or might not have provided a guarantee)
B28 When the contractual arrangement specifies that the parties have rights to the
assets and obligations for the liabilities relating to the arrangement they are
parties to a joint operation and do not need to consider other facts and
circumstances (paragraphs B29–B33) for the purposes of classifying the joint
arrangement
Assessing other facts and circumstances
B29 When the terms of the contractual arrangement do not specify that the parties
have rights to the assets and obligations for the liabilities relating to the
arrangement the parties shall consider other facts and circumstances to assess
whether the arrangement is a joint operation or a joint venture
B30 A joint arrangement might be structured in a separate vehicle whose legal form
confers separation between the parties and the separate vehicle The contractual
terms agreed among the parties might not specify the parties’ rights to the
assets and obligations for the liabilities yet consideration of other facts and
circumstances can lead to such an arrangement being classified as a joint
operation This will be the case when other facts and circumstances give the
parties rights to the assets and obligations for the liabilities relating to the
arrangement
B31 When the activities of an arrangement are primarily designed for the provision
of output to the parties this indicates that the parties have rights to
substantially all the economic benefits of the assets of the arrangement The
parties to such arrangements often ensure their access to the outputs provided
by the arrangement by preventing the arrangement from selling output to third
parties
B32 The effect of an arrangement with such a design and purpose is that the
liabilities incurred by the arrangement are in substance satisfied by the cash
flows received from the parties through their purchases of the output When
the parties are substantially the only source of cash flows contributing to the
IFRS 11
IFRS Foundation A561continuity of the operations of the arrangement this indicates that the parties
have an obligation for the liabilities relating to the arrangement
Application example
Example 5
Assume that two parties structure a joint arrangement in an incorporated
entity (entity C) in which each party has a 50 per cent ownership interest
The purpose of the arrangement is to manufacture materials required by the
parties for their own individual manufacturing processes The arrangement
ensures that the parties operate the facility that produces the materials to
the quantity and quality specifications of the parties
The legal form of entity C (an incorporated entity) through which the
activities are conducted initially indicates that the assets and liabilities held
in entity C are the assets and liabilities of entity C The contractual
arrangement between the parties does not specify that the parties have rights
to the assets or obligations for the liabilities of entity C Accordingly the
legal form of entity C and the terms of the contractual arrangement indicate
that the arrangement is a joint venture
However the parties also consider the following aspects of the arrangement
● The parties agreed to purchase all the output produced by entity C in
a ratio of 5050 Entity C cannot sell any of the output to third
parties unless this is approved by the two parties to the arrangement
Because the purpose of the arrangement is to provide the parties with
output they require such sales to third parties are expected to be
uncommon and not material
● The price of the output sold to the parties is set by both parties at a
level that is designed to cover the costs of production and
administrative expenses incurred by entity C On the basis of this
operating model the arrangement is intended to operate at a
breakeven level
continued
IFRS 11
IFRS FoundationA562continued
Application example
From the fact pattern above the following facts and circumstances are
relevant
● The obligation of the parties to purchase all the output produced by
entity C reflects the exclusive dependence of entity C upon the parties
for the generation of cash flows and thus the parties have an
obligation to fund the settlement of the liabilities of entity C
● The fact that the parties have rights to all the output produced by
entity C means that the parties are consuming and therefore have
rights to all the economic benefits of the assets of entity C
These facts and circumstances indicate that the arrangement is a joint
operation The conclusion about the classification of the joint arrangement
in these circumstances would not change if instead of the parties using their
share of the output themselves in a subsequent manufacturing process the
parties sold their share of the output to third parties
If the parties changed the terms of the contractual arrangement so that the
arrangement was able to sell output to third parties this would result in
entity C assuming demand inventory and credit risks In that scenario such
a change in the facts and circumstances would require reassessment of the
classification of the joint arrangement Such facts and circumstances would
indicate that the arrangement is a joint venture
B33 The following flow chart reflects the assessment an entity follows to classify an
arrangement when the joint arrangement is structured through a separate
vehicle
IFRS 11
IFRS Foundation A563Financial statements of parties to a joint arrangement
(paragraphs 21A–22)
Accounting for acquisitions of interests in joint
operations
B33A When an entity acquires an interest in a joint operation in which the activity of
the joint operation constitutes a business as defined in IFRS 3 it shall apply to
the extent of its share in accordance with paragraph 20 all of the principles on
business combinations accounting in IFRS 3 and other IFRSs that do not
conflict with the guidance in this IFRS and disclose the information required by
those IFRSs in relation to business combinations The principles on business
combinations accounting that do not conflict with the guidance in this IFRS
include but are not limited to
(a) measuring identifiable assets and liabilities at fair value other than
items for which exceptions are given in IFRS 3 and other IFRSs
IFRS 11
IFRS FoundationA564(b) recognising acquisitionrelated costs as expenses in the periods in which
the costs are incurred and the services are received with the exception
that the costs to issue debt or equity securities are recognised in
accordance with IAS 32 Financial Instruments Presentation and IFRS 91
(c) recognising deferred tax assets and deferred tax liabilities that arise from
the initial recognition of assets or liabilities except for deferred tax
liabilities that arise from the initial recognition of goodwill as required
by IFRS 3 and IAS 12 Income Taxes for business combinations
(d) recognising the excess of the consideration transferred over the net of
the acquisitiondate amounts of the identifiable assets acquired and the
liabilities assumed if any as goodwill and
(e) testing for impairment a cashgenerating unit to which goodwill has
been allocated at least annually and whenever there is an indication
that the unit may be impaired as required by IAS 36 Impairment of Assets
for goodwill acquired in a business combination
B33B Paragraphs 21A and B33A also apply to the formation of a joint operation if and
only if an existing business as defined in IFRS 3 is contributed to the joint
operation on its formation by one of the parties that participate in the joint
operation However those paragraphs do not apply to the formation of a joint
operation if all of the parties that participate in the joint operation only
contribute assets or groups of assets that do not constitute businesses to the
joint operation on its formation
B33C A joint operator might increase its interest in a joint operation in which the
activity of the joint operation constitutes a business as defined in IFRS 3 by
acquiring an additional interest in the joint operation In such cases previously
held interests in the joint operation are not remeasured if the joint operator
retains joint control
B33D Paragraphs 21A and B33A–B33C do not apply on the acquisition of an interest in
a joint operation when the parties sharing joint control including the entity
acquiring the interest in the joint operation are under the common control of
the same ultimate controlling party or parties both before and after the
acquisition and that control is not transitory
Accounting for sales or contributions of assets to a joint
operation
B34 When an entity enters into a transaction with a joint operation in which it is a
joint operator such as a sale or contribution of assets it is conducting the
transaction with the other parties to the joint operation and as such the joint
operator shall recognise gains and losses resulting from such a transaction only
to the extent of the other parties’ interests in the joint operation
1 If an entity applies these amendments but does not yet apply IFRS 9 the reference in these
amendments to IFRS 9 shall be read as a reference to IAS 39 Financial Instruments Recognition and
Measurement
IFRS 11
IFRS Foundation A565B35 When such transactions provide evidence of a reduction in the net realisable
value of the assets to be sold or contributed to the joint operation or of an
impairment loss of those assets those losses shall be recognised fully by the joint
operator
Accounting for purchases of assets from a joint
operation
B36 When an entity enters into a transaction with a joint operation in which it is a
joint operator such as a purchase of assets it shall not recognise its share of the
gains and losses until it resells those assets to a third party
B37 When such transactions provide evidence of a reduction in the net realisable
value of the assets to be purchased or of an impairment loss of those assets a
joint operator shall recognise its share of those losses
IFRS 11
IFRS FoundationA566Appendix C
Effective date transition and withdrawal of other IFRSs
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
Effective date
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted If an entity applies this IFRS
earlier it shall disclose that fact and apply IFRS 10 IFRS 12 Disclosure of Interests in
Other Entities IAS 27 (as amended in 2011) and IAS 28 (as amended in 2011) at the
same time
C1A Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 amended paragraphs C2–C5 C7–C10 and C12 and added
paragraphs C1B and C12A–C12B An entity shall apply those amendments for
annual periods beginning on or after 1 January 2013 If an entity applies IFRS 11
for an earlier period it shall apply those amendments for that earlier period
C1AA Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
issued in May 2014 amended the heading after paragraph B33 and added
paragraphs 21A B33A–B33D and C14A and their related headings An entity
shall apply those amendments prospectively in annual periods beginning on or
after 1 January 2016 Earlier application is permitted If an entity applies those
amendments in an earlier period it shall disclose that fact
Transition
C1B Notwithstanding the requirements of paragraph 28 of IAS 8 Accounting Policies
Changes in Accounting Estimates and Errors when this IFRS is first applied an entity
need only present the quantitative information required by paragraph 28(f) of
IAS 8 for the annual period immediately preceding the first annual period for
which IFRS 11 is applied (the immediately preceding period’) An entity may
also present this information for the current period or for earlier comparative
periods but is not required to do so
Joint ventures—transition from proportionate
consolidation to the equity method
C2 When changing from proportionate consolidation to the equity method an
entity shall recognise its investment in the joint venture as at the beginning of
the immediately preceding period That initial investment shall be measured as
the aggregate of the carrying amounts of the assets and liabilities that the entity
had previously proportionately consolidated including any goodwill arising
from acquisition If the goodwill previously belonged to a larger cashgenerating
unit or to a group of cashgenerating units the entity shall allocate goodwill to
the joint venture on the basis of the relative carrying amounts of the joint
venture and the cashgenerating unit or group of cashgenerating units to which
it belonged
IFRS 11
IFRS Foundation A567C3 The opening balance of the investment determined in accordance with
paragraph C2 is regarded as the deemed cost of the investment at initial
recognition An entity shall apply paragraphs 40–43 of IAS 28 (as amended in
2011) to the opening balance of the investment to assess whether the investment
is impaired and shall recognise any impairment loss as an adjustment to
retained earnings at the beginning of the immediately preceding period The
initial recognition exception in paragraphs 15 and 24 of IAS 12 Income Taxes does
not apply when the entity recognises an investment in a joint venture resulting
from applying the transition requirements for joint ventures that had previously
been proportionately consolidated
C4 If aggregating all previously proportionately consolidated assets and liabilities
results in negative net assets an entity shall assess whether it has legal or
constructive obligations in relation to the negative net assets and if so the
entity shall recognise the corresponding liability If the entity concludes that it
does not have legal or constructive obligations in relation to the negative net
assets it shall not recognise the corresponding liability but it shall adjust
retained earnings at the beginning of the immediately preceding period The
entity shall disclose this fact along with its cumulative unrecognised share of
losses of its joint ventures as at the beginning of the immediately preceding
period and at the date at which this IFRS is first applied
C5 An entity shall disclose a breakdown of the assets and liabilities that have been
aggregated into the single line investment balance as at the beginning of the
immediately preceding period That disclosure shall be prepared in an
aggregated manner for all joint ventures for which an entity applies the
transition requirements referred to in paragraphs C2–C6
C6 After initial recognition an entity shall account for its investment in the joint
venture using the equity method in accordance with IAS 28 (as amended in
2011)
Joint operations—transition from the equity method to
accounting for assets and liabilities
C7 When changing from the equity method to accounting for assets and liabilities
in respect of its interest in a joint operation an entity shall at the beginning of
the immediately preceding period derecognise the investment that was
previously accounted for using the equity method and any other items that
formed part of the entity’s net investment in the arrangement in accordance
with paragraph 38 of IAS 28 (as amended in 2011) and recognise its share of each
of the assets and the liabilities in respect of its interest in the joint operation
including any goodwill that might have formed part of the carrying amount of
the investment
C8 An entity shall determine its interest in the assets and liabilities relating to the
joint operation on the basis of its rights and obligations in a specified
proportion in accordance with the contractual arrangement An entity
measures the initial carrying amounts of the assets and liabilities by
disaggregating them from the carrying amount of the investment at the
beginning of the immediately preceding period on the basis of the information
used by the entity in applying the equity method
IFRS 11
IFRS FoundationA568C9 Any difference arising from the investment previously accounted for using the
equity method together with any other items that formed part of the entity’s net
investment in the arrangement in accordance with paragraph 38 of IAS 28 (as
amended in 2011) and the net amount of the assets and liabilities including
any goodwill recognised shall be
(a) offset against any goodwill relating to the investment with any
remaining difference adjusted against retained earnings at the
beginning of the immediately preceding period if the net amount of the
assets and liabilities including any goodwill recognised is higher than
the investment (and any other items that formed part of the entity’s net
investment) derecognised
(b) adjusted against retained earnings at the beginning of the immediately
preceding period if the net amount of the assets and liabilities
including any goodwill recognised is lower than the investment (and
any other items that formed part of the entity’s net investment)
derecognised
C10 An entity changing from the equity method to accounting for assets and
liabilities shall provide a reconciliation between the investment derecognised
and the assets and liabilities recognised together with any remaining difference
adjusted against retained earnings at the beginning of the immediately
preceding period
C11 The initial recognition exception in paragraphs 15 and 24 of IAS 12 does not
apply when the entity recognises assets and liabilities relating to its interest in a
joint operation
Transition provisions in an entity’s separate financial
statements
C12 An entity that in accordance with paragraph 10 of IAS 27 was previously
accounting in its separate financial statements for its interest in a joint
operation as an investment at cost or in accordance with IFRS 9 shall
(a) derecognise the investment and recognise the assets and the liabilities in
respect of its interest in the joint operation at the amounts determined
in accordance with paragraphs C7–C9
(b) provide a reconciliation between the investment derecognised and the
assets and liabilities recognised together with any remaining difference
adjusted in retained earnings at the beginning of the immediately
preceding period
C13 The initial recognition exception in paragraphs 15 and 24 of IAS 12 does not
apply when the entity recognises assets and liabilities relating to its interest in a
joint operation in its separate financial statements resulting from applying the
transition requirements for joint operations referred to in paragraph C12
References to the immediately preceding period’
C13A Notwithstanding the references to the immediately preceding period’ in
paragraphs C2–C12 an entity may also present adjusted comparative
information for any earlier periods presented but is not required to do so If an
IFRS 11
IFRS Foundation A569entity does present adjusted comparative information for any earlier periods all
references to the immediately preceding period’ in paragraphs C2–C12 shall be
read as the earliest adjusted comparative period presented’
C13B If an entity presents unadjusted comparative information for any earlier
periods it shall clearly identify the information that has not been adjusted state
that it has been prepared on a different basis and explain that basis
References to IFRS 9
C14 If an entity applies this IFRS but does not yet apply IFRS 9 any reference to
IFRS 9 shall be read as a reference to IAS 39 Financial Instruments Recognition and
Measurement
Accounting for acquisitions of interests in joint
operations
C14A Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
issued in May 2014 amended the heading after paragraph B33 and added
paragraphs 21A B33A–B33D C1AA and their related headings An entity shall
apply those amendments prospectively for acquisitions of interests in joint
operations in which the activities of the joint operations constitute businesses
as defined in IFRS 3 for those acquisitions occurring from the beginning of the
first period in which it applies those amendments Consequently amounts
recognised for acquisitions of interests in joint operations occurring in prior
periods shall not be adjusted
Withdrawal of other IFRSs
C15 This IFRS supersedes the following IFRSs
(a) IAS 31 Interests in Joint Ventures and
(b) SIC13 Jointly Controlled Entities—NonMonetary Contributions by Venturers
IFRS 11
IFRS FoundationA570Appendix D
Amendments to other IFRSs
This appendix sets out amendments to other IFRSs that are a consequence of the Board issuing
IFRS 11 An entity shall apply the amendments for annual periods beginning on or after 1 January
2013 If an entity applies IFRS 11 for an earlier period it shall apply the amendments for that
earlier period Amended paragraphs are shown with new text underlined and deleted text struck
through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 11
IFRS Foundation A571IFRS Standard 12
Disclosure of Interests in Other Entities
In May 2011 the International Accounting Standards Board issued IFRS 12 Disclosure of
Interests in Other Entities IFRS 12 replaced the disclosure requirements in IAS 27 Consolidated
and Separate Financial Statements IAS 28 Investments in Associates and IAS 31 Interests in Joint
Ventures
In June 2012 IFRS 12 was amended by Consolidated Financial Statements Joint Arrangements and
Disclosure of Interests in Other Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and
IFRS 12) These amendments provided additional transition relief in IFRS 12 limiting the
requirement to present adjusted comparative information to only the annual period
immediately preceding the first annual period for which IFRS 12 is applied Furthermore
for disclosures related to unconsolidated structured entities the amendments removed the
requirement to present comparative information for periods before IFRS 12 is first applied
In October 2012 Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) introduced
new disclosure requirements for investment entities that in accordance with IFRS 10
Consolidated Financial Statements measure their subsidiaries at fair value through profit or
loss instead of consolidating them
Other Standards have made minor amendments to IFRS 12 including Investment Entities
Applying the Consolidation Exception (Amendments to IFRS 10 IFRS 12 and IAS 28) (issued
December 2014)
IFRS 12
IFRS Foundation A573CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 12
DISCLOSURE OF INTERESTS IN OTHER ENTITIES
OBJECTIVE 1
Meeting the objective 2
SCOPE 5
SIGNIFICANT JUDGEMENTS AND ASSUMPTIONS 7
Investment entity status 9A
INTERESTS IN SUBSIDIARIES 10
The interest that noncontrolling interests have in the group’s activities and
cash flows 12
The nature and extent of significant restrictions 13
Nature of the risks associated with an entity’s interests in consolidated
structured entities 14
Consequences of changes in a parent’s ownership interest in a subsidiary
that do not result in a loss of control 18
Consequences of losing control of a subsidiary during the reporting period 19
INTERESTS IN UNCONSOLIDATED SUBSIDIARIES (INVESTMENT ENTITIES) 19A
INTERESTS IN JOINT ARRANGEMENTS AND ASSOCIATES 20
Nature extent and financial effects of an entity’s interests in joint
arrangements and associates 21
Risks associated with an entity’s interests in joint ventures and associates 23
INTERESTS IN UNCONSOLIDATED STRUCTURED ENTITIES 24
Nature of interests 26
Nature of risks 29
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 12 ISSUED IN MAY 2011
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 12
Consolidated Financial Statements Joint Arrangements and Disclosure of
Interests in Other Entities Transition Guidance (Amendments to IFRS 10
IFRS 11 and IFRS 12) issued in June 2012
IFRS 12
IFRS FoundationA574Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in
October 2012
Investment Entities Applying the Consolidation Exception (Amendments to
IFRS 10 IFRS 12 and IAS 28) issued in December 2014
BASIS FOR CONCLUSIONS
IFRS 12
IFRS Foundation A575International Financial Reporting Standard 12 Disclosure of Interests in Other Entities
(IFRS 12) is set out in paragraphs 1–31 and Appendices A–D All the paragraphs have
equal authority Paragraphs in bold type state the main principles Terms defined in
Appendix A are in italics the first time they appear in the IFRS Definitions of other terms
are given in the Glossary for International Financial Reporting Standards IFRS 12
should be read in the context of its objective and the Basis for Conclusions the Preface to
International Financial Reporting Standards and the Conceptual Framework for Financial
Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance
IFRS 12
IFRS FoundationA576Introduction
IN1 IFRS 12 Disclosure of Interests in Other Entities applies to entities that have an interest
in a subsidiary a joint arrangement an associate or an unconsolidated
structured entity
IN2 The IFRS is effective for annual periods beginning on or after 1 January 2013
Earlier application is permitted
Reasons for issuing the IFRS
IN3 Users of financial statements have consistently requested improvements to the
disclosure of a reporting entity’s interests in other entities to help identify the
profit or loss and cash flows available to the reporting entity and determine the
value of a current or future investment in the reporting entity
IN4 They highlighted the need for better information about the subsidiaries that are
consolidated as well as an entity’s interests in joint arrangements and associates
that are not consolidated but with which the entity has a special relationship
IN5 The global financial crisis that started in 2007 also highlighted a lack of
transparency about the risks to which a reporting entity was exposed from its
involvement with structured entities including those that it had sponsored
IN6 In response to input received from users and others including the G20 leaders
and the Financial Stability Board the Board decided to address in IFRS 12 the
need for improved disclosure of a reporting entity’s interests in other entities
when the reporting entity has a special relationship with those other entities
IN7 The Board identified an opportunity to integrate and make consistent the
disclosure requirements for subsidiaries joint arrangements associates and
unconsolidated structured entities and present those requirements in a single
IFRS The Board observed that the disclosure requirements of IAS 27 Consolidated
and Separate Financial Statements IAS 28 Investments in Associates and IAS 31 Interests
in Joint Ventures overlapped in many areas In addition many commented that
the disclosure requirements for interests in unconsolidated structured entities
should not be located in a consolidation standard Therefore the Board
concluded that a combined disclosure standard for interests in other entities
would make it easier to understand and apply the disclosure requirements for
subsidiaries joint ventures associates and unconsolidated structured entities
Main features of the IFRS
IN8 The IFRS requires an entity to disclose information that enables users of
financial statements to evaluate
(a) the nature of and risks associated with its interests in other entities
and
(b) the effects of those interests on its financial position financial
performance and cash flows
IFRS 12
IFRS Foundation A577General requirements
IN9 The IFRS establishes disclosure objectives according to which an entity discloses
information that enables users of its financial statements
(a) to understand
(i) the significant judgements and assumptions (and changes to
those judgements and assumptions) made in determining the
nature of its interest in another entity or arrangement
(ie control joint control or significant influence) and in
determining the type of joint arrangement in which it has an
interest and
(ii) the interest that noncontrolling interests have in the group’s
activities and cash flows and
(b) to evaluate
(i) the nature and extent of significant restrictions on its ability to
access or use assets and settle liabilities of the group
(ii) the nature of and changes in the risks associated with its
interests in consolidated structured entities
(iii) the nature and extent of its interests in unconsolidated
structured entities and the nature of and changes in the risks
associated with those interests
(iv) the nature extent and financial effects of its interests in joint
arrangements and associates and the nature of the risks
associated with those interests
(v) the consequences of changes in a parent’s ownership interest in a
subsidiary that do not result in a loss of control and
(vi) the consequences of losing control of a subsidiary during the
reporting period
IN10 The IFRS specifies minimum disclosures that an entity must provide If the
minimum disclosures required by the IFRS are not sufficient to meet the
disclosure objective an entity discloses whatever additional information is
necessary to meet that objective
IN11 The IFRS requires an entity to consider the level of detail necessary to satisfy the
disclosure objective and how much emphasis to place on each of the
requirements in the IFRS An entity shall aggregate or disaggregate disclosures
so that useful information is not obscured by either the inclusion of a large
amount of insignificant detail or the aggregation of items that have different
characteristics
IN12 Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 introduced an exception to the principle in IFRS 10 Consolidated Financial
Statements that all subsidiaries shall be consolidated The amendments define an
investment entity and require a parent that is an investment entity to measure
its investment in particular subsidiaries at fair value through profit or loss in
accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments
IFRS 12
IFRS FoundationA578Recognition and Measurement if IFRS 9 has not yet been adopted) instead of
consolidating those subsidiaries in its consolidated and separate financial
statements Consequently the amendments also introduced new disclosure
requirements for investment entities in this IFRS and IAS 27 Separate Financial
Statements
IFRS 12
IFRS Foundation A579International Financial Reporting Standard 12
Disclosure of Interests in Other Entities
Objective
1 The objective of this IFRS is to require an entity to disclose information
that enables users of its financial statements to evaluate
(a) the nature of and risks associated with its interests in other
entities and
(b) the effects of those interests on its financial position financial
performance and cash flows
Meeting the objective
2 To meet the objective in paragraph 1 an entity shall disclose
(a) the significant judgements and assumptions it has made in determining
(i) the nature of its interest in another entity or arrangement
(ii) the type of joint arrangement in which it has an interest
(paragraphs 7–9)
(iii) that it meets the definition of an investment entity if applicable
(paragraph 9A) and
(b) information about its interests in
(i) subsidiaries (paragraphs 10–19)
(ii) joint arrangements and associates (paragraphs 20–23) and
(iii) structured entities that are not controlled by the entity
(unconsolidated structured entities) (paragraphs 24–31)
3 If the disclosures required by this IFRS together with disclosures required by
other IFRSs do not meet the objective in paragraph 1 an entity shall disclose
whatever additional information is necessary to meet that objective
4 An entity shall consider the level of detail necessary to satisfy the disclosure
objective and how much emphasis to place on each of the requirements in this
IFRS It shall aggregate or disaggregate disclosures so that useful information is
not obscured by either the inclusion of a large amount of insignificant detail or
the aggregation of items that have different characteristics (see paragraphs
B2–B6)
Scope
5 This IFRS shall be applied by an entity that has an interest in any of the
following
(a) subsidiaries
(b) joint arrangements (ie joint operations or joint ventures)
IFRS 12
IFRS FoundationA580(c) associates
(d) unconsolidated structured entities
6 This IFRS does not apply to
(a) postemployment benefit plans or other longterm employee benefit
plans to which IAS 19 Employee Benefits applies
(b) an entity’s separate financial statements to which IAS 27 Separate
Financial Statements applies However
(i) if an entity has interests in unconsolidated structured entities
and prepares separate financial statements as its only financial
statements it shall apply the requirements in paragraphs 24–31
when preparing those separate financial statements
(ii) an investment entity that prepares financial statements in which
all of its subsidiaries are measured at fair value through profit or
loss in accordance with paragraph 31 of IFRS 10 shall present the
disclosures relating to investment entities required by this IFRS
(c) an interest held by an entity that participates in but does not have joint
control of a joint arrangement unless that interest results in significant
influence over the arrangement or is an interest in a structured entity
(d) an interest in another entity that is accounted for in accordance with
IFRS 9 Financial Instruments However an entity shall apply this IFRS
(i) when that interest is an interest in an associate or a joint venture
that in accordance with IAS 28 Investments in Associates and Joint
Ventures is measured at fair value through profit or loss or
(ii) when that interest is an interest in an unconsolidated structured
entity
Significant judgements and assumptions
7 An entity shall disclose information about significant judgements and
assumptions it has made (and changes to those judgements and
assumptions) in determining
(a) that it has control of another entity ie an investee as described in
paragraphs 5 and 6 of IFRS 10 Consolidated Financial Statements
(b) that it has joint control of an arrangement or significant influence
over another entity and
(c) the type of joint arrangement (ie joint operation or joint venture)
when the arrangement has been structured through a separate
vehicle
8 The significant judgements and assumptions disclosed in accordance with
paragraph 7 include those made by the entity when changes in facts and
circumstances are such that the conclusion about whether it has control joint
control or significant influence changes during the reporting period
IFRS 12
IFRS Foundation A5819 To comply with paragraph 7 an entity shall disclose for example significant
judgements and assumptions made in determining that
(a) it does not control another entity even though it holds more than half of
the voting rights of the other entity
(b) it controls another entity even though it holds less than half of the
voting rights of the other entity
(c) it is an agent or a principal (see paragraphs B58–B72 of IFRS 10)
(d) it does not have significant influence even though it holds 20 per cent or
more of the voting rights of another entity
(e) it has significant influence even though it holds less than 20 per cent of
the voting rights of another entity
Investment entity status
9A When a parent determines that it is an investment entity in accordance
with paragraph 27 of IFRS 10 the investment entity shall disclose
information about significant judgements and assumptions it has made in
determining that it is an investment entity If the investment entity does not
have one or more of the typical characteristics of an investment entity (see
paragraph 28 of IFRS 10) it shall disclose its reasons for concluding that it is
nevertheless an investment entity
9B When an entity becomes or ceases to be an investment entity it shall disclose
the change of investment entity status and the reasons for the change In
addition an entity that becomes an investment entity shall disclose the effect of
the change of status on the financial statements for the period presented
including
(a) the total fair value as of the date of change of status of the subsidiaries
that cease to be consolidated
(b) the total gain or loss if any calculated in accordance with
paragraph B101 of IFRS 10 and
(c) the line item(s) in profit or loss in which the gain or loss is recognised (if
not presented separately)
Interests in subsidiaries
10 An entity shall disclose information that enables users of its consolidated
financial statements
(a) to understand
(i) the composition of the group and
(ii) the interest that noncontrolling interests have in the
group’s activities and cash flows (paragraph 12) and
(b) to evaluate
IFRS 12
IFRS FoundationA582(i) the nature and extent of significant restrictions on its
ability to access or use assets and settle liabilities of the
group (paragraph 13)
(ii) the nature of and changes in the risks associated with its
interests in consolidated structured entities (paragraphs
14–17)
(iii) the consequences of changes in its ownership interest in a
subsidiary that do not result in a loss of control
(paragraph 18) and
(iv) the consequences of losing control of a subsidiary during
the reporting period (paragraph 19)
11 When the financial statements of a subsidiary used in the preparation of
consolidated financial statements are as of a date or for a period that is different
from that of the consolidated financial statements (see paragraphs B92 and B93
of IFRS 10) an entity shall disclose
(a) the date of the end of the reporting period of the financial statements of
that subsidiary and
(b) the reason for using a different date or period
The interest that noncontrolling interests have in the
group’s activities and cash flows
12 An entity shall disclose for each of its subsidiaries that have noncontrolling
interests that are material to the reporting entity
(a) the name of the subsidiary
(b) the principal place of business (and country of incorporation if different
from the principal place of business) of the subsidiary
(c) the proportion of ownership interests held by noncontrolling interests
(d) the proportion of voting rights held by noncontrolling interests if
different from the proportion of ownership interests held
(e) the profit or loss allocated to noncontrolling interests of the subsidiary
during the reporting period
(f) accumulated noncontrolling interests of the subsidiary at the end of the
reporting period
(g) summarised financial information about the subsidiary (see
paragraph B10)
The nature and extent of significant restrictions
13 An entity shall disclose
(a) significant restrictions (eg statutory contractual and regulatory
restrictions) on its ability to access or use the assets and settle the
liabilities of the group such as
IFRS 12
IFRS Foundation A583(i) those that restrict the ability of a parent or its subsidiaries to
transfer cash or other assets to (or from) other entities within the
group
(ii) guarantees or other requirements that may restrict dividends
and other capital distributions being paid or loans and advances
being made or repaid to (or from) other entities within the
group
(b) the nature and extent to which protective rights of noncontrolling
interests can significantly restrict the entity’s ability to access or use the
assets and settle the liabilities of the group (such as when a parent is
obliged to settle liabilities of a subsidiary before settling its own
liabilities or approval of noncontrolling interests is required either to
access the assets or to settle the liabilities of a subsidiary)
(c) the carrying amounts in the consolidated financial statements of the
assets and liabilities to which those restrictions apply
Nature of the risks associated with an entity’s interests
in consolidated structured entities
14 An entity shall disclose the terms of any contractual arrangements that could
require the parent or its subsidiaries to provide financial support to a
consolidated structured entity including events or circumstances that could
expose the reporting entity to a loss (eg liquidity arrangements or credit rating
triggers associated with obligations to purchase assets of the structured entity or
provide financial support)
15 If during the reporting period a parent or any of its subsidiaries has without
having a contractual obligation to do so provided financial or other support to a
consolidated structured entity (eg purchasing assets of or instruments issued by
the structured entity) the entity shall disclose
(a) the type and amount of support provided including situations in which
the parent or its subsidiaries assisted the structured entity in obtaining
financial support and
(b) the reasons for providing the support
16 If during the reporting period a parent or any of its subsidiaries has without
having a contractual obligation to do so provided financial or other support to a
previously unconsolidated structured entity and that provision of support
resulted in the entity controlling the structured entity the entity shall disclose
an explanation of the relevant factors in reaching that decision
17 An entity shall disclose any current intentions to provide financial or other
support to a consolidated structured entity including intentions to assist the
structured entity in obtaining financial support
IFRS 12
IFRS FoundationA584Consequences of changes in a parent’s ownership
interest in a subsidiary that do not result in a loss of
control
18 An entity shall present a schedule that shows the effects on the equity
attributable to owners of the parent of any changes in its ownership interest in a
subsidiary that do not result in a loss of control
Consequences of losing control of a subsidiary during
the reporting period
19 An entity shall disclose the gain or loss if any calculated in accordance with
paragraph 25 of IFRS 10 and
(a) the portion of that gain or loss attributable to measuring any investment
retained in the former subsidiary at its fair value at the date when
control is lost and
(b) the line item(s) in profit or loss in which the gain or loss is recognised (if
not presented separately)
Interests in unconsolidated subsidiaries (investment entities)
19A An investment entity that in accordance with IFRS 10 is required to apply the
exception to consolidation and instead account for its investment in a subsidiary
at fair value through profit or loss shall disclose that fact
19B For each unconsolidated subsidiary an investment entity shall disclose
(a) the subsidiary’s name
(b) the principal place of business (and country of incorporation if different
from the principal place of business) of the subsidiary and
(c) the proportion of ownership interest held by the investment entity and
if different the proportion of voting rights held
19C If an investment entity is the parent of another investment entity the parent
shall also provide the disclosures in 19B(a)–(c) for investments that are
controlled by its investment entity subsidiary The disclosure may be provided
by including in the financial statements of the parent the financial statements
of the subsidiary (or subsidiaries) that contain the above information
19D An investment entity shall disclose
(a) the nature and extent of any significant restrictions (eg resulting from
borrowing arrangements regulatory requirements or contractual
arrangements) on the ability of an unconsolidated subsidiary to transfer
funds to the investment entity in the form of cash dividends or to repay
loans or advances made to the unconsolidated subsidiary by the
investment entity and
(b) any current commitments or intentions to provide financial or other
support to an unconsolidated subsidiary including commitments or
intentions to assist the subsidiary in obtaining financial support
IFRS 12
IFRS Foundation A58519E If during the reporting period an investment entity or any of its subsidiaries
has without having a contractual obligation to do so provided financial or
other support to an unconsolidated subsidiary (eg purchasing assets of or
instruments issued by the subsidiary or assisting the subsidiary in obtaining
financial support) the entity shall disclose
(a) the type and amount of support provided to each unconsolidated
subsidiary and
(b) the reasons for providing the support
19F An investment entity shall disclose the terms of any contractual arrangements
that could require the entity or its unconsolidated subsidiaries to provide
financial support to an unconsolidated controlled structured entity including
events or circumstances that could expose the reporting entity to a loss
(eg liquidity arrangements or credit rating triggers associated with obligations
to purchase assets of the structured entity or to provide financial support)
19G If during the reporting period an investment entity or any of its unconsolidated
subsidiaries has without having a contractual obligation to do so provided
financial or other support to an unconsolidated structured entity that the
investment entity did not control and if that provision of support resulted in
the investment entity controlling the structured entity the investment entity
shall disclose an explanation of the relevant factors in reaching the decision to
provide that support
Interests in joint arrangements and associates
20 An entity shall disclose information that enables users of its financial
statements to evaluate
(a) the nature extent and financial effects of its interests in joint
arrangements and associates including the nature and effects of
its contractual relationship with the other investors with joint
control of or significant influence over joint arrangements and
associates (paragraphs 21 and 22) and
(b) the nature of and changes in the risks associated with its interests
in joint ventures and associates (paragraph 23)
Nature extent and financial effects of an entity’s
interests in joint arrangements and associates
21 An entity shall disclose
(a) for each joint arrangement and associate that is material to the
reporting entity
(i) the name of the joint arrangement or associate
(ii) the nature of the entity’s relationship with the joint arrangement
or associate (by for example describing the nature of the
activities of the joint arrangement or associate and whether they
are strategic to the entity’s activities)
IFRS 12
IFRS FoundationA586(iii) the principal place of business (and country of incorporation if
applicable and different from the principal place of business) of
the joint arrangement or associate
(iv) the proportion of ownership interest or participating share held
by the entity and if different the proportion of voting rights
held (if applicable)
(b) for each joint venture and associate that is material to the reporting
entity
(i) whether the investment in the joint venture or associate is
measured using the equity method or at fair value
(ii) summarised financial information about the joint venture or
associate as specified in paragraphs B12 and B13
(iii) if the joint venture or associate is accounted for using the equity
method the fair value of its investment in the joint venture or
associate if there is a quoted market price for the investment
(c) financial information as specified in paragraph B16 about the entity’s
investments in joint ventures and associates that are not individually
material
(i) in aggregate for all individually immaterial joint ventures and
separately
(ii) in aggregate for all individually immaterial associates
21A An investment entity need not provide the disclosures required by
paragraphs 21(b)–21(c)
22 An entity shall also disclose
(a) the nature and extent of any significant restrictions (eg resulting from
borrowing arrangements regulatory requirements or contractual
arrangements between investors with joint control of or significant
influence over a joint venture or an associate) on the ability of joint
ventures or associates to transfer funds to the entity in the form of cash
dividends or to repay loans or advances made by the entity
(b) when the financial statements of a joint venture or associate used in
applying the equity method are as of a date or for a period that is
different from that of the entity
(i) the date of the end of the reporting period of the financial
statements of that joint venture or associate and
(ii) the reason for using a different date or period
(c) the unrecognised share of losses of a joint venture or associate both for
the reporting period and cumulatively if the entity has stopped
recognising its share of losses of the joint venture or associate when
applying the equity method
IFRS 12
IFRS Foundation A587Risks associated with an entity’s interests in joint
ventures and associates
23 An entity shall disclose
(a) commitments that it has relating to its joint ventures separately from
the amount of other commitments as specified in paragraphs B18–B20
(b) in accordance with IAS 37 Provisions Contingent Liabilities and Contingent
Assets unless the probability of loss is remote contingent liabilities
incurred relating to its interests in joint ventures or associates (including
its share of contingent liabilities incurred jointly with other investors
with joint control of or significant influence over the joint ventures or
associates) separately from the amount of other contingent liabilities
Interests in unconsolidated structured entities
24 An entity shall disclose information that enables users of its financial
statements
(a) to understand the nature and extent of its interests in
unconsolidated structured entities (paragraphs 26–28) and
(b) to evaluate the nature of and changes in the risks associated with
its interests in unconsolidated structured entities
(paragraphs 29–31)
25 The information required by paragraph 24(b) includes information about an
entity’s exposure to risk from involvement that it had with unconsolidated
structured entities in previous periods (eg sponsoring the structured entity)
even if the entity no longer has any contractual involvement with the structured
entity at the reporting date
25A An investment entity need not provide the disclosures required by paragraph 24
for an unconsolidated structured entity that it controls and for which it presents
the disclosures required by paragraphs 19A–19G
Nature of interests
26 An entity shall disclose qualitative and quantitative information about its
interests in unconsolidated structured entities including but not limited to the
nature purpose size and activities of the structured entity and how the
structured entity is financed
27 If an entity has sponsored an unconsolidated structured entity for which it does
not provide information required by paragraph 29 (eg because it does not have
an interest in the entity at the reporting date) the entity shall disclose
(a) how it has determined which structured entities it has sponsored
(b) income from those structured entities during the reporting period including a
description of the types of income presented and
(c) the carrying amount (at the time of transfer) of all assets transferred to
those structured entities during the reporting period
IFRS 12
IFRS FoundationA58828 An entity shall present the information in paragraph 27(b) and (c) in tabular
format unless another format is more appropriate and classify its sponsoring
activities into relevant categories (see paragraphs B2–B6)
Nature of risks
29 An entity shall disclose in tabular format unless another format is more
appropriate a summary of
(a) the carrying amounts of the assets and liabilities recognised in its
financial statements relating to its interests in unconsolidated
structured entities
(b) the line items in the statement of financial position in which those assets
and liabilities are recognised
(c) the amount that best represents the entity’s maximum exposure to loss
from its interests in unconsolidated structured entities including how
the maximum exposure to loss is determined If an entity cannot
quantify its maximum exposure to loss from its interests in
unconsolidated structured entities it shall disclose that fact and the
reasons
(d) a comparison of the carrying amounts of the assets and liabilities of the
entity that relate to its interests in unconsolidated structured entities
and the entity’s maximum exposure to loss from those entities
30 If during the reporting period an entity has without having a contractual
obligation to do so provided financial or other support to an unconsolidated
structured entity in which it previously had or currently has an interest (for
example purchasing assets of or instruments issued by the structured entity)
the entity shall disclose
(a) the type and amount of support provided including situations in which
the entity assisted the structured entity in obtaining financial support
and
(b) the reasons for providing the support
31 An entity shall disclose any current intentions to provide financial or other
support to an unconsolidated structured entity including intentions to assist
the structured entity in obtaining financial support
IFRS 12
IFRS Foundation A589Appendix A
Defined terms
This appendix is an integral part of the IFRS
income from a
structured entity
For the purpose of this IFRS income from a structured entity
includes but is not limited to recurring and nonrecurring fees
interest dividends gains or losses on the remeasurement or
derecognition of interests in structured entities and gains or
losses from the transfer of assets and liabilities to the structured
entity
interest in another
entity
For the purpose of this IFRS an interest in another entity refers to
contractual and noncontractual involvement that exposes an
entity to variability of returns from the performance of the other
entity An interest in another entity can be evidenced by but is
not limited to the holding of equity or debt instruments as well
as other forms of involvement such as the provision of funding
liquidity support credit enhancement and guarantees It
includes the means by which an entity has control or joint
control of or significant influence over another entity An entity
does not necessarily have an interest in another entity solely
because of a typical customer supplier relationship
Paragraphs B7–B9 provide further information about interests in
other entities
Paragraphs B55–B57 of IFRS 10 explain variability of returns
structured entity An entity that has been designed so that voting or similar rights
are not the dominant factor in deciding who controls the entity
such as when any voting rights relate to administrative tasks only
and the relevant activities are directed by means of contractual
arrangements
Paragraphs B22–B24 provide further information about
structured entities
The following terms are defined in IAS 27 (as amended in 2011) IAS 28 (as amended in
2011) IFRS 10 and IFRS 11 Joint Arrangements and are used in this IFRS with the meanings
specified in those IFRSs
● associate
● consolidated financial statements
● control of an entity
● equity method
● group
● investment entity
● joint arrangement
● joint control
IFRS 12
IFRS FoundationA590● joint operation
● joint venture
● noncontrolling interest
● parent
● protective rights
● relevant activities
● separate financial statements
● separate vehicle
● significant influence
● subsidiary
IFRS 12
IFRS Foundation A591Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–31 and
has the same authority as the other parts of the IFRS
B1 The examples in this appendix portray hypothetical situations Although some
aspects of the examples may be present in actual fact patterns all relevant facts
and circumstances of a particular fact pattern would need to be evaluated when
applying IFRS 12
Aggregation (paragraph 4)
B2 An entity shall decide in the light of its circumstances how much detail it
provides to satisfy the information needs of users how much emphasis it places
on different aspects of the requirements and how it aggregates the information
It is necessary to strike a balance between burdening financial statements with
excessive detail that may not assist users of financial statements and obscuring
information as a result of too much aggregation
B3 An entity may aggregate the disclosures required by this IFRS for interests in
similar entities if aggregation is consistent with the disclosure objective and the
requirement in paragraph B4 and does not obscure the information provided
An entity shall disclose how it has aggregated its interests in similar entities
B4 An entity shall present information separately for interests in
(a) subsidiaries
(b) joint ventures
(c) joint operations
(d) associates and
(e) unconsolidated structured entities
B5 In determining whether to aggregate information an entity shall consider
quantitative and qualitative information about the different risk and return
characteristics of each entity it is considering for aggregation and the
significance of each such entity to the reporting entity The entity shall present
the disclosures in a manner that clearly explains to users of financial statements
the nature and extent of its interests in those other entities
B6 Examples of aggregation levels within the classes of entities set out in
paragraph B4 that might be appropriate are
(a) nature of activities (eg a research and development entity a revolving
credit card securitisation entity)
(b) industry classification
(c) geography (eg country or region)
IFRS 12
IFRS FoundationA592Interests in other entities
B7 An interest in another entity refers to contractual and noncontractual
involvement that exposes the reporting entity to variability of returns from the
performance of the other entity Consideration of the purpose and design of the
other entity may help the reporting entity when assessing whether it has an
interest in that entity and therefore whether it is required to provide the
disclosures in this IFRS That assessment shall include consideration of the risks
that the other entity was designed to create and the risks the other entity was
designed to pass on to the reporting entity and other parties
B8 A reporting entity is typically exposed to variability of returns from the
performance of another entity by holding instruments (such as equity or debt
instruments issued by the other entity) or having another involvement that
absorbs variability For example assume a structured entity holds a loan
portfolio The structured entity obtains a credit default swap from another
entity (the reporting entity) to protect itself from the default of interest and
principal payments on the loans The reporting entity has involvement that
exposes it to variability of returns from the performance of the structured entity
because the credit default swap absorbs variability of returns of the structured
entity
B9 Some instruments are designed to transfer risk from a reporting entity to
another entity Such instruments create variability of returns for the other
entity but do not typically expose the reporting entity to variability of returns
from the performance of the other entity For example assume a structured
entity is established to provide investment opportunities for investors who wish
to have exposure to entity Z’s credit risk (entity Z is unrelated to any party
involved in the arrangement) The structured entity obtains funding by issuing
to those investors notes that are linked to entity Z’s credit risk (creditlinked
notes) and uses the proceeds to invest in a portfolio of riskfree financial assets
The structured entity obtains exposure to entity Z’s credit risk by entering into a
credit default swap (CDS) with a swap counterparty The CDS passes entity Z’s
credit risk to the structured entity in return for a fee paid by the swap
counterparty The investors in the structured entity receive a higher return that
reflects both the structured entity’s return from its asset portfolio and the CDS
fee The swap counterparty does not have involvement with the structured
entity that exposes it to variability of returns from the performance of the
structured entity because the CDS transfers variability to the structured entity
rather than absorbing variability of returns of the structured entity
Summarised financial information for subsidiaries joint ventures
and associates (paragraphs 12 and 21)
B10 For each subsidiary that has noncontrolling interests that are material to the
reporting entity an entity shall disclose
(a) dividends paid to noncontrolling interests
IFRS 12
IFRS Foundation A593(b) summarised financial information about the assets liabilities profit or
loss and cash flows of the subsidiary that enables users to understand the
interest that noncontrolling interests have in the group’s activities and
cash flows That information might include but is not limited to for
example current assets noncurrent assets current liabilities
noncurrent liabilities revenue profit or loss and total comprehensive
income
B11 The summarised financial information required by paragraph B10(b) shall be the
amounts before intercompany eliminations
B12 For each joint venture and associate that is material to the reporting entity an
entity shall disclose
(a) dividends received from the joint venture or associate
(b) summarised financial information for the joint venture or associate (see
paragraphs B14 and B15) including but not necessarily limited to
(i) current assets
(ii) noncurrent assets
(iii) current liabilities
(iv) noncurrent liabilities
(v) revenue
(vi) profit or loss from continuing operations
(vii) posttax profit or loss from discontinued operations
(viii) other comprehensive income
(ix) total comprehensive income
B13 In addition to the summarised financial information required by paragraph B12
an entity shall disclose for each joint venture that is material to the reporting
entity the amount of
(a) cash and cash equivalents included in paragraph B12(b)(i)
(b) current financial liabilities (excluding trade and other payables and
provisions) included in paragraph B12(b)(iii)
(c) noncurrent financial liabilities (excluding trade and other payables and
provisions) included in paragraph B12(b)(iv)
(d) depreciation and amortisation
(e) interest income
(f) interest expense
(g) income tax expense or income
B14 The summarised financial information presented in accordance with
paragraphs B12 and B13 shall be the amounts included in the IFRS financial
statements of the joint venture or associate (and not the entity’s share of those
amounts) If the entity accounts for its interest in the joint venture or associate
using the equity method
IFRS 12
IFRS FoundationA594(a) the amounts included in the IFRS financial statements of the joint
venture or associate shall be adjusted to reflect adjustments made by the
entity when using the equity method such as fair value adjustments
made at the time of acquisition and adjustments for differences in
accounting policies
(b) the entity shall provide a reconciliation of the summarised financial
information presented to the carrying amount of its interest in the joint
venture or associate
B15 An entity may present the summarised financial information required by
paragraphs B12 and B13 on the basis of the joint venture’s or associate’s
financial statements if
(a) the entity measures its interest in the joint venture or associate at fair
value in accordance with IAS 28 (as amended in 2011) and
(b) the joint venture or associate does not prepare IFRS financial statements
and preparation on that basis would be impracticable or cause undue
cost
In that case the entity shall disclose the basis on which the summarised
financial information has been prepared
B16 An entity shall disclose in aggregate the carrying amount of its interests in all
individually immaterial joint ventures or associates that are accounted for using
the equity method An entity shall also disclose separately the aggregate
amount of its share of those joint ventures’ or associates’
(a) profit or loss from continuing operations
(b) posttax profit or loss from discontinued operations
(c) other comprehensive income
(d) total comprehensive income
An entity provides the disclosures separately for joint ventures and associates
B17 When an entity’s interest in a subsidiary a joint venture or an associate (or a
portion of its interest in a joint venture or an associate) is classified as held for
sale in accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations the entity is not required to disclose summarised financial
information for that subsidiary joint venture or associate in accordance with
paragraphs B10–B16
Commitments for joint ventures (paragraph 23(a))
B18 An entity shall disclose total commitments it has made but not recognised at the
reporting date (including its share of commitments made jointly with other
investors with joint control of a joint venture) relating to its interests in joint
ventures Commitments are those that may give rise to a future outflow of cash
or other resources
B19 Unrecognised commitments that may give rise to a future outflow of cash or
other resources include
IFRS 12
IFRS Foundation A595(a) unrecognised commitments to contribute funding or resources as a
result of for example
(i) the constitution or acquisition agreements of a joint venture
(that for example require an entity to contribute funds over a
specific period)
(ii) capitalintensive projects undertaken by a joint venture
(iii) unconditional purchase obligations comprising procurement of
equipment inventory or services that an entity is committed to
purchasing from or on behalf of a joint venture
(iv) unrecognised commitments to provide loans or other financial
support to a joint venture
(v) unrecognised commitments to contribute resources to a joint
venture such as assets or services
(vi) other noncancellable unrecognised commitments relating to a
joint venture
(b) unrecognised commitments to acquire another party’s ownership
interest (or a portion of that ownership interest) in a joint venture if a
particular event occurs or does not occur in the future
B20 The requirements and examples in paragraphs B18 and B19 illustrate some of
the types of disclosure required by paragraph 18 of IAS 24 Related Party Disclosures
Interests in unconsolidated structured entities
(paragraphs 24–31)
Structured entities
B21 A structured entity is an entity that has been designed so that voting or similar
rights are not the dominant factor in deciding who controls the entity such as
when any voting rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements
B22 A structured entity often has some or all of the following features or attributes
(a) restricted activities
(b) a narrow and welldefined objective such as to effect a taxefficient lease
carry out research and development activities provide a source of capital
or funding to an entity or provide investment opportunities for investors
by passing on risks and rewards associated with the assets of the
structured entity to investors
(c) insufficient equity to permit the structured entity to finance its activities
without subordinated financial support
(d) financing in the form of multiple contractually linked instruments to
investors that create concentrations of credit or other risks (tranches)
B23 Examples of entities that are regarded as structured entities include but are not
limited to
IFRS 12
IFRS FoundationA596(a) securitisation vehicles
(b) assetbacked financings
(c) some investment funds
B24 An entity that is controlled by voting rights is not a structured entity simply
because for example it receives funding from third parties following a
restructuring
Nature of risks from interests in unconsolidated
structured entities (paragraphs 29–31)
B25 In addition to the information required by paragraphs 29–31 an entity shall
disclose additional information that is necessary to meet the disclosure objective
in paragraph 24(b)
B26 Examples of additional information that depending on the circumstances
might be relevant to an assessment of the risks to which an entity is exposed
when it has an interest in an unconsolidated structured entity are
(a) the terms of an arrangement that could require the entity to provide
financial support to an unconsolidated structured entity (eg liquidity
arrangements or credit rating triggers associated with obligations to
purchase assets of the structured entity or provide financial support)
including
(i) a description of events or circumstances that could expose the
reporting entity to a loss
(ii) whether there are any terms that would limit the obligation
(iii) whether there are any other parties that provide financial
support and if so how the reporting entity’s obligation ranks
with those of other parties
(b) losses incurred by the entity during the reporting period relating to its
interests in unconsolidated structured entities
(c) the types of income the entity received during the reporting period from
its interests in unconsolidated structured entities
(d) whether the entity is required to absorb losses of an unconsolidated
structured entity before other parties the maximum limit of such losses
for the entity and (if relevant) the ranking and amounts of potential
losses borne by parties whose interests rank lower than the entity’s
interest in the unconsolidated structured entity
(e) information about any liquidity arrangements guarantees or other
commitments with third parties that may affect the fair value or risk of
the entity’s interests in unconsolidated structured entities
(f) any difficulties an unconsolidated structured entity has experienced in
financing its activities during the reporting period
(g) in relation to the funding of an unconsolidated structured entity the
forms of funding (eg commercial paper or mediumterm notes) and their
weightedaverage life That information might include maturity
IFRS 12
IFRS Foundation A597analyses of the assets and funding of an unconsolidated structured entity
if the structured entity has longerterm assets funded by shorterterm
funding
IFRS 12
IFRS FoundationA598Appendix C
Effective date and transition
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
Effective date and transition
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted
C1A Consolidated Financial Statements Joint Arrangements and Disclosure of Interests in Other
Entities Transition Guidance (Amendments to IFRS 10 IFRS 11 and IFRS 12) issued
in June 2012 added paragraphs C2A–C2B An entity shall apply those
amendments for annual periods beginning on or after 1 January 2013 If an
entity applies IFRS 12 for an earlier period it shall apply those amendments for
that earlier period
C1B Investment Entities (Amendments to IFRS 10 IFRS 12 and IAS 27) issued in October
2012 amended paragraph 2 and Appendix A and added paragraphs 9A–9B
19A–19G 21A and 25A An entity shall apply those amendments for annual
periods beginning on or after 1 January 2014 Early adoption is permitted If an
entity applies those amendments earlier it shall disclose that fact and apply all
amendments included in Investment Entities at the same time
C1C Investment Entities Applying the Consolidation Exception (Amendments to IFRS 10
IFRS 12 and IAS 28) issued in December 2014 amended paragraph 6 An entity
shall apply that amendment for annual periods beginning on or after 1 January
2016 Earlier application is permitted If an entity applies that amendment for
an earlier period it shall disclose that fact
C2 An entity is encouraged to provide information required by this IFRS earlier
than annual periods beginning on or after 1 January 2013 Providing some of
the disclosures required by this IFRS does not compel the entity to comply with
all the requirements of this IFRS or to apply IFRS 10 IFRS 11 IAS 27 (as amended
in 2011) and IAS 28 (as amended in 2011) early
C2A The disclosure requirements of this IFRS need not be applied for any period
presented that begins before the annual period immediately preceding the first
annual period for which IFRS 12 is applied
C2B The disclosure requirements of paragraphs 24–31 and the corresponding
guidance in paragraphs B21–B26 of this IFRS need not be applied for any period
presented that begins before the first annual period for which IFRS 12 is applied
References to IFRS 9
C3 If an entity applies this IFRS but does not yet apply IFRS 9 any reference to
IFRS 9 shall be read as a reference to IAS 39 Financial Instruments Recognition and
Measurement
IFRS 12
IFRS Foundation A599Appendix D
Amendments to other IFRSs
This appendix sets out amendments to other IFRSs that are a consequence of the Board issuing
IFRS 12 An entity shall apply the amendments for annual periods beginning on or after 1 January
2013 If an entity applies IFRS 12 for an earlier period it shall apply the amendments for that
earlier period Amended paragraphs are shown with new text underlined and deleted text struck
through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 12
IFRS FoundationA600IFRS Standard 13
Fair Value Measurement
In May 2011 the International Accounting Standards Board issued IFRS 13 Fair Value
Measurement IFRS 13 defines fair value and replaces the requirement contained in
individual Standards
Other Standards have made minor consequential amendments to IFRS 13 They include
IAS 19 Employee Benefits (issued June 2011) Annual Improvements to IFRSs 2011–2013 Cycle (issued
December 2013) IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases (issued
January 2016)
IFRS 13
IFRS Foundation A601CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 13
FAIR VALUE MEASUREMENT
OBJECTIVE 1
SCOPE 5
MEASUREMENT 9
Definition of fair value 9
The asset or liability 11
The transaction 15
Market participants 22
The price 24
Application to nonfinancial assets 27
Application to liabilities and an entity’s own equity instruments 34
Application to financial assets and financial liabilities with offsetting
positions in market risks or counterparty credit risk 48
Fair value at initial recognition 57
Valuation techniques 61
Inputs to valuation techniques 67
Fair value hierarchy 72
DISCLOSURE 91
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other IFRSs
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 13 ISSUED IN MAY
2011 BASIS FOR CONCLUSIONS
APPENDIX
Amendments to the Basis for Conclusions on other IFRSs
ILLUSTRATIVE EXAMPLES
APPENDIX
Amendments to the guidance on other IFRSs
IFRS 13
IFRS FoundationA602International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13) is set out
in paragraphs 1–99 and Appendices A–D All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time they appear in the IFRS Definitions of other terms are given in the
Glossary for International Financial Reporting Standards IFRS 13 should be read in the
context of its objective and the Basis for Conclusions the Preface to International Financial
Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors provides a basis for selecting and applying
accounting policies in the absence of explicit guidance
IFRS 13
IFRS Foundation A603Introduction
Overview
IN1 International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13)
(a) defines fair value
(b) sets out in a single IFRS a framework for measuring fair value and
(c) requires disclosures about fair value measurements
IN2 The IFRS applies to IFRSs that require or permit fair value measurements or
disclosures about fair value measurements (and measurements such as fair
value less costs to sell based on fair value or disclosures about those
measurements) except in specified circumstances
IN3 The IFRS is to be applied for annual periods beginning on or after 1 January
2013 Earlier application is permitted
IN4 The IFRS explains how to measure fair value for financial reporting It does not
require fair value measurements in addition to those already required or
permitted by other IFRSs and is not intended to establish valuation standards or
affect valuation practices outside financial reporting
Reasons for issuing the IFRS
IN5 Some IFRSs require or permit entities to measure or disclose the fair value of
assets liabilities or their own equity instruments Because those IFRSs were
developed over many years the requirements for measuring fair value and for
disclosing information about fair value measurements were dispersed and in
many cases did not articulate a clear measurement or disclosure objective
IN6 As a result some of those IFRSs contained limited guidance about how to
measure fair value whereas others contained extensive guidance and that
guidance was not always consistent across those IFRSs that refer to fair value
Inconsistencies in the requirements for measuring fair value and for disclosing
information about fair value measurements have contributed to diversity in
practice and have reduced the comparability of information reported in
financial statements IFRS 13 remedies that situation
IN7 Furthermore in 2006 the International Accounting Standards Board (IASB) and
the US national standardsetter the Financial Accounting Standards Board
(FASB) published a Memorandum of Understanding which has served as the
foundation of the boards’ efforts to create a common set of high quality global
accounting standards Consistent with the Memorandum of Understanding and
the boards’ commitment to achieving that goal IFRS 13 is the result of the work
by the IASB and the FASB to develop common requirements for measuring fair
value and for disclosing information about fair value measurements in
accordance with IFRSs and US generally accepted accounting principles (GAAP)
IFRS 13
IFRS FoundationA604Main features
IN8 IFRS 13 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants
at the measurement date (ie an exit price)
IN9 That definition of fair value emphasises that fair value is a marketbased
measurement not an entityspecific measurement When measuring fair value
an entity uses the assumptions that market participants would use when pricing
the asset or liability under current market conditions including assumptions
about risk As a result an entity’s intention to hold an asset or to settle or
otherwise fulfil a liability is not relevant when measuring fair value
IN10 The IFRS explains that a fair value measurement requires an entity to determine
the following
(a) the particular asset or liability being measured
(b) for a nonfinancial asset the highest and best use of the asset and
whether the asset is used in combination with other assets or on a
standalone basis
(c) the market in which an orderly transaction would take place for the
asset or liability and
(d) the appropriate valuation technique(s) to use when measuring fair value
The valuation technique(s) used should maximise the use of relevant
observable inputs and minimise unobservable inputs Those inputs
should be consistent with the inputs a market participant would use
when pricing the asset or liability
IFRS 13
IFRS Foundation A605International Financial Reporting Standard 13
Fair Value Measurement
Objective
1 This IFRS
(a) defines fair value
(b) sets out in a single IFRS a framework for measuring fair value and
(c) requires disclosures about fair value measurements
2 Fair value is a marketbased measurement not an entityspecific measurement
For some assets and liabilities observable market transactions or market
information might be available For other assets and liabilities observable
market transactions and market information might not be available However
the objective of a fair value measurement in both cases is the same—to estimate
the price at which an orderly transaction to sell the asset or to transfer the liability
would take place between market participants at the measurement date under
current market conditions (ie an exit price at the measurement date from the
perspective of a market participant that holds the asset or owes the liability)
3 When a price for an identical asset or liability is not observable an entity
measures fair value using another valuation technique that maximises the use
of relevant observable inputs and minimises the use of unobservable inputs Because
fair value is a marketbased measurement it is measured using the assumptions
that market participants would use when pricing the asset or liability including
assumptions about risk As a result an entity’s intention to hold an asset or to
settle or otherwise fulfil a liability is not relevant when measuring fair value
4 The definition of fair value focuses on assets and liabilities because they are a
primary subject of accounting measurement In addition this IFRS shall be
applied to an entity’s own equity instruments measured at fair value
Scope
5 This IFRS applies when another IFRS requires or permits fair value
measurements or disclosures about fair value measurements (and
measurements such as fair value less costs to sell based on fair value or
disclosures about those measurements) except as specified in
paragraphs 6 and 7
6 The measurement and disclosure requirements of this IFRS do not apply to the
following
(a) sharebased payment transactions within the scope of IFRS 2 Sharebased
Payment
(b) leasing transactions accounted for in accordance with IFRS 16 Leases and
IFRS 13
IFRS FoundationA606(c) measurements that have some similarities to fair value but are not fair
value such as net realisable value in IAS 2 Inventories or value in use in
IAS 36 Impairment of Assets
7 The disclosures required by this IFRS are not required for the following
(a) plan assets measured at fair value in accordance with IAS 19 Employee
Benefits
(b) retirement benefit plan investments measured at fair value in
accordance with IAS 26 Accounting and Reporting by Retirement Benefit Plans
and
(c) assets for which recoverable amount is fair value less costs of disposal in
accordance with IAS 36
8 The fair value measurement framework described in this IFRS applies to both
initial and subsequent measurement if fair value is required or permitted by
other IFRSs
Measurement
Definition of fair value
9 This IFRS defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date
10 Paragraph B2 describes the overall fair value measurement approach
The asset or liability
11 A fair value measurement is for a particular asset or liability Therefore
when measuring fair value an entity shall take into account the
characteristics of the asset or liability if market participants would take
those characteristics into account when pricing the asset or liability at
the measurement date Such characteristics include for example the
following
(a) the condition and location of the asset and
(b) restrictions if any on the sale or use of the asset
12 The effect on the measurement arising from a particular characteristic will
differ depending on how that characteristic would be taken into account by
market participants
13 The asset or liability measured at fair value might be either of the following
(a) a standalone asset or liability (eg a financial instrument or a
nonfinancial asset) or
(b) a group of assets a group of liabilities or a group of assets and liabilities
(eg a cashgenerating unit or a business)
14 Whether the asset or liability is a standalone asset or liability a group of assets
a group of liabilities or a group of assets and liabilities for recognition or
disclosure purposes depends on its unit of account The unit of account for the
IFRS 13
IFRS Foundation A607asset or liability shall be determined in accordance with the IFRS that requires
or permits the fair value measurement except as provided in this IFRS
The transaction
15 A fair value measurement assumes that the asset or liability is exchanged
in an orderly transaction between market participants to sell the asset or
transfer the liability at the measurement date under current market
conditions
16 A fair value measurement assumes that the transaction to sell the asset or
transfer the liability takes place either
(a) in the principal market for the asset or liability or
(b) in the absence of a principal market in the most advantageous
market for the asset or liability
17 An entity need not undertake an exhaustive search of all possible markets to
identify the principal market or in the absence of a principal market the most
advantageous market but it shall take into account all information that is
reasonably available In the absence of evidence to the contrary the market in
which the entity would normally enter into a transaction to sell the asset or to
transfer the liability is presumed to be the principal market or in the absence of
a principal market the most advantageous market
18 If there is a principal market for the asset or liability the fair value
measurement shall represent the price in that market (whether that price is
directly observable or estimated using another valuation technique) even if the
price in a different market is potentially more advantageous at the
measurement date
19 The entity must have access to the principal (or most advantageous) market at
the measurement date Because different entities (and businesses within those
entities) with different activities may have access to different markets the
principal (or most advantageous) market for the same asset or liability might be
different for different entities (and businesses within those entities) Therefore
the principal (or most advantageous) market (and thus market participants)
shall be considered from the perspective of the entity thereby allowing for
differences between and among entities with different activities
20 Although an entity must be able to access the market the entity does not need
to be able to sell the particular asset or transfer the particular liability on the
measurement date to be able to measure fair value on the basis of the price in
that market
21 Even when there is no observable market to provide pricing information about
the sale of an asset or the transfer of a liability at the measurement date a fair
value measurement shall assume that a transaction takes place at that date
considered from the perspective of a market participant that holds the asset or
owes the liability That assumed transaction establishes a basis for estimating
the price to sell the asset or to transfer the liability
IFRS 13
IFRS FoundationA608Market participants
22 An entity shall measure the fair value of an asset or a liability using the
assumptions that market participants would use when pricing the asset
or liability assuming that market participants act in their economic best
interest
23 In developing those assumptions an entity need not identify specific market
participants Rather the entity shall identify characteristics that distinguish
market participants generally considering factors specific to all the following
(a) the asset or liability
(b) the principal (or most advantageous) market for the asset or liability and
(c) market participants with whom the entity would enter into a
transaction in that market
The price
24 Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction in the principal (or most
advantageous) market at the measurement date under current market
conditions (ie an exit price) regardless of whether that price is directly
observable or estimated using another valuation technique
25 The price in the principal (or most advantageous) market used to measure the
fair value of the asset or liability shall not be adjusted for transaction costs
Transaction costs shall be accounted for in accordance with other IFRSs
Transaction costs are not a characteristic of an asset or a liability rather they
are specific to a transaction and will differ depending on how an entity enters
into a transaction for the asset or liability
26 Transaction costs do not include transport costs If location is a characteristic of
the asset (as might be the case for example for a commodity) the price in the
principal (or most advantageous) market shall be adjusted for the costs if any
that would be incurred to transport the asset from its current location to that
market
Application to nonfinancial assets
Highest and best use for nonfinancial assets
27 A fair value measurement of a nonfinancial asset takes into account a
market participant’s ability to generate economic benefits by using the
asset in its highest and best use or by selling it to another market
participant that would use the asset in its highest and best use
28 The highest and best use of a nonfinancial asset takes into account the use of
the asset that is physically possible legally permissible and financially feasible
as follows
(a) A use that is physically possible takes into account the physical
characteristics of the asset that market participants would take into
account when pricing the asset (eg the location or size of a property)
IFRS 13
IFRS Foundation A609(b) A use that is legally permissible takes into account any legal restrictions
on the use of the asset that market participants would take into account
when pricing the asset (eg the zoning regulations applicable to a
property)
(c) A use that is financially feasible takes into account whether a use of the
asset that is physically possible and legally permissible generates
adequate income or cash flows (taking into account the costs of
converting the asset to that use) to produce an investment return that
market participants would require from an investment in that asset put
to that use
29 Highest and best use is determined from the perspective of market participants
even if the entity intends a different use However an entity’s current use of a
nonfinancial asset is presumed to be its highest and best use unless market or
other factors suggest that a different use by market participants would
maximise the value of the asset
30 To protect its competitive position or for other reasons an entity may intend
not to use an acquired nonfinancial asset actively or it may intend not to use the
asset according to its highest and best use For example that might be the case
for an acquired intangible asset that the entity plans to use defensively by
preventing others from using it Nevertheless the entity shall measure the fair
value of a nonfinancial asset assuming its highest and best use by market
participants
Valuation premise for nonfinancial assets
31 The highest and best use of a nonfinancial asset establishes the valuation
premise used to measure the fair value of the asset as follows
(a) The highest and best use of a nonfinancial asset might provide
maximum value to market participants through its use in combination
with other assets as a group (as installed or otherwise configured for use)
or in combination with other assets and liabilities (eg a business)
(i) If the highest and best use of the asset is to use the asset in
combination with other assets or with other assets and liabilities
the fair value of the asset is the price that would be received in a
current transaction to sell the asset assuming that the asset
would be used with other assets or with other assets and
liabilities and that those assets and liabilities (ie its
complementary assets and the associated liabilities) would be
available to market participants
(ii) Liabilities associated with the asset and with the complementary
assets include liabilities that fund working capital but do not
include liabilities used to fund assets other than those within the
group of assets
(iii) Assumptions about the highest and best use of a nonfinancial
asset shall be consistent for all the assets (for which highest and
best use is relevant) of the group of assets or the group of assets
and liabilities within which the asset would be used
IFRS 13
IFRS FoundationA610(b) The highest and best use of a nonfinancial asset might provide
maximum value to market participants on a standalone basis If the
highest and best use of the asset is to use it on a standalone basis the
fair value of the asset is the price that would be received in a current
transaction to sell the asset to market participants that would use the
asset on a standalone basis
32 The fair value measurement of a nonfinancial asset assumes that the asset is
sold consistently with the unit of account specified in other IFRSs (which may be
an individual asset) That is the case even when that fair value measurement
assumes that the highest and best use of the asset is to use it in combination
with other assets or with other assets and liabilities because a fair value
measurement assumes that the market participant already holds the
complementary assets and the associated liabilities
33 Paragraph B3 describes the application of the valuation premise concept for
nonfinancial assets
Application to liabilities and an entity’s own equity
instruments
General principles
34 A fair value measurement assumes that a financial or nonfinancial
liability or an entity’s own equity instrument (eg equity interests issued
as consideration in a business combination) is transferred to a market
participant at the measurement date The transfer of a liability or an
entity’s own equity instrument assumes the following
(a) A liability would remain outstanding and the market participant
transferee would be required to fulfil the obligation The liability
would not be settled with the counterparty or otherwise
extinguished on the measurement date
(b) An entity’s own equity instrument would remain outstanding and
the market participant transferee would take on the rights and
responsibilities associated with the instrument The instrument
would not be cancelled or otherwise extinguished on the
measurement date
35 Even when there is no observable market to provide pricing information about
the transfer of a liability or an entity’s own equity instrument (eg because
contractual or other legal restrictions prevent the transfer of such items) there
might be an observable market for such items if they are held by other parties as
assets (eg a corporate bond or a call option on an entity’s shares)
36 In all cases an entity shall maximise the use of relevant observable inputs and
minimise the use of unobservable inputs to meet the objective of a fair value
measurement which is to estimate the price at which an orderly transaction to
transfer the liability or equity instrument would take place between market
participants at the measurement date under current market conditions
IFRS 13
IFRS Foundation A611Liabilities and equity instruments held by other parties as assets
37 When a quoted price for the transfer of an identical or a similar liability
or entity’s own equity instrument is not available and the identical item
is held by another party as an asset an entity shall measure the fair value
of the liability or equity instrument from the perspective of a market
participant that holds the identical item as an asset at the measurement
date
38 In such cases an entity shall measure the fair value of the liability or equity
instrument as follows
(a) using the quoted price in an active market for the identical item held by
another party as an asset if that price is available
(b) if that price is not available using other observable inputs such as the
quoted price in a market that is not active for the identical item held by
another party as an asset
(c) if the observable prices in (a) and (b) are not available using another
valuation technique such as
(i) an income approach (eg a present value technique that takes into
account the future cash flows that a market participant would
expect to receive from holding the liability or equity instrument
as an asset see paragraphs B10 and B11)
(ii) a market approach (eg using quoted prices for similar liabilities or
equity instruments held by other parties as assets see
paragraphs B5–B7)
39 An entity shall adjust the quoted price of a liability or an entity’s own equity
instrument held by another party as an asset only if there are factors specific to
the asset that are not applicable to the fair value measurement of the liability or
equity instrument An entity shall ensure that the price of the asset does not
reflect the effect of a restriction preventing the sale of that asset Some factors
that may indicate that the quoted price of the asset should be adjusted include
the following
(a) The quoted price for the asset relates to a similar (but not identical)
liability or equity instrument held by another party as an asset For
example the liability or equity instrument may have a particular
characteristic (eg the credit quality of the issuer) that is different from
that reflected in the fair value of the similar liability or equity
instrument held as an asset
(b) The unit of account for the asset is not the same as for the liability or
equity instrument For example for liabilities in some cases the price
for an asset reflects a combined price for a package comprising both the
amounts due from the issuer and a thirdparty credit enhancement If
the unit of account for the liability is not for the combined package the
objective is to measure the fair value of the issuer’s liability not the fair
value of the combined package Thus in such cases the entity would
adjust the observed price for the asset to exclude the effect of the
thirdparty credit enhancement
IFRS 13
IFRS FoundationA612Liabilities and equity instruments not held by other parties as assets
40 When a quoted price for the transfer of an identical or a similar liability
or entity’s own equity instrument is not available and the identical item
is not held by another party as an asset an entity shall measure the fair
value of the liability or equity instrument using a valuation technique
from the perspective of a market participant that owes the liability or has
issued the claim on equity
41 For example when applying a present value technique an entity might take into
account either of the following
(a) the future cash outflows that a market participant would expect to incur
in fulfilling the obligation including the compensation that a market
participant would require for taking on the obligation (see paragraphs
B31–B33)
(b) the amount that a market participant would receive to enter into or
issue an identical liability or equity instrument using the assumptions
that market participants would use when pricing the identical item
(eg having the same credit characteristics) in the principal (or most
advantageous) market for issuing a liability or an equity instrument with
the same contractual terms
Nonperformance risk
42 The fair value of a liability reflects the effect of nonperformance risk
Nonperformance risk includes but may not be limited to an entity’s own
credit risk (as defined in IFRS 7 Financial Instruments Disclosures)
Nonperformance risk is assumed to be the same before and after the
transfer of the liability
43 When measuring the fair value of a liability an entity shall take into account
the effect of its credit risk (credit standing) and any other factors that might
influence the likelihood that the obligation will or will not be fulfilled That
effect may differ depending on the liability for example
(a) whether the liability is an obligation to deliver cash (a financial liability)
or an obligation to deliver goods or services (a nonfinancial liability)
(b) the terms of credit enhancements related to the liability if any
44 The fair value of a liability reflects the effect of nonperformance risk on the
basis of its unit of account The issuer of a liability issued with an inseparable
thirdparty credit enhancement that is accounted for separately from the
liability shall not include the effect of the credit enhancement (eg a thirdparty
guarantee of debt) in the fair value measurement of the liability If the credit
enhancement is accounted for separately from the liability the issuer would
take into account its own credit standing and not that of the third party
guarantor when measuring the fair value of the liability
IFRS 13
IFRS Foundation A613Restriction preventing the transfer of a liability or an entity’s own
equity instrument
45 When measuring the fair value of a liability or an entity’s own equity
instrument an entity shall not include a separate input or an adjustment to
other inputs relating to the existence of a restriction that prevents the transfer of
the item The effect of a restriction that prevents the transfer of a liability or an
entity’s own equity instrument is either implicitly or explicitly included in the
other inputs to the fair value measurement
46 For example at the transaction date both the creditor and the obligor accepted
the transaction price for the liability with full knowledge that the obligation
includes a restriction that prevents its transfer As a result of the restriction
being included in the transaction price a separate input or an adjustment to an
existing input is not required at the transaction date to reflect the effect of the
restriction on transfer Similarly a separate input or an adjustment to an
existing input is not required at subsequent measurement dates to reflect the
effect of the restriction on transfer
Financial liability with a demand feature
47 The fair value of a financial liability with a demand feature (eg a demand
deposit) is not less than the amount payable on demand discounted from the
first date that the amount could be required to be paid
Application to financial assets and financial liabilities
with offsetting positions in market risks or counterparty
credit risk
48 An entity that holds a group of financial assets and financial liabilities is
exposed to market risks (as defined in IFRS 7) and to the credit risk (as defined in
IFRS 7) of each of the counterparties If the entity manages that group of
financial assets and financial liabilities on the basis of its net exposure to either
market risks or credit risk the entity is permitted to apply an exception to this
IFRS for measuring fair value That exception permits an entity to measure the
fair value of a group of financial assets and financial liabilities on the basis of
the price that would be received to sell a net long position (ie an asset) for a
particular risk exposure or paid to transfer a net short position (ie a liability) for
a particular risk exposure in an orderly transaction between market participants
at the measurement date under current market conditions Accordingly an
entity shall measure the fair value of the group of financial assets and financial
liabilities consistently with how market participants would price the net risk
exposure at the measurement date
49 An entity is permitted to use the exception in paragraph 48 only if the entity
does all the following
(a) manages the group of financial assets and financial liabilities on the
basis of the entity’s net exposure to a particular market risk (or risks) or
to the credit risk of a particular counterparty in accordance with the
entity’s documented risk management or investment strategy
IFRS 13
IFRS FoundationA614(b) provides information on that basis about the group of financial assets
and financial liabilities to the entity’s key management personnel as
defined in IAS 24 Related Party Disclosures and
(c) is required or has elected to measure those financial assets and financial
liabilities at fair value in the statement of financial position at the end of
each reporting period
50 The exception in paragraph 48 does not pertain to financial statement
presentation In some cases the basis for the presentation of financial
instruments in the statement of financial position differs from the basis for the
measurement of financial instruments for example if an IFRS does not require
or permit financial instruments to be presented on a net basis In such cases an
entity may need to allocate the portfoliolevel adjustments (see paragraphs
53–56) to the individual assets or liabilities that make up the group of financial
assets and financial liabilities managed on the basis of the entity’s net risk
exposure An entity shall perform such allocations on a reasonable and
consistent basis using a methodology appropriate in the circumstances
51 An entity shall make an accounting policy decision in accordance with IAS 8
Accounting Policies Changes in Accounting Estimates and Errors to use the exception in
paragraph 48 An entity that uses the exception shall apply that accounting
policy including its policy for allocating bidask adjustments (see paragraphs
53–55) and credit adjustments (see paragraph 56) if applicable consistently
from period to period for a particular portfolio
52 The exception in paragraph 48 applies only to financial assets financial
liabilities and other contracts within the scope of IFRS 9 Financial Instruments (or
IAS 39 Financial Instruments Recognition and Measurement if IFRS 9 has not yet been
adopted) The references to financial assets and financial liabilities in
paragraphs 48–51 and 53–56 should be read as applying to all contracts within
the scope of and accounted for in accordance with IFRS 9 (or IAS 39 if IFRS 9
has not yet been adopted) regardless of whether they meet the definitions of
financial assets or financial liabilities in IAS 32 Financial Instruments Presentation
Exposure to market risks
53 When using the exception in paragraph 48 to measure the fair value of a group
of financial assets and financial liabilities managed on the basis of the entity’s
net exposure to a particular market risk (or risks) the entity shall apply the price
within the bidask spread that is most representative of fair value in the
circumstances to the entity’s net exposure to those market risks (see paragraphs
70 and 71)
54 When using the exception in paragraph 48 an entity shall ensure that the
market risk (or risks) to which the entity is exposed within that group of
financial assets and financial liabilities is substantially the same For example
an entity would not combine the interest rate risk associated with a financial
asset with the commodity price risk associated with a financial liability because
doing so would not mitigate the entity’s exposure to interest rate risk or
commodity price risk When using the exception in paragraph 48 any basis risk
IFRS 13
IFRS Foundation A615resulting from the market risk parameters not being identical shall be taken
into account in the fair value measurement of the financial assets and financial
liabilities within the group
55 Similarly the duration of the entity’s exposure to a particular market risk (or
risks) arising from the financial assets and financial liabilities shall be
substantially the same For example an entity that uses a 12month futures
contract against the cash flows associated with 12 months’ worth of interest rate
risk exposure on a fiveyear financial instrument within a group made up of only
those financial assets and financial liabilities measures the fair value of the
exposure to 12month interest rate risk on a net basis and the remaining interest
rate risk exposure (ie years 2–5) on a gross basis
Exposure to the credit risk of a particular counterparty
56 When using the exception in paragraph 48 to measure the fair value of a group
of financial assets and financial liabilities entered into with a particular
counterparty the entity shall include the effect of the entity’s net exposure to
the credit risk of that counterparty or the counterparty’s net exposure to the
credit risk of the entity in the fair value measurement when market participants
would take into account any existing arrangements that mitigate credit risk
exposure in the event of default (eg a master netting agreement with the
counterparty or an agreement that requires the exchange of collateral on the
basis of each party’s net exposure to the credit risk of the other party) The fair
value measurement shall reflect market participants’ expectations about the
likelihood that such an arrangement would be legally enforceable in the event
of default
Fair value at initial recognition
57 When an asset is acquired or a liability is assumed in an exchange transaction
for that asset or liability the transaction price is the price paid to acquire the
asset or received to assume the liability (an entry price) In contrast the fair value
of the asset or liability is the price that would be received to sell the asset or paid
to transfer the liability (an exit price) Entities do not necessarily sell assets at
the prices paid to acquire them Similarly entities do not necessarily transfer
liabilities at the prices received to assume them
58 In many cases the transaction price will equal the fair value (eg that might be
the case when on the transaction date the transaction to buy an asset takes place
in the market in which the asset would be sold)
59 When determining whether fair value at initial recognition equals the
transaction price an entity shall take into account factors specific to the
transaction and to the asset or liability Paragraph B4 describes situations in
which the transaction price might not represent the fair value of an asset or a
liability at initial recognition
60 If another IFRS requires or permits an entity to measure an asset or a liability
initially at fair value and the transaction price differs from fair value the entity
shall recognise the resulting gain or loss in profit or loss unless that IFRS
specifies otherwise
IFRS 13
IFRS FoundationA616Valuation techniques
61 An entity shall use valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to measure fair
value maximising the use of relevant observable inputs and minimising
the use of unobservable inputs
62 The objective of using a valuation technique is to estimate the price at which an
orderly transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market
conditions Three widely used valuation techniques are the market approach
the cost approach and the income approach The main aspects of those
approaches are summarised in paragraphs B5–B11 An entity shall use valuation
techniques consistent with one or more of those approaches to measure fair
value
63 In some cases a single valuation technique will be appropriate (eg when valuing
an asset or a liability using quoted prices in an active market for identical assets
or liabilities) In other cases multiple valuation techniques will be appropriate
(eg that might be the case when valuing a cashgenerating unit) If multiple
valuation techniques are used to measure fair value the results (ie respective
indications of fair value) shall be evaluated considering the reasonableness of
the range of values indicated by those results A fair value measurement is the
point within that range that is most representative of fair value in the
circumstances
64 If the transaction price is fair value at initial recognition and a valuation
technique that uses unobservable inputs will be used to measure fair value in
subsequent periods the valuation technique shall be calibrated so that at initial
recognition the result of the valuation technique equals the transaction price
Calibration ensures that the valuation technique reflects current market
conditions and it helps an entity to determine whether an adjustment to the
valuation technique is necessary (eg there might be a characteristic of the asset
or liability that is not captured by the valuation technique) After initial
recognition when measuring fair value using a valuation technique or
techniques that use unobservable inputs an entity shall ensure that those
valuation techniques reflect observable market data (eg the price for a similar
asset or liability) at the measurement date
65 Valuation techniques used to measure fair value shall be applied consistently
However a change in a valuation technique or its application (eg a change in its
weighting when multiple valuation techniques are used or a change in an
adjustment applied to a valuation technique) is appropriate if the change results
in a measurement that is equally or more representative of fair value in the
circumstances That might be the case if for example any of the following
events take place
(a) new markets develop
(b) new information becomes available
(c) information previously used is no longer available
(d) valuation techniques improve or
IFRS 13
IFRS Foundation A617(e) market conditions change
66 Revisions resulting from a change in the valuation technique or its application
shall be accounted for as a change in accounting estimate in accordance with
IAS 8 However the disclosures in IAS 8 for a change in accounting estimate are
not required for revisions resulting from a change in a valuation technique or its
application
Inputs to valuation techniques
General principles
67 Valuation techniques used to measure fair value shall maximise the use
of relevant observable inputs and minimise the use of unobservable
inputs
68 Examples of markets in which inputs might be observable for some assets and
liabilities (eg financial instruments) include exchange markets dealer markets
brokered markets and principaltoprincipal markets (see paragraph B34)
69 An entity shall select inputs that are consistent with the characteristics of the
asset or liability that market participants would take into account in a
transaction for the asset or liability (see paragraphs 11 and 12) In some cases
those characteristics result in the application of an adjustment such as a
premium or discount (eg a control premium or noncontrolling interest
discount) However a fair value measurement shall not incorporate a premium
or discount that is inconsistent with the unit of account in the IFRS that requires
or permits the fair value measurement (see paragraphs 13 and 14) Premiums or
discounts that reflect size as a characteristic of the entity’s holding (specifically
a blockage factor that adjusts the quoted price of an asset or a liability because
the market’s normal daily trading volume is not sufficient to absorb the
quantity held by the entity as described in paragraph 80) rather than as a
characteristic of the asset or liability (eg a control premium when measuring the
fair value of a controlling interest) are not permitted in a fair value
measurement In all cases if there is a quoted price in an active market (ie a
Level 1 input) for an asset or a liability an entity shall use that price without
adjustment when measuring fair value except as specified in paragraph 79
Inputs based on bid and ask prices
70 If an asset or a liability measured at fair value has a bid price and an ask price
(eg an input from a dealer market) the price within the bidask spread that is
most representative of fair value in the circumstances shall be used to measure
fair value regardless of where the input is categorised within the fair value
hierarchy (ie Level 1 2 or 3 see paragraphs 72–90) The use of bid prices for asset
positions and ask prices for liability positions is permitted but is not required
71 This IFRS does not preclude the use of midmarket pricing or other pricing
conventions that are used by market participants as a practical expedient for fair
value measurements within a bidask spread
IFRS 13
IFRS FoundationA618Fair value hierarchy
72 To increase consistency and comparability in fair value measurements and
related disclosures this IFRS establishes a fair value hierarchy that categorises
into three levels (see paragraphs 76–90) the inputs to valuation techniques used
to measure fair value The fair value hierarchy gives the highest priority to
quoted prices (unadjusted) in active markets for identical assets or liabilities
(Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs)
73 In some cases the inputs used to measure the fair value of an asset or a liability
might be categorised within different levels of the fair value hierarchy In those
cases the fair value measurement is categorised in its entirety in the same level
of the fair value hierarchy as the lowest level input that is significant to the
entire measurement Assessing the significance of a particular input to the
entire measurement requires judgement taking into account factors specific to
the asset or liability Adjustments to arrive at measurements based on fair value
such as costs to sell when measuring fair value less costs to sell shall not be
taken into account when determining the level of the fair value hierarchy
within which a fair value measurement is categorised
74 The availability of relevant inputs and their relative subjectivity might affect the
selection of appropriate valuation techniques (see paragraph 61) However the
fair value hierarchy prioritises the inputs to valuation techniques not the
valuation techniques used to measure fair value For example a fair value
measurement developed using a present value technique might be categorised
within Level 2 or Level 3 depending on the inputs that are significant to the
entire measurement and the level of the fair value hierarchy within which those
inputs are categorised
75 If an observable input requires an adjustment using an unobservable input and
that adjustment results in a significantly higher or lower fair value
measurement the resulting measurement would be categorised within Level 3
of the fair value hierarchy For example if a market participant would take into
account the effect of a restriction on the sale of an asset when estimating the
price for the asset an entity would adjust the quoted price to reflect the effect of
that restriction If that quoted price is a Level 2 input and the adjustment is an
unobservable input that is significant to the entire measurement the
measurement would be categorised within Level 3 of the fair value hierarchy
Level 1 inputs
76 Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement date
77 A quoted price in an active market provides the most reliable evidence of fair
value and shall be used without adjustment to measure fair value whenever
available except as specified in paragraph 79
78 A Level 1 input will be available for many financial assets and financial
liabilities some of which might be exchanged in multiple active markets (eg on
different exchanges) Therefore the emphasis within Level 1 is on determining
both of the following
IFRS 13
IFRS Foundation A619(a) the principal market for the asset or liability or in the absence of a
principal market the most advantageous market for the asset or
liability and
(b) whether the entity can enter into a transaction for the asset or liability at
the price in that market at the measurement date
79 An entity shall not make an adjustment to a Level 1 input except in the
following circumstances
(a) when an entity holds a large number of similar (but not identical) assets
or liabilities (eg debt securities) that are measured at fair value and a
quoted price in an active market is available but not readily accessible
for each of those assets or liabilities individually (ie given the large
number of similar assets or liabilities held by the entity it would be
difficult to obtain pricing information for each individual asset or
liability at the measurement date) In that case as a practical expedient
an entity may measure fair value using an alternative pricing method
that does not rely exclusively on quoted prices (eg matrix pricing)
However the use of an alternative pricing method results in a fair value
measurement categorised within a lower level of the fair value hierarchy
(b) when a quoted price in an active market does not represent fair value at
the measurement date That might be the case if for example
significant events (such as transactions in a principaltoprincipal
market trades in a brokered market or announcements) take place after
the close of a market but before the measurement date An entity shall
establish and consistently apply a policy for identifying those events that
might affect fair value measurements However if the quoted price is
adjusted for new information the adjustment results in a fair value
measurement categorised within a lower level of the fair value hierarchy
(c) when measuring the fair value of a liability or an entity’s own equity
instrument using the quoted price for the identical item traded as an
asset in an active market and that price needs to be adjusted for factors
specific to the item or the asset (see paragraph 39) If no adjustment to
the quoted price of the asset is required the result is a fair value
measurement categorised within Level 1 of the fair value hierarchy
However any adjustment to the quoted price of the asset results in a fair
value measurement categorised within a lower level of the fair value
hierarchy
80 If an entity holds a position in a single asset or liability (including a position
comprising a large number of identical assets or liabilities such as a holding of
financial instruments) and the asset or liability is traded in an active market the
fair value of the asset or liability shall be measured within Level 1 as the product
of the quoted price for the individual asset or liability and the quantity held by
the entity That is the case even if a market’s normal daily trading volume is not
sufficient to absorb the quantity held and placing orders to sell the position in a
single transaction might affect the quoted price
IFRS 13
IFRS FoundationA620Level 2 inputs
81 Level 2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability either directly or indirectly
82 If the asset or liability has a specified (contractual) term a Level 2 input must be
observable for substantially the full term of the asset or liability Level 2 inputs
include the following
(a) quoted prices for similar assets or liabilities in active markets
(b) quoted prices for identical or similar assets or liabilities in markets that
are not active
(c) inputs other than quoted prices that are observable for the asset or
liability for example
(i) interest rates and yield curves observable at commonly quoted
intervals
(ii) implied volatilities and
(iii) credit spreads
(d) marketcorroborated inputs
83 Adjustments to Level 2 inputs will vary depending on factors specific to the asset
or liability Those factors include the following
(a) the condition or location of the asset
(b) the extent to which inputs relate to items that are comparable to the
asset or liability (including those factors described in paragraph 39) and
(c) the volume or level of activity in the markets within which the inputs
are observed
84 An adjustment to a Level 2 input that is significant to the entire measurement
might result in a fair value measurement categorised within Level 3 of the fair
value hierarchy if the adjustment uses significant unobservable inputs
85 Paragraph B35 describes the use of Level 2 inputs for particular assets and
liabilities
Level 3 inputs
86 Level 3 inputs are unobservable inputs for the asset or liability
87 Unobservable inputs shall be used to measure fair value to the extent that
relevant observable inputs are not available thereby allowing for situations in
which there is little if any market activity for the asset or liability at the
measurement date However the fair value measurement objective remains the
same ie an exit price at the measurement date from the perspective of a market
participant that holds the asset or owes the liability Therefore unobservable
inputs shall reflect the assumptions that market participants would use when
pricing the asset or liability including assumptions about risk
88 Assumptions about risk include the risk inherent in a particular valuation
technique used to measure fair value (such as a pricing model) and the risk
IFRS 13
IFRS Foundation A621inherent in the inputs to the valuation technique A measurement that does not
include an adjustment for risk would not represent a fair value measurement if
market participants would include one when pricing the asset or liability For
example it might be necessary to include a risk adjustment when there is
significant measurement uncertainty (eg when there has been a significant
decrease in the volume or level of activity when compared with normal market
activity for the asset or liability or similar assets or liabilities and the entity has
determined that the transaction price or quoted price does not represent fair
value as described in paragraphs B37–B47)
89 An entity shall develop unobservable inputs using the best information available
in the circumstances which might include the entity’s own data In developing
unobservable inputs an entity may begin with its own data but it shall adjust
those data if reasonably available information indicates that other market
participants would use different data or there is something particular to the
entity that is not available to other market participants (eg an entityspecific
synergy) An entity need not undertake exhaustive efforts to obtain information
about market participant assumptions However an entity shall take into
account all information about market participant assumptions that is
reasonably available Unobservable inputs developed in the manner described
above are considered market participant assumptions and meet the objective of
a fair value measurement
90 Paragraph B36 describes the use of Level 3 inputs for particular assets and
liabilities
Disclosure
91 An entity shall disclose information that helps users of its financial
statements assess both of the following
(a) for assets and liabilities that are measured at fair value on a
recurring or nonrecurring basis in the statement of financial
position after initial recognition the valuation techniques and
inputs used to develop those measurements
(b) for recurring fair value measurements using significant
unobservable inputs (Level 3) the effect of the measurements on
profit or loss or other comprehensive income for the period
92 To meet the objectives in paragraph 91 an entity shall consider all the
following
(a) the level of detail necessary to satisfy the disclosure requirements
(b) how much emphasis to place on each of the various requirements
(c) how much aggregation or disaggregation to undertake and
(d) whether users of financial statements need additional information to
evaluate the quantitative information disclosed
If the disclosures provided in accordance with this IFRS and other IFRSs are
insufficient to meet the objectives in paragraph 91 an entity shall disclose
additional information necessary to meet those objectives
IFRS 13
IFRS FoundationA62293 To meet the objectives in paragraph 91 an entity shall disclose at a minimum
the following information for each class of assets and liabilities (see
paragraph 94 for information on determining appropriate classes of assets and
liabilities) measured at fair value (including measurements based on fair value
within the scope of this IFRS) in the statement of financial position after initial
recognition
(a) for recurring and nonrecurring fair value measurements the fair value
measurement at the end of the reporting period and for nonrecurring
fair value measurements the reasons for the measurement Recurring
fair value measurements of assets or liabilities are those that other IFRSs
require or permit in the statement of financial position at the end of
each reporting period Nonrecurring fair value measurements of assets
or liabilities are those that other IFRSs require or permit in the statement
of financial position in particular circumstances (eg when an entity
measures an asset held for sale at fair value less costs to sell in
accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations because the asset’s fair value less costs to sell is lower than its
carrying amount)
(b) for recurring and nonrecurring fair value measurements the level of the
fair value hierarchy within which the fair value measurements are
categorised in their entirety (Level 1 2 or 3)
(c) for assets and liabilities held at the end of the reporting period that are
measured at fair value on a recurring basis the amounts of any transfers
between Level 1 and Level 2 of the fair value hierarchy the reasons for
those transfers and the entity’s policy for determining when transfers
between levels are deemed to have occurred (see paragraph 95)
Transfers into each level shall be disclosed and discussed separately from
transfers out of each level
(d) for recurring and nonrecurring fair value measurements categorised
within Level 2 and Level 3 of the fair value hierarchy a description of the
valuation technique(s) and the inputs used in the fair value
measurement If there has been a change in valuation technique
(eg changing from a market approach to an income approach or the use
of an additional valuation technique) the entity shall disclose that
change and the reason(s) for making it For fair value measurements
categorised within Level 3 of the fair value hierarchy an entity shall
provide quantitative information about the significant unobservable
inputs used in the fair value measurement An entity is not required to
create quantitative information to comply with this disclosure
requirement if quantitative unobservable inputs are not developed by
the entity when measuring fair value (eg when an entity uses prices from
prior transactions or thirdparty pricing information without
adjustment) However when providing this disclosure an entity cannot
ignore quantitative unobservable inputs that are significant to the fair
value measurement and are reasonably available to the entity
IFRS 13
IFRS Foundation A623(e) for recurring fair value measurements categorised within Level 3 of the
fair value hierarchy a reconciliation from the opening balances to the
closing balances disclosing separately changes during the period
attributable to the following
(i) total gains or losses for the period recognised in profit or loss
and the line item(s) in profit or loss in which those gains or losses
are recognised
(ii) total gains or losses for the period recognised in other
comprehensive income and the line item(s) in other
comprehensive income in which those gains or losses are
recognised
(iii) purchases sales issues and settlements (each of those types of
changes disclosed separately)
(iv) the amounts of any transfers into or out of Level 3 of the fair
value hierarchy the reasons for those transfers and the entity’s
policy for determining when transfers between levels are deemed
to have occurred (see paragraph 95) Transfers into Level 3 shall
be disclosed and discussed separately from transfers out of
Level 3
(f) for recurring fair value measurements categorised within Level 3 of the
fair value hierarchy the amount of the total gains or losses for the period
in (e)(i) included in profit or loss that is attributable to the change in
unrealised gains or losses relating to those assets and liabilities held at
the end of the reporting period and the line item(s) in profit or loss in
which those unrealised gains or losses are recognised
(g) for recurring and nonrecurring fair value measurements categorised
within Level 3 of the fair value hierarchy a description of the valuation
processes used by the entity (including for example how an entity
decides its valuation policies and procedures and analyses changes in fair
value measurements from period to period)
(h) for recurring fair value measurements categorised within Level 3 of the
fair value hierarchy
(i) for all such measurements a narrative description of the
sensitivity of the fair value measurement to changes in
unobservable inputs if a change in those inputs to a different
amount might result in a significantly higher or lower fair value
measurement If there are interrelationships between those
inputs and other unobservable inputs used in the fair value
measurement an entity shall also provide a description of those
interrelationships and of how they might magnify or mitigate
the effect of changes in the unobservable inputs on the fair value
measurement To comply with that disclosure requirement the
narrative description of the sensitivity to changes in
unobservable inputs shall include at a minimum the
unobservable inputs disclosed when complying with (d)
IFRS 13
IFRS FoundationA624(ii) for financial assets and financial liabilities if changing one or
more of the unobservable inputs to reflect reasonably possible
alternative assumptions would change fair value significantly an
entity shall state that fact and disclose the effect of those
changes The entity shall disclose how the effect of a change to
reflect a reasonably possible alternative assumption was
calculated For that purpose significance shall be judged with
respect to profit or loss and total assets or total liabilities or
when changes in fair value are recognised in other
comprehensive income total equity
(i) for recurring and nonrecurring fair value measurements if the highest
and best use of a nonfinancial asset differs from its current use an entity
shall disclose that fact and why the nonfinancial asset is being used in a
manner that differs from its highest and best use
94 An entity shall determine appropriate classes of assets and liabilities on the basis
of the following
(a) the nature characteristics and risks of the asset or liability and
(b) the level of the fair value hierarchy within which the fair value
measurement is categorised
The number of classes may need to be greater for fair value measurements
categorised within Level 3 of the fair value hierarchy because those
measurements have a greater degree of uncertainty and subjectivity
Determining appropriate classes of assets and liabilities for which disclosures
about fair value measurements should be provided requires judgement A class
of assets and liabilities will often require greater disaggregation than the line
items presented in the statement of financial position However an entity shall
provide information sufficient to permit reconciliation to the line items
presented in the statement of financial position If another IFRS specifies the
class for an asset or a liability an entity may use that class in providing the
disclosures required in this IFRS if that class meets the requirements in this
paragraph
95 An entity shall disclose and consistently follow its policy for determining when
transfers between levels of the fair value hierarchy are deemed to have occurred
in accordance with paragraph 93(c) and (e)(iv) The policy about the timing of
recognising transfers shall be the same for transfers into the levels as for
transfers out of the levels Examples of policies for determining the timing of
transfers include the following
(a) the date of the event or change in circumstances that caused the
transfer
(b) the beginning of the reporting period
(c) the end of the reporting period
96 If an entity makes an accounting policy decision to use the exception in
paragraph 48 it shall disclose that fact
IFRS 13
IFRS Foundation A62597 For each class of assets and liabilities not measured at fair value in the statement
of financial position but for which the fair value is disclosed an entity shall
disclose the information required by paragraph 93(b) (d) and (i) However an
entity is not required to provide the quantitative disclosures about significant
unobservable inputs used in fair value measurements categorised within Level 3
of the fair value hierarchy required by paragraph 93(d) For such assets and
liabilities an entity does not need to provide the other disclosures required by
this IFRS
98 For a liability measured at fair value and issued with an inseparable thirdparty
credit enhancement an issuer shall disclose the existence of that credit
enhancement and whether it is reflected in the fair value measurement of the
liability
99 An entity shall present the quantitative disclosures required by this IFRS in a
tabular format unless another format is more appropriate
IFRS 13
IFRS FoundationA626Appendix A
Defined terms
This appendix is an integral part of the IFRS
active market A market in which transactions for the asset or liability take
place with sufficient frequency and volume to provide pricing
information on an ongoing basis
cost approach A valuation technique that reflects the amount that would be
required currently to replace the service capacity of an asset
(often referred to as current replacement cost)
entry price The price paid to acquire an asset or received to assume a liability
in an exchange transaction
exit price The price that would be received to sell an asset or paid to
transfer a liability
expected cash flow The probabilityweighted average (ie mean of the distribution) of
possible future cash flows
fair value The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date
highest and best use The use of a nonfinancial asset by market participants that
would maximise the value of the asset or the group of assets and
liabilities (eg a business) within which the asset would be used
income approach Valuation techniques that convert future amounts (eg cash flows
or income and expenses) to a single current (ie discounted)
amount The fair value measurement is determined on the basis
of the value indicated by current market expectations about
those future amounts
inputs The assumptions that market participants would use when
pricing the asset or liability including assumptions about risk
such as the following
(a) the risk inherent in a particular valuation technique used
to measure fair value (such as a pricing model) and
(b) the risk inherent in the inputs to the valuation technique
Inputs may be observable or unobservable
Level 1 inputs Quoted prices (unadjusted) in active markets for identical assets
or liabilities that the entity can access at the measurement date
Level 2 inputs Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability either directly or indirectly
Level 3 inputs Unobservable inputs for the asset or liability
IFRS 13
IFRS Foundation A627market approach A valuation technique that uses prices and other relevant
information generated by market transactions involving
identical or comparable (ie similar) assets liabilities or a group of
assets and liabilities such as a business
marketcorroborated
inputs
Inputs that are derived principally from or corroborated by
observable market data by correlation or other means
market participant Buyers and sellers in the principal (or most advantageous) market
for the asset or liability that have all of the following
characteristics
(a) They are independent of each other ie they are not
related parties as defined in IAS 24 although the price in
a related party transaction may be used as an input to a
fair value measurement if the entity has evidence that the
transaction was entered into at market terms
(b) They are knowledgeable having a reasonable
understanding about the asset or liability and the
transaction using all available information including
information that might be obtained through due
diligence efforts that are usual and customary
(c) They are able to enter into a transaction for the asset or
liability
(d) They are willing to enter into a transaction for the asset
or liability ie they are motivated but not forced or
otherwise compelled to do so
most advantageous
market
The market that maximises the amount that would be received to
sell the asset or minimises the amount that would be paid to
transfer the liability after taking into account transaction costs
and transport costs
nonperformance risk The risk that an entity will not fulfil an obligation
Nonperformance risk includes but may not be limited to the
entity’s own credit risk
observable inputs Inputs that are developed using market data such as publicly
available information about actual events or transactions and
that reflect the assumptions that market participants would use
when pricing the asset or liability
orderly transaction A transaction that assumes exposure to the market for a period
before the measurement date to allow for marketing activities
that are usual and customary for transactions involving such
assets or liabilities it is not a forced transaction (eg a forced
liquidation or distress sale)
principal market The market with the greatest volume and level of activity for the
asset or liability
IFRS 13
IFRS FoundationA628risk premium Compensation sought by riskaverse market participants for
bearing the uncertainty inherent in the cash flows of an asset or a
liability Also referred to as a risk adjustment’
transaction costs The costs to sell an asset or transfer a liability in the principal (or
most advantageous) market for the asset or liability that are
directly attributable to the disposal of the asset or the transfer of
the liability and meet both of the following criteria
(a) They result directly from and are essential to that
transaction
(b) They would not have been incurred by the entity had the
decision to sell the asset or transfer the liability not been
made (similar to costs to sell as defined in IFRS 5)
transport costs The costs that would be incurred to transport an asset from its
current location to its principal (or most advantageous) market
unit of account The level at which an asset or a liability is aggregated or
disaggregated in an IFRS for recognition purposes
unobservable inputs Inputs for which market data are not available and that are
developed using the best information available about the
assumptions that market participants would use when pricing
the asset or liability
IFRS 13
IFRS Foundation A629Appendix B
Application guidance
This appendix is an integral part of the IFRS It describes the application of paragraphs 1–99 and
has the same authority as the other parts of the IFRS
B1 The judgements applied in different valuation situations may be different This
appendix describes the judgements that might apply when an entity measures
fair value in different valuation situations
The fair value measurement approach
B2 The objective of a fair value measurement is to estimate the price at which an
orderly transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market
conditions A fair value measurement requires an entity to determine all the
following
(a) the particular asset or liability that is the subject of the measurement
(consistently with its unit of account)
(b) for a nonfinancial asset the valuation premise that is appropriate for
the measurement (consistently with its highest and best use)
(c) the principal (or most advantageous) market for the asset or liability
(d) the valuation technique(s) appropriate for the measurement considering
the availability of data with which to develop inputs that represent the
assumptions that market participants would use when pricing the asset
or liability and the level of the fair value hierarchy within which the
inputs are categorised
Valuation premise for nonfinancial assets (paragraphs 31–33)
B3 When measuring the fair value of a nonfinancial asset used in combination
with other assets as a group (as installed or otherwise configured for use) or in
combination with other assets and liabilities (eg a business) the effect of the
valuation premise depends on the circumstances For example
(a) the fair value of the asset might be the same whether the asset is used on
a standalone basis or in combination with other assets or with other
assets and liabilities That might be the case if the asset is a business that
market participants would continue to operate In that case the
transaction would involve valuing the business in its entirety The use of
the assets as a group in an ongoing business would generate synergies
that would be available to market participants (ie market participant
synergies that therefore should affect the fair value of the asset on
either a standalone basis or in combination with other assets or with
other assets and liabilities)
(b) an asset’s use in combination with other assets or with other assets and
liabilities might be incorporated into the fair value measurement
through adjustments to the value of the asset used on a standalone basis
IFRS 13
IFRS FoundationA630That might be the case if the asset is a machine and the fair value
measurement is determined using an observed price for a similar
machine (not installed or otherwise configured for use) adjusted for
transport and installation costs so that the fair value measurement
reflects the current condition and location of the machine (installed and
configured for use)
(c) an asset’s use in combination with other assets or with other assets and
liabilities might be incorporated into the fair value measurement
through the market participant assumptions used to measure the fair
value of the asset For example if the asset is work in progress inventory
that is unique and market participants would convert the inventory into
finished goods the fair value of the inventory would assume that market
participants have acquired or would acquire any specialised machinery
necessary to convert the inventory into finished goods
(d) an asset’s use in combination with other assets or with other assets and
liabilities might be incorporated into the valuation technique used to
measure the fair value of the asset That might be the case when using
the multiperiod excess earnings method to measure the fair value of an
intangible asset because that valuation technique specifically takes into
account the contribution of any complementary assets and the
associated liabilities in the group in which such an intangible asset
would be used
(e) in more limited situations when an entity uses an asset within a group
of assets the entity might measure the asset at an amount that
approximates its fair value when allocating the fair value of the asset
group to the individual assets of the group That might be the case if the
valuation involves real property and the fair value of improved property
(ie an asset group) is allocated to its component assets (such as land and
improvements)
Fair value at initial recognition (paragraphs 57–60)
B4 When determining whether fair value at initial recognition equals the
transaction price an entity shall take into account factors specific to the
transaction and to the asset or liability For example the transaction price
might not represent the fair value of an asset or a liability at initial recognition
if any of the following conditions exist
(a) The transaction is between related parties although the price in a
related party transaction may be used as an input into a fair value
measurement if the entity has evidence that the transaction was entered
into at market terms
(b) The transaction takes place under duress or the seller is forced to accept
the price in the transaction For example that might be the case if the
seller is experiencing financial difficulty
(c) The unit of account represented by the transaction price is different from
the unit of account for the asset or liability measured at fair value For
example that might be the case if the asset or liability measured at fair
IFRS 13
IFRS Foundation A631value is only one of the elements in the transaction (eg in a business
combination) the transaction includes unstated rights and privileges
that are measured separately in accordance with another IFRS or the
transaction price includes transaction costs
(d) The market in which the transaction takes place is different from the
principal market (or most advantageous market) For example those
markets might be different if the entity is a dealer that enters into
transactions with customers in the retail market but the principal (or
most advantageous) market for the exit transaction is with other dealers
in the dealer market
Valuation techniques (paragraphs 61–66)
Market approach
B5 The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable (ie similar) assets
liabilities or a group of assets and liabilities such as a business
B6 For example valuation techniques consistent with the market approach often
use market multiples derived from a set of comparables Multiples might be in
ranges with a different multiple for each comparable The selection of the
appropriate multiple within the range requires judgement considering
qualitative and quantitative factors specific to the measurement
B7 Valuation techniques consistent with the market approach include matrix
pricing Matrix pricing is a mathematical technique used principally to value
some types of financial instruments such as debt securities without relying
exclusively on quoted prices for the specific securities but rather relying on the
securities’ relationship to other benchmark quoted securities
Cost approach
B8 The cost approach reflects the amount that would be required currently to
replace the service capacity of an asset (often referred to as current replacement
cost)
B9 From the perspective of a market participant seller the price that would be
received for the asset is based on the cost to a market participant buyer to
acquire or construct a substitute asset of comparable utility adjusted for
obsolescence That is because a market participant buyer would not pay more
for an asset than the amount for which it could replace the service capacity of
that asset Obsolescence encompasses physical deterioration functional
(technological) obsolescence and economic (external) obsolescence and is
broader than depreciation for financial reporting purposes (an allocation of
historical cost) or tax purposes (using specified service lives) In many cases the
current replacement cost method is used to measure the fair value of tangible
assets that are used in combination with other assets or with other assets and
liabilities
IFRS 13
IFRS FoundationA632Income approach
B10 The income approach converts future amounts (eg cash flows or income and
expenses) to a single current (ie discounted) amount When the income
approach is used the fair value measurement reflects current market
expectations about those future amounts
B11 Those valuation techniques include for example the following
(a) present value techniques (see paragraphs B12–B30)
(b) option pricing models such as the BlackScholesMerton formula or a
binomial model (ie a lattice model) that incorporate present value
techniques and reflect both the time value and the intrinsic value of an
option and
(c) the multiperiod excess earnings method which is used to measure the
fair value of some intangible assets
Present value techniques
B12 Paragraphs B13–B30 describe the use of present value techniques to measure fair
value Those paragraphs focus on a discount rate adjustment technique and an
expected cash flow (expected present value) technique Those paragraphs neither
prescribe the use of a single specific present value technique nor limit the use of
present value techniques to measure fair value to the techniques discussed The
present value technique used to measure fair value will depend on facts and
circumstances specific to the asset or liability being measured (eg whether prices
for comparable assets or liabilities can be observed in the market) and the
availability of sufficient data
The components of a present value measurement
B13 Present value (ie an application of the income approach) is a tool used to link
future amounts (eg cash flows or values) to a present amount using a discount
rate A fair value measurement of an asset or a liability using a present value
technique captures all the following elements from the perspective of market
participants at the measurement date
(a) an estimate of future cash flows for the asset or liability being measured
(b) expectations about possible variations in the amount and timing of the
cash flows representing the uncertainty inherent in the cash flows
(c) the time value of money represented by the rate on riskfree monetary
assets that have maturity dates or durations that coincide with the
period covered by the cash flows and pose neither uncertainty in timing
nor risk of default to the holder (ie a riskfree interest rate)
(d) the price for bearing the uncertainty inherent in the cash flows (ie a risk
premium)
(e) other factors that market participants would take into account in the
circumstances
(f) for a liability the nonperformance risk relating to that liability
including the entity’s (ie the obligor’s) own credit risk
IFRS 13
IFRS Foundation A633General principles
B14 Present value techniques differ in how they capture the elements in
paragraph B13 However all the following general principles govern the
application of any present value technique used to measure fair value
(a) Cash flows and discount rates should reflect assumptions that market
participants would use when pricing the asset or liability
(b) Cash flows and discount rates should take into account only the factors
attributable to the asset or liability being measured
(c) To avoid doublecounting or omitting the effects of risk factors discount
rates should reflect assumptions that are consistent with those inherent
in the cash flows For example a discount rate that reflects the
uncertainty in expectations about future defaults is appropriate if using
contractual cash flows of a loan (ie a discount rate adjustment
technique) That same rate should not be used if using expected
(ie probabilityweighted) cash flows (ie an expected present value
technique) because the expected cash flows already reflect assumptions
about the uncertainty in future defaults instead a discount rate that is
commensurate with the risk inherent in the expected cash flows should
be used
(d) Assumptions about cash flows and discount rates should be internally
consistent For example nominal cash flows which include the effect of
inflation should be discounted at a rate that includes the effect of
inflation The nominal riskfree interest rate includes the effect of
inflation Real cash flows which exclude the effect of inflation should
be discounted at a rate that excludes the effect of inflation Similarly
aftertax cash flows should be discounted using an aftertax discount
rate Pretax cash flows should be discounted at a rate consistent with
those cash flows
(e) Discount rates should be consistent with the underlying economic
factors of the currency in which the cash flows are denominated
Risk and uncertainty
B15 A fair value measurement using present value techniques is made under
conditions of uncertainty because the cash flows used are estimates rather than
known amounts In many cases both the amount and timing of the cash flows
are uncertain Even contractually fixed amounts such as the payments on a
loan are uncertain if there is risk of default
B16 Market participants generally seek compensation (ie a risk premium) for bearing
the uncertainty inherent in the cash flows of an asset or a liability A fair value
measurement should include a risk premium reflecting the amount that market
participants would demand as compensation for the uncertainty inherent in the
cash flows Otherwise the measurement would not faithfully represent fair
value In some cases determining the appropriate risk premium might be
difficult However the degree of difficulty alone is not a sufficient reason to
exclude a risk premium
IFRS 13
IFRS FoundationA634B17 Present value techniques differ in how they adjust for risk and in the type of
cash flows they use For example
(a) The discount rate adjustment technique (see paragraphs B18–B22) uses a
riskadjusted discount rate and contractual promised or most likely cash
flows
(b) Method 1 of the expected present value technique (see paragraph B25)
uses riskadjusted expected cash flows and a riskfree rate
(c) Method 2 of the expected present value technique (see paragraph B26)
uses expected cash flows that are not riskadjusted and a discount rate
adjusted to include the risk premium that market participants require
That rate is different from the rate used in the discount rate adjustment
technique
Discount rate adjustment technique
B18 The discount rate adjustment technique uses a single set of cash flows from the
range of possible estimated amounts whether contractual or promised (as is the
case for a bond) or most likely cash flows In all cases those cash flows are
conditional upon the occurrence of specified events (eg contractual or promised
cash flows for a bond are conditional on the event of no default by the debtor)
The discount rate used in the discount rate adjustment technique is derived
from observed rates of return for comparable assets or liabilities that are traded
in the market Accordingly the contractual promised or most likely cash flows
are discounted at an observed or estimated market rate for such conditional
cash flows (ie a market rate of return)
B19 The discount rate adjustment technique requires an analysis of market data for
comparable assets or liabilities Comparability is established by considering the
nature of the cash flows (eg whether the cash flows are contractual or
noncontractual and are likely to respond similarly to changes in economic
conditions) as well as other factors (eg credit standing collateral duration
restrictive covenants and liquidity) Alternatively if a single comparable asset or
liability does not fairly reflect the risk inherent in the cash flows of the asset or
liability being measured it may be possible to derive a discount rate using data
for several comparable assets or liabilities in conjunction with the riskfree yield
curve (ie using a buildup’ approach)
B20 To illustrate a buildup approach assume that Asset A is a contractual right to
receive CU8001 in one year (ie there is no timing uncertainty) There is an
established market for comparable assets and information about those assets
including price information is available Of those comparable assets
(a) Asset B is a contractual right to receive CU1200 in one year and has a
market price of CU1083 Thus the implied annual rate of return (ie a
oneyear market rate of return) is 108 per cent [(CU1200CU1083) – 1]
(b) Asset C is a contractual right to receive CU700 in two years and has a
market price of CU566 Thus the implied annual rate of return (ie a
twoyear market rate of return) is 112 per cent [(CU700CU566)^05 – 1]
1 In this IFRS monetary amounts are denominated in currency units (CU)’
IFRS 13
IFRS Foundation A635(c) All three assets are comparable with respect to risk (ie dispersion of
possible payoffs and credit)
B21 On the basis of the timing of the contractual payments to be received for Asset A
relative to the timing for Asset B and Asset C (ie one year for Asset B versus two
years for Asset C) Asset B is deemed more comparable to Asset A Using the
contractual payment to be received for Asset A (CU800) and the oneyear market
rate derived from Asset B (108 per cent) the fair value of Asset A is CU722
(CU8001108) Alternatively in the absence of available market information for
Asset B the oneyear market rate could be derived from Asset C using the
buildup approach In that case the twoyear market rate indicated by Asset C
(112 per cent) would be adjusted to a oneyear market rate using the term
structure of the riskfree yield curve Additional information and analysis might
be required to determine whether the risk premiums for oneyear and twoyear
assets are the same If it is determined that the risk premiums for oneyear and
twoyear assets are not the same the twoyear market rate of return would be
further adjusted for that effect
B22 When the discount rate adjustment technique is applied to fixed receipts or
payments the adjustment for risk inherent in the cash flows of the asset or
liability being measured is included in the discount rate In some applications
of the discount rate adjustment technique to cash flows that are not fixed
receipts or payments an adjustment to the cash flows may be necessary to
achieve comparability with the observed asset or liability from which the
discount rate is derived
Expected present value technique
B23 The expected present value technique uses as a starting point a set of cash flows
that represents the probabilityweighted average of all possible future cash flows
(ie the expected cash flows) The resulting estimate is identical to expected
value which in statistical terms is the weighted average of a discrete random
variable’s possible values with the respective probabilities as the weights
Because all possible cash flows are probabilityweighted the resulting expected
cash flow is not conditional upon the occurrence of any specified event (unlike
the cash flows used in the discount rate adjustment technique)
B24 In making an investment decision riskaverse market participants would take
into account the risk that the actual cash flows may differ from the expected
cash flows Portfolio theory distinguishes between two types of risk
(a) unsystematic (diversifiable) risk which is the risk specific to a particular
asset or liability
(b) systematic (nondiversifiable) risk which is the common risk shared by
an asset or a liability with the other items in a diversified portfolio
Portfolio theory holds that in a market in equilibrium market participants will
be compensated only for bearing the systematic risk inherent in the cash flows
(In markets that are inefficient or out of equilibrium other forms of return or
compensation might be available)
B25 Method 1 of the expected present value technique adjusts the expected cash
flows of an asset for systematic (ie market) risk by subtracting a cash risk
IFRS 13
IFRS FoundationA636premium (ie riskadjusted expected cash flows) Those riskadjusted expected
cash flows represent a certaintyequivalent cash flow which is discounted at a
riskfree interest rate A certaintyequivalent cash flow refers to an expected cash
flow (as defined) adjusted for risk so that a market participant is indifferent to
trading a certain cash flow for an expected cash flow For example if a market
participant was willing to trade an expected cash flow of CU1200 for a certain
cash flow of CU1000 the CU1000 is the certainty equivalent of the CU1200
(ie the CU200 would represent the cash risk premium) In that case the market
participant would be indifferent as to the asset held
B26 In contrast Method 2 of the expected present value technique adjusts for
systematic (ie market) risk by applying a risk premium to the riskfree interest
rate Accordingly the expected cash flows are discounted at a rate that
corresponds to an expected rate associated with probabilityweighted cash flows
(ie an expected rate of return) Models used for pricing risky assets such as the
capital asset pricing model can be used to estimate the expected rate of return
Because the discount rate used in the discount rate adjustment technique is a
rate of return relating to conditional cash flows it is likely to be higher than the
discount rate used in Method 2 of the expected present value technique which
is an expected rate of return relating to expected or probabilityweighted cash
flows
B27 To illustrate Methods 1 and 2 assume that an asset has expected cash flows of
CU780 in one year determined on the basis of the possible cash flows and
probabilities shown below The applicable riskfree interest rate for cash flows
with a oneyear horizon is 5 per cent and the systematic risk premium for an
asset with the same risk profile is 3 per cent
Possible cash flows Probability Probabilityweighted
cash flows
CU500 15 CU75
CU800 60 CU480
CU900 25 CU225
Expected cash flows CU780
B28 In this simple illustration the expected cash flows (CU780) represent the
probabilityweighted average of the three possible outcomes In more realistic
situations there could be many possible outcomes However to apply the
expected present value technique it is not always necessary to take into account
distributions of all possible cash flows using complex models and techniques
Rather it might be possible to develop a limited number of discrete scenarios
and probabilities that capture the array of possible cash flows For example an
entity might use realised cash flows for some relevant past period adjusted for
changes in circumstances occurring subsequently (eg changes in external
factors including economic or market conditions industry trends and
competition as well as changes in internal factors affecting the entity more
specifically) taking into account the assumptions of market participants
B29 In theory the present value (ie the fair value) of the asset’s cash flows is the same
whether determined using Method 1 or Method 2 as follows
IFRS 13
IFRS Foundation A637(a) Using Method 1 the expected cash flows are adjusted for systematic
(ie market) risk In the absence of market data directly indicating the
amount of the risk adjustment such adjustment could be derived from
an asset pricing model using the concept of certainty equivalents For
example the risk adjustment (ie the cash risk premium of CU22) could
be determined using the systematic risk premium of 3 per cent (CU780 –
[CU780 × (105108)]) which results in riskadjusted expected cash flows
of CU758 (CU780 – CU22) The CU758 is the certainty equivalent of
CU780 and is discounted at the riskfree interest rate (5 per cent) The
present value (ie the fair value) of the asset is CU722 (CU758105)
(b) Using Method 2 the expected cash flows are not adjusted for systematic
(ie market) risk Rather the adjustment for that risk is included in the
discount rate Thus the expected cash flows are discounted at an
expected rate of return of 8 per cent (ie the 5 per cent riskfree interest
rate plus the 3 per cent systematic risk premium) The present value
(ie the fair value) of the asset is CU722 (CU780108)
B30 When using an expected present value technique to measure fair value either
Method 1 or Method 2 could be used The selection of Method 1 or Method 2 will
depend on facts and circumstances specific to the asset or liability being
measured the extent to which sufficient data are available and the judgements
applied
Applying present value techniques to liabilities and an entity’s
own equity instruments not held by other parties as assets
(paragraphs 40 and 41)
B31 When using a present value technique to measure the fair value of a liability
that is not held by another party as an asset (eg a decommissioning liability) an
entity shall among other things estimate the future cash outflows that market
participants would expect to incur in fulfilling the obligation Those future cash
outflows shall include market participants’ expectations about the costs of
fulfilling the obligation and the compensation that a market participant would
require for taking on the obligation Such compensation includes the return
that a market participant would require for the following
(a) undertaking the activity (ie the value of fulfilling the obligation eg by
using resources that could be used for other activities) and
(b) assuming the risk associated with the obligation (ie a risk premium that
reflects the risk that the actual cash outflows might differ from the
expected cash outflows see paragraph B33)
B32 For example a nonfinancial liability does not contain a contractual rate of
return and there is no observable market yield for that liability In some cases
the components of the return that market participants would require will be
indistinguishable from one another (eg when using the price a third party
contractor would charge on a fixed fee basis) In other cases an entity needs to
estimate those components separately (eg when using the price a third party
contractor would charge on a cost plus basis because the contractor in that case
would not bear the risk of future changes in costs)
IFRS 13
IFRS FoundationA638B33 An entity can include a risk premium in the fair value measurement of a
liability or an entity’s own equity instrument that is not held by another party as
an asset in one of the following ways
(a) by adjusting the cash flows (ie as an increase in the amount of cash
outflows) or
(b) by adjusting the rate used to discount the future cash flows to their
present values (ie as a reduction in the discount rate)
An entity shall ensure that it does not doublecount or omit adjustments for risk
For example if the estimated cash flows are increased to take into account the
compensation for assuming the risk associated with the obligation the discount
rate should not be adjusted to reflect that risk
Inputs to valuation techniques (paragraphs 67–71)
B34 Examples of markets in which inputs might be observable for some assets and
liabilities (eg financial instruments) include the following
(a) Exchange markets In an exchange market closing prices are both readily
available and generally representative of fair value An example of such
a market is the London Stock Exchange
(b) Dealer markets In a dealer market dealers stand ready to trade (either buy
or sell for their own account) thereby providing liquidity by using their
capital to hold an inventory of the items for which they make a market
Typically bid and ask prices (representing the price at which the dealer is
willing to buy and the price at which the dealer is willing to sell
respectively) are more readily available than closing prices
Overthecounter markets (for which prices are publicly reported) are
dealer markets Dealer markets also exist for some other assets and
liabilities including some financial instruments commodities and
physical assets (eg used equipment)
(c) Brokered markets In a brokered market brokers attempt to match buyers
with sellers but do not stand ready to trade for their own account In
other words brokers do not use their own capital to hold an inventory of
the items for which they make a market The broker knows the prices
bid and asked by the respective parties but each party is typically
unaware of another party’s price requirements Prices of completed
transactions are sometimes available Brokered markets include
electronic communication networks in which buy and sell orders are
matched and commercial and residential real estate markets
(d) Principaltoprincipal markets In a principaltoprincipal market
transactions both originations and resales are negotiated
independently with no intermediary Little information about those
transactions may be made available publicly
IFRS 13
IFRS Foundation A639Fair value hierarchy (paragraphs 72–90)
Level 2 inputs (paragraphs 81–85)
B35 Examples of Level 2 inputs for particular assets and liabilities include the
following
(a) Receivefixed payvariable interest rate swap based on the London Interbank Offered
Rate (LIBOR) swap rate A Level 2 input would be the LIBOR swap rate if that
rate is observable at commonly quoted intervals for substantially the full
term of the swap
(b) Receivefixed payvariable interest rate swap based on a yield curve denominated in
a foreign currency A Level 2 input would be the swap rate based on a yield
curve denominated in a foreign currency that is observable at commonly
quoted intervals for substantially the full term of the swap That would
be the case if the term of the swap is 10 years and that rate is observable
at commonly quoted intervals for 9 years provided that any reasonable
extrapolation of the yield curve for year 10 would not be significant to
the fair value measurement of the swap in its entirety
(c) Receivefixed payvariable interest rate swap based on a specific bank’s prime rate
A Level 2 input would be the bank’s prime rate derived through
extrapolation if the extrapolated values are corroborated by observable
market data for example by correlation with an interest rate that is
observable over substantially the full term of the swap
(d) Threeyear option on exchangetraded shares A Level 2 input would be the
implied volatility for the shares derived through extrapolation to year 3
if both of the following conditions exist
(i) Prices for oneyear and twoyear options on the shares are
observable
(ii) The extrapolated implied volatility of a threeyear option is
corroborated by observable market data for substantially the full
term of the option
In that case the implied volatility could be derived by extrapolating from
the implied volatility of the oneyear and twoyear options on the shares
and corroborated by the implied volatility for threeyear options on
comparable entities’ shares provided that correlation with the oneyear
and twoyear implied volatilities is established
(e) Licensing arrangement For a licensing arrangement that is acquired in a
business combination and was recently negotiated with an unrelated
party by the acquired entity (the party to the licensing arrangement) a
Level 2 input would be the royalty rate in the contract with the unrelated
party at inception of the arrangement
(f) Finished goods inventory at a retail outlet For finished goods inventory that
is acquired in a business combination a Level 2 input would be either a
price to customers in a retail market or a price to retailers in a wholesale
market adjusted for differences between the condition and location of
IFRS 13
IFRS FoundationA640the inventory item and the comparable (ie similar) inventory items so
that the fair value measurement reflects the price that would be received
in a transaction to sell the inventory to another retailer that would
complete the requisite selling efforts Conceptually the fair value
measurement will be the same whether adjustments are made to a retail
price (downward) or to a wholesale price (upward) Generally the price
that requires the least amount of subjective adjustments should be used
for the fair value measurement
(g) Building held and used A Level 2 input would be the price per square
metre for the building (a valuation multiple) derived from observable
market data eg multiples derived from prices in observed transactions
involving comparable (ie similar) buildings in similar locations
(h) Cashgenerating unit A Level 2 input would be a valuation multiple (eg a
multiple of earnings or revenue or a similar performance measure)
derived from observable market data eg multiples derived from prices in
observed transactions involving comparable (ie similar) businesses
taking into account operational market financial and nonfinancial
factors
Level 3 inputs (paragraphs 86–90)
B36 Examples of Level 3 inputs for particular assets and liabilities include the
following
(a) Longdated currency swap A Level 3 input would be an interest rate in a
specified currency that is not observable and cannot be corroborated by
observable market data at commonly quoted intervals or otherwise for
substantially the full term of the currency swap The interest rates in a
currency swap are the swap rates calculated from the respective
countries’ yield curves
(b) Threeyear option on exchangetraded shares A Level 3 input would be
historical volatility ie the volatility for the shares derived from the
shares’ historical prices Historical volatility typically does not represent
current market participants’ expectations about future volatility even if
it is the only information available to price an option
(c) Interest rate swap A Level 3 input would be an adjustment to a
midmarket consensus (nonbinding) price for the swap developed using
data that are not directly observable and cannot otherwise be
corroborated by observable market data
(d) Decommissioning liability assumed in a business combination A Level 3 input
would be a current estimate using the entity’s own data about the future
cash outflows to be paid to fulfil the obligation (including market
participants’ expectations about the costs of fulfilling the obligation and
the compensation that a market participant would require for taking on
the obligation to dismantle the asset) if there is no reasonably available
information that indicates that market participants would use different
assumptions That Level 3 input would be used in a present value
technique together with other inputs eg a current riskfree interest rate
or a creditadjusted riskfree rate if the effect of the entity’s credit
IFRS 13
IFRS Foundation A641standing on the fair value of the liability is reflected in the discount rate
rather than in the estimate of future cash outflows
(e) Cashgenerating unit A Level 3 input would be a financial forecast (eg of
cash flows or profit or loss) developed using the entity’s own data if there
is no reasonably available information that indicates that market
participants would use different assumptions
Measuring fair value when the volume or level of activity for an
asset or a liability has significantly decreased
B37 The fair value of an asset or a liability might be affected when there has been a
significant decrease in the volume or level of activity for that asset or liability in
relation to normal market activity for the asset or liability (or similar assets or
liabilities) To determine whether on the basis of the evidence available there
has been a significant decrease in the volume or level of activity for the asset or
liability an entity shall evaluate the significance and relevance of factors such as
the following
(a) There are few recent transactions
(b) Price quotations are not developed using current information
(c) Price quotations vary substantially either over time or among
marketmakers (eg some brokered markets)
(d) Indices that previously were highly correlated with the fair values of the
asset or liability are demonstrably uncorrelated with recent indications
of fair value for that asset or liability
(e) There is a significant increase in implied liquidity risk premiums yields
or performance indicators (such as delinquency rates or loss severities)
for observed transactions or quoted prices when compared with the
entity’s estimate of expected cash flows taking into account all available
market data about credit and other nonperformance risk for the asset or
liability
(f) There is a wide bidask spread or significant increase in the bidask
spread
(g) There is a significant decline in the activity of or there is an absence of a
market for new issues (ie a primary market) for the asset or liability or
similar assets or liabilities
(h) Little information is publicly available (eg for transactions that take
place in a principaltoprincipal market)
B38 If an entity concludes that there has been a significant decrease in the volume or
level of activity for the asset or liability in relation to normal market activity for
the asset or liability (or similar assets or liabilities) further analysis of the
transactions or quoted prices is needed A decrease in the volume or level of
activity on its own may not indicate that a transaction price or quoted price does
not represent fair value or that a transaction in that market is not orderly
However if an entity determines that a transaction or quoted price does not
represent fair value (eg there may be transactions that are not orderly) an
IFRS 13
IFRS FoundationA642adjustment to the transactions or quoted prices will be necessary if the entity
uses those prices as a basis for measuring fair value and that adjustment may be
significant to the fair value measurement in its entirety Adjustments also may
be necessary in other circumstances (eg when a price for a similar asset requires
significant adjustment to make it comparable to the asset being measured or
when the price is stale)
B39 This IFRS does not prescribe a methodology for making significant adjustments
to transactions or quoted prices See paragraphs 61–66 and B5–B11 for a
discussion of the use of valuation techniques when measuring fair value
Regardless of the valuation technique used an entity shall include appropriate
risk adjustments including a risk premium reflecting the amount that market
participants would demand as compensation for the uncertainty inherent in the
cash flows of an asset or a liability (see paragraph B17) Otherwise the
measurement does not faithfully represent fair value In some cases
determining the appropriate risk adjustment might be difficult However the
degree of difficulty alone is not a sufficient basis on which to exclude a risk
adjustment The risk adjustment shall be reflective of an orderly transaction
between market participants at the measurement date under current market
conditions
B40 If there has been a significant decrease in the volume or level of activity for the
asset or liability a change in valuation technique or the use of multiple
valuation techniques may be appropriate (eg the use of a market approach and a
present value technique) When weighting indications of fair value resulting
from the use of multiple valuation techniques an entity shall consider the
reasonableness of the range of fair value measurements The objective is to
determine the point within the range that is most representative of fair value
under current market conditions A wide range of fair value measurements may
be an indication that further analysis is needed
B41 Even when there has been a significant decrease in the volume or level of
activity for the asset or liability the objective of a fair value measurement
remains the same Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction (ie not a forced
liquidation or distress sale) between market participants at the measurement
date under current market conditions
B42 Estimating the price at which market participants would be willing to enter into
a transaction at the measurement date under current market conditions if there
has been a significant decrease in the volume or level of activity for the asset or
liability depends on the facts and circumstances at the measurement date and
requires judgement An entity’s intention to hold the asset or to settle or
otherwise fulfil the liability is not relevant when measuring fair value because
fair value is a marketbased measurement not an entityspecific measurement
Identifying transactions that are not orderly
B43 The determination of whether a transaction is orderly (or is not orderly) is more
difficult if there has been a significant decrease in the volume or level of activity
for the asset or liability in relation to normal market activity for the asset or
liability (or similar assets or liabilities) In such circumstances it is not
IFRS 13
IFRS Foundation A643appropriate to conclude that all transactions in that market are not orderly (ie
forced liquidations or distress sales) Circumstances that may indicate that a
transaction is not orderly include the following
(a) There was not adequate exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and
customary for transactions involving such assets or liabilities under
current market conditions
(b) There was a usual and customary marketing period but the seller
marketed the asset or liability to a single market participant
(c) The seller is in or near bankruptcy or receivership (ie the seller is
distressed)
(d) The seller was required to sell to meet regulatory or legal requirements
(ie the seller was forced)
(e) The transaction price is an outlier when compared with other recent
transactions for the same or a similar asset or liability
An entity shall evaluate the circumstances to determine whether on the weight
of the evidence available the transaction is orderly
B44 An entity shall consider all the following when measuring fair value or
estimating market risk premiums
(a) If the evidence indicates that a transaction is not orderly an entity shall
place little if any weight (compared with other indications of fair value)
on that transaction price
(b) If the evidence indicates that a transaction is orderly an entity shall take
into account that transaction price The amount of weight placed on
that transaction price when compared with other indications of fair
value will depend on the facts and circumstances such as the following
(i) the volume of the transaction
(ii) the comparability of the transaction to the asset or liability being
measured
(iii) the proximity of the transaction to the measurement date
(c) If an entity does not have sufficient information to conclude whether a
transaction is orderly it shall take into account the transaction price
However that transaction price may not represent fair value (ie the
transaction price is not necessarily the sole or primary basis for
measuring fair value or estimating market risk premiums) When an
entity does not have sufficient information to conclude whether
particular transactions are orderly the entity shall place less weight on
those transactions when compared with other transactions that are
known to be orderly
An entity need not undertake exhaustive efforts to determine whether a
transaction is orderly but it shall not ignore information that is reasonably
available When an entity is a party to a transaction it is presumed to have
sufficient information to conclude whether the transaction is orderly
IFRS 13
IFRS FoundationA644Using quoted prices provided by third parties
B45 This IFRS does not preclude the use of quoted prices provided by third parties
such as pricing services or brokers if an entity has determined that the quoted
prices provided by those parties are developed in accordance with this IFRS
B46 If there has been a significant decrease in the volume or level of activity for the
asset or liability an entity shall evaluate whether the quoted prices provided by
third parties are developed using current information that reflects orderly
transactions or a valuation technique that reflects market participant
assumptions (including assumptions about risk) In weighting a quoted price as
an input to a fair value measurement an entity places less weight (when
compared with other indications of fair value that reflect the results of
transactions) on quotes that do not reflect the result of transactions
B47 Furthermore the nature of a quote (eg whether the quote is an indicative price
or a binding offer) shall be taken into account when weighting the available
evidence with more weight given to quotes provided by third parties that
represent binding offers
IFRS 13
IFRS Foundation A645Appendix C
Effective date and transition
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS
C1 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013 Earlier application is permitted If an entity applies this IFRS
for an earlier period it shall disclose that fact
C2 This IFRS shall be applied prospectively as of the beginning of the annual period
in which it is initially applied
C3 The disclosure requirements of this IFRS need not be applied in comparative
information provided for periods before initial application of this IFRS
C4 Annual Improvements Cycle 2011–2013 issued in December 2013 amended
paragraph 52 An entity shall apply that amendment for annual periods
beginning on or after 1 July 2014 An entity shall apply that amendment
prospectively from the beginning of the annual period in which IFRS 13 was
initially applied Earlier application is permitted If an entity applies that
amendment for an earlier period it shall disclose that fact
C5 IFRS 9 as issued in July 2014 amended paragraph 52 An entity shall apply that
amendment when it applies IFRS 9
C6 IFRS 16 Leases issued in January 2016 amended paragraph 6 An entity shall
apply that amendment when it applies IFRS 16
IFRS 13
IFRS FoundationA646Appendix D
Amendments to other IFRSs
This appendix sets out amendments to other IFRSs that are a consequence of the Board issuing
IFRS 13 An entity shall apply the amendments for annual periods beginning on or after 1 January
2013 If an entity applies IFRS 13 for an earlier period it shall apply the amendments for that
earlier period Amended paragraphs are shown with new text underlined and deleted text struck
through
*****
The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated
into the relevant IFRSs published in this volume
IFRS 13
IFRS Foundation A647IFRS Standard 14
Regulatory Deferral Accounts
In January 2014 the International Accounting Standards Board issued IFRS 14 Regulatory
Deferral Accounts IFRS 14 permits a firsttime adopter of IFRS Standards that is within its
scope to continue to recognise and measure its regulatory deferral account balances in its
first and subsequent IFRS financial statements in accordance with its previous GAAP
IFRS 14
IFRS Foundation A649CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 14
REGULATORY DEFERRAL ACCOUNTS
OBJECTIVE 1
SCOPE 5
RECOGNITION MEASUREMENT IMPAIRMENT AND DERECOGNITION 9
Temporary exemption from paragraph 11 of IAS 8 Accounting Policies
Changes in Accounting Estimates and Errors 9
Continuation of existing accounting policies 11
Changes in accounting policies 13
Interaction with other Standards 16
PRESENTATION 18
Changes in presentation 18
Classification of regulatory deferral account balances 20
Classification of movements in regulatory deferral account balances 22
DISCLOSURE 27
Objective 27
Explanation of activities subject to rate regulation 30
Explanation of recognised amounts 32
APPENDICES
A Defined terms
B Application Guidance
C Effective date and transition
D Consequential amendments to IFRS 1 Firsttime Adoption of International
Financial Reporting Standards
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 14 REGULATORY
DEFERRAL ACCOUNTS ISSUED IN JANUARY 2014
BASIS FOR CONCLUSIONS ON IFRS 14 REGULATORY DEFERRAL
ACCOUNTS
DISSENTING OPINIONS
ILLUSTRATIVE EXAMPLES
IFRS 14
IFRS FoundationA650International Financial Reporting Standard 14 Regulatory Deferral Accounts (IFRS 14) is set
out in paragraphs 1–36 and Appendices A–D All the paragraphs have equal authority
Paragraphs in bold type state the main principles Terms defined in Appendix A are in
italics the first time that they appear in the Standard Definitions of other terms are
given in the Glossary for International Financial Reporting Standards The Standard
should be read in the context of its objective and the Basis for Conclusions the Preface to
International Financial Reporting Standards and the Conceptual Framework for Financial
Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance
IFRS 14
IFRS Foundation A651Introduction
IN1 IFRS 14 Regulatory Deferral Accounts (this Standard’) describes regulatory deferral
account balances as amounts of expense or income that would not be recognised
as assets or liabilities in accordance with other Standards but that qualify to be
deferred in accordance with this Standard because the amount is included or is
expected to be included by the rate regulator in establishing the price(s) that an
entity can charge to customers for rateregulated goods or services
IN2 This Standard permits a firsttime adopter within its scope to continue to
account for regulatory deferral account balances in its first IFRS financial
statements in accordance with its previous GAAP when it adopts IFRS However
IFRS 14 introduces limited changes to some previous GAAP accounting practices
for regulatory deferral account balances which are primarily related to the
presentation of these accounts
IN3 The scope of this Standard is limited to firsttime adopters that recognised
regulatory deferral account balances in their financial statements in accordance
with their previous GAAP as defined in IFRS 1 Firsttime Adoption of International
Financial Reporting Standards (ie the basis of accounting that a firsttime adopter
used immediately before adopting IFRS) An entity that is within the scope of
and that elects to apply this Standard in its first IFRS financial statements
continues to apply it in the entity’s subsequent financial statements
IN4 This Standard is effective for annual periods beginning on or after 1 January
2016 Earlier application is permitted
Reasons for publishing this Standard
IN5 The International Accounting Standards Board (IASB) has developed this
International Financial Reporting Standard for regulatory deferral accounts
because
(a) the requirements of some national accounting standardsetting bodies
permit or require entities that are subject to rate regulation to capitalise
and defer expenditures that nonrateregulated entities would recognise
as expenses Similarly these rateregulated entities are permitted or
required to defer income that nonrateregulated entities would
recognise in the statement of profit or loss and other comprehensive
income The resulting regulatory deferral account balances are
presented in a variety of ways They are often described as regulatory
assets’ and regulatory liabilities’ but are sometimes incorporated within
other line items in the financial statements such as property plant and
equipment
(b) there is currently no Standard in IFRS that specifically addresses the
accounting for rateregulated activities Consequently an entity is
required to determine its accounting policy for the financial effects of
rate regulation in accordance with paragraphs 10–12 of IAS 8 Accounting
Policies Changes in Accounting Estimates and Errors The IASB has not seen
evidence of significant diversity in practice within jurisdictions that are
IFRS 14
IFRS FoundationA652applying IFRS because almost all entities have eliminated regulatory
deferral account balances when making the transition to IFRS and thus
do not recognise them in IFRS financial statements However despite
this consistency of treatment within IFRS financial statements there are
different views within jurisdictions that have not yet adopted IFRS and
also within some others that have adopted IFRS on how the effects of
rate regulation should be accounted for This has resulted in several
requests to the IASB for guidance which have asked whether regulatory
deferral account balances might meet the definitions of assets and
liabilities in the Conceptual Framework for Financial Reporting (the Conceptual
Framework) depending on the terms of the rate regulation
(c) the lack of specific guidance in IFRS has resulted in various jurisdictions
that have not yet fully adopted IFRS taking different approaches to
reporting the effects of rate regulation which could reduce
comparability and transparency for users of financial statements and
(d) income and expenses that are subject to rate regulation are significant to
entities that are engaged in rateregulated activities such as those in the
utilities telecommunications and transport industries Consequently
the lack of guidance could be a significant barrier to the adoption of IFRS
for those entities
IN6 In September 2012 the IASB started a comprehensive Rateregulated Activities
project starting with a research phase to develop a Discussion Paper
IN7 In December 2012 the IASB decided to add an additional phase to the
Rateregulated Activities project to develop a limitedscope Standard to provide a
shortterm interim solution for rateregulated entities that had not yet adopted
IFRS This Standard is intended to allow entities that are firsttime adopters of
IFRS and that currently recognise regulatory deferral accounts in accordance
with their previous GAAP to continue to do so on transition to IFRS This will
allow those entities to avoid making major changes in accounting policy for
regulatory deferral accounts on transition to IFRS until the comprehensive
project is completed
IN8 However by publishing this Standard the IASB is not anticipating the outcome
of the comprehensive Rateregulated Activities project The term regulatory
deferral account balances’ has been chosen as a neutral descriptor for the items
that arise from rate regulation and that are within the scope of this Standard In
this Standard such balances are not described as regulatory assets’ or
regulatory liabilities’ because of differing views as to whether they meet the
definitions of assets or liabilities in the Conceptual Framework Consequently the
IASB’s objectives for this Standard are to
(a) enhance the comparability of financial reporting by reducing barriers to
the adoption of IFRS by entities with rateregulated activities until
guidance is developed through the IASB’s comprehensive Rateregulated
Activities project and
(b) ensure that users of financial statements will be able to clearly identify
the amounts of regulatory deferral account balances and movements in
those balances in order to be able to compare the financial statements of
IFRS 14
IFRS Foundation A653entities that recognise such balances in accordance with this Standard
against the financial statements of entities that do not recognise such
balances
Main features of this Standard
IN9 This Standard
(a) permits an entity that adopts IFRS to continue to use in its first and
subsequent IFRS financial statements its previous GAAP accounting
policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances without
specifically considering the requirements of paragraph 11 of IAS 8
(b) requires entities to present regulatory deferral account balances as
separate line items in the statement of financial position and to present
movements in those account balances as separate line items in the
statement of profit or loss and other comprehensive income and
(c) requires specific disclosures to identify the nature of and risks
associated with the rate regulation that has resulted in the recognition
of regulatory deferral account balances in accordance with this
Standard
IFRS 14
IFRS FoundationA654International Financial Reporting Standard 14
Regulatory Deferral Accounts
Objective
1 The objective of this Standard is to specify the financial reporting requirements
for regulatory deferral account balances that arise when an entity provides goods or
services to customers at a price or rate that is subject to rate regulation
2 In meeting this objective the Standard requires
(a) limited changes to the accounting policies that were applied in
accordance with previous generally accepted accounting principles
(previous GAAP) for regulatory deferral account balances which are
primarily related to the presentation of these accounts and
(b) disclosures that
(i) identify and explain the amounts recognised in the entity’s
financial statements that arise from rate regulation and
(ii) help users of the financial statements to understand the amount
timing and uncertainty of future cash flows from any regulatory
deferral account balances that are recognised
3 The requirements of this Standard permit an entity within its scope to continue
to account for regulatory deferral account balances in its financial statements in
accordance with its previous GAAP when it adopts IFRS subject to the limited
changes referred to in paragraph 2 above
4 In addition this Standard provides some exceptions to or exemptions from the
requirements of other Standards All specified requirements for reporting
regulatory deferral account balances and any exceptions to or exemptions
from the requirements of other Standards that are related to those balances are
contained within this Standard instead of within those other Standards
Scope
5 An entity is permitted to apply the requirements of this Standard in its
first IFRS financial statements if and only if it
(a) conducts rateregulated activities and
(b) recognised amounts that qualify as regulatory deferral account
balances in its financial statements in accordance with its
previous GAAP
6 An entity shall apply the requirements of this Standard in its financial
statements for subsequent periods if and only if in its first IFRS financial
statements it recognised regulatory deferral account balances by electing
to apply the requirements of this Standard
7 This Standard does not address other aspects of accounting by entities that are
engaged in rateregulated activities By applying the requirements in this
IFRS 14
IFRS Foundation A655Standard any amounts that are permitted or required to be recognised as assets
or liabilities in accordance with other Standards shall not be included within
the amounts classified as regulatory deferral account balances
8 An entity that is within the scope of and that elects to apply this
Standard shall apply all of its requirements to all regulatory deferral
account balances that arise from all of the entity’s rateregulated
activities
Recognition measurement impairment and derecognition
Temporary exemption from paragraph 11 of IAS 8
Accounting Policies Changes in Accounting Estimates
and Errors
9 An entity that has rateregulated activities and that is within the scope of
and elects to apply this Standard shall apply paragraphs 10 and 12 of
IAS 8 when developing its accounting policies for the recognition
measurement impairment and derecognition of regulatory deferral
account balances
10 Paragraphs 11–12 of IAS 8 specify sources of requirements and guidance that
management is required or permitted to consider in developing an accounting
policy for an item if no relevant Standard applies specifically to that item This
Standard exempts an entity from applying paragraph 11 of IAS 8 to its
accounting policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances Consequently entities
that recognise regulatory deferral account balances either as separate items or
as part of the carrying value of other assets and liabilities in accordance with
their previous GAAP are permitted to continue to recognise those balances in
accordance with this Standard through the exemption from paragraph 11 of
IAS 8 subject to any presentation changes required by paragraphs 18–19 of this
Standard
Continuation of existing accounting policies
11 On initial application of this Standard an entity shall continue to apply
its previous GAAP accounting policies for the recognition measurement
impairment and derecognition of regulatory deferral account balances
except for any changes permitted by paragraphs 13–15 However the
presentation of such amounts shall comply with the presentation
requirements of this Standard which may require changes to the entity’s
previous GAAP presentation policies (see paragraphs 18–19)
12 An entity shall apply the policies established in accordance with paragraph 11
consistently in subsequent periods except for any changes permitted by
paragraphs 13–15
Changes in accounting policies
13 An entity shall not change its accounting policies in order to start to
recognise regulatory deferral account balances An entity may only
change its accounting policies for the recognition measurement
IFRS 14
IFRS FoundationA656impairment and derecognition of regulatory deferral account balances if
the change makes the financial statements more relevant to the
economic decisionmaking needs of users and no less reliable1 or more
reliable and no less relevant to those needs An entity shall judge
relevance and reliability using the criteria in paragraph 10 of IAS 8
14 This Standard does not exempt entities from applying paragraphs 10 or 14–15 of
IAS 8 to changes in accounting policy To justify changing its accounting
policies for regulatory deferral account balances an entity shall demonstrate
that the change brings its financial statements closer to meeting the criteria in
paragraph 10 of IAS 8 However the change does not need to achieve full
compliance with those criteria for the recognition measurement impairment
and derecognition of regulatory deferral account balances
15 Paragraphs 13–14 apply both to changes made on initial application of this
Standard and to changes made in subsequent reporting periods
Interaction with other Standards
16 Any specific exception exemption or additional requirements related to
the interaction of this Standard with other Standards are contained
within this Standard (see paragraphs B7–B28) In the absence of any such
exception exemption or additional requirements other Standards shall
apply to regulatory deferral account balances in the same way as they
apply to assets liabilities income and expenses that are recognised in
accordance with other Standards
17 In some situations another Standard might need to be applied to a regulatory
deferral account balance that has been measured in accordance with an entity’s
accounting policies that are established in accordance with paragraphs 11–12 in
order to reflect that balance appropriately in the financial statements For
example the entity might have rateregulated activities in a foreign country for
which the transactions and regulatory deferral account balances are
denominated in a currency that is not the functional currency of the reporting
entity The regulatory deferral account balances and the movements in those
balances are translated by applying IAS 21 The Effects of Changes in Foreign Exchange
Rates
Presentation
Changes in presentation
18 This Standard introduces presentation requirements outlined in paragraphs
20–26 for regulatory deferral account balances that are recognised in
accordance with paragraphs 11–12 When this Standard is applied the
regulatory deferral account balances are recognised in the statement of financial
position in addition to the assets and liabilities that are recognised in
1 In September 2010 the IASB replaced the Framework for the Preparation and Presentation of Financial
Statements with the Conceptual Framework for Financial Reporting The term faithful representation
encompasses the main characteristics that the previous Framework called reliability The
requirement in paragraph 13 of this Standard is based on the requirements of IAS 8 which retains
the term reliable
IFRS 14
IFRS Foundation A657accordance with other Standards These presentation requirements separate the
impact of recognising regulatory deferral account balances from the financial
reporting requirements of other Standards
19 In addition to the items that are required to be presented in the statement of
financial position and in the statement(s) of profit or loss and other
comprehensive income in accordance with IAS 1 Presentation of Financial
Statements an entity applying this Standard shall present all regulatory deferral
account balances and the movements in those balances in accordance with
paragraphs 20–26
Classification of regulatory deferral account balances
20 An entity shall present separate line items in the statement of financial
position for
(a) the total of all regulatory deferral account debit balances and
(b) the total of all regulatory deferral account credit balances
21 When an entity presents current and noncurrent assets and current and
noncurrent liabilities as separate classifications in its statement of
financial position it shall not classify the totals of regulatory deferral
account balances as current or noncurrent Instead the separate line
items required by paragraph 20 shall be distinguished from the assets
and liabilities that are presented in accordance with other Standards by
the use of subtotals which are drawn before the regulatory deferral
account balances are presented
Classification of movements in regulatory deferral
account balances
22 An entity shall present in the other comprehensive income section of the
statement of profit or loss and other comprehensive income the net
movement in all regulatory deferral account balances for the reporting
period that relate to items recognised in other comprehensive income
Separate line items shall be used for the net movement related to items
that in accordance with other Standards
(a) will not be reclassified subsequently to profit or loss and
(b) will be reclassified subsequently to profit or loss when specific
conditions are met
23 An entity shall present a separate line item in the profit or loss section of
the statement of profit or loss and other comprehensive income or in the
separate statement of profit or loss for the remaining net movement in
all regulatory deferral account balances for the reporting period
excluding movements that are not reflected in profit or loss such as
amounts acquired This separate line item shall be distinguished from
the income and expenses that are presented in accordance with other
Standards by the use of a subtotal which is drawn before the net
movement in regulatory deferral account balances
IFRS 14
IFRS FoundationA65824 When an entity recognises a deferred tax asset or a deferred tax liability as a
result of recognising regulatory deferral account balances the entity shall
present the resulting deferred tax asset (liability) and the related movement in
that deferred tax asset (liability) with the related regulatory deferral account
balances and movements in those balances instead of within the total presented
in accordance with IAS 12 Income Taxes for deferred tax assets (liabilities) and the
tax expense (income) (see paragraphs B9–B12)
25 When an entity presents a discontinued operation or a disposal group in
accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations
the entity shall present any related regulatory deferral account balances and the
net movement in those balances as applicable with the regulatory deferral
account balances and movements in those balances instead of within the
disposal groups or discontinued operations (see paragraphs B19–B22)
26 When an entity presents earnings per share in accordance with IAS 33 Earnings
per Share the entity shall present additional basic and diluted earnings per
share which are calculated using the earnings amounts required by IAS 33 but
excluding the movements in regulatory deferral account balances (see
paragraphs B13–B14)
Disclosure
Objective
27 An entity that elects to apply this Standard shall disclose information
that enables users to assess
(a) the nature of and the risks associated with the rate regulation
that establishes the price(s) that the entity can charge customers
for the goods or services it provides and
(b) the effects of that rate regulation on its financial position
financial performance and cash flows
28 If any of the disclosures set out in paragraphs 30–36 are not considered relevant
to meet the objective in paragraph 27 they may be omitted from the financial
statements If the disclosures provided in accordance with paragraphs 30–36 are
insufficient to meet the objective in paragraph 27 an entity shall disclose
additional information that is necessary to meet that objective
29 To meet the disclosure objective in paragraph 27 an entity shall consider all of
the following
(a) the level of detail that is necessary to satisfy the disclosure requirements
(b) how much emphasis to place on each of the various requirements
(c) how much aggregation or disaggregation to undertake and
(d) whether users of financial statements need additional information to
evaluate the quantitative information disclosed
IFRS 14
IFRS Foundation A659Explanation of activities subject to rate regulation
30 To help a user of the financial statements assess the nature of and the risks
associated with the entity’s rateregulated activities an entity shall for each
type of rateregulated activity disclose
(a) a brief description of the nature and extent of the rateregulated activity
and the nature of the regulatory ratesetting process
(b) the identity of the rate regulator(s) If the rate regulator is a related party
(as defined in IAS 24 Related Party Disclosures) the entity shall disclose that
fact together with an explanation of how it is related
(c) how the future recovery of each class (ie each type of cost or income) of
regulatory deferral account debit balance or reversal of each class of
regulatory deferral account credit balance is affected by risks and
uncertainty for example
(i) demand risk (for example changes in consumer attitudes the
availability of alternative sources of supply or the level of
competition)
(ii) regulatory risk (for example the submission or approval of a
ratesetting application or the entity’s assessment of the expected
future regulatory actions) and
(iii) other risks (for example currency or other market risks)
31 The disclosures required by paragraph 30 shall be given in the financial
statements either directly in the notes or incorporated by crossreference from
the financial statements to some other statement such as a management
commentary or risk report that is available to users of the financial statements
on the same terms as the financial statements and at the same time If the
information is not included in the financial statements directly or incorporated
by crossreference the financial statements are incomplete
Explanation of recognised amounts
32 An entity shall disclose the basis on which regulatory deferral account balances
are recognised and derecognised and how they are measured initially and
subsequently including how regulatory deferral account balances are assessed
for recoverability and how any impairment loss is allocated
33 For each type of rateregulated activity an entity shall disclose the following
information for each class of regulatory deferral account balance
(a) a reconciliation of the carrying amount at the beginning and the end of
the period in a table unless another format is more appropriate The
entity shall apply judgement in deciding the level of detail necessary (see
paragraphs 28–29) but the following components would usually be
relevant
(i) the amounts that have been recognised in the current period in
the statement of financial position as regulatory deferral account
balances
IFRS 14
IFRS FoundationA660(ii) the amounts that have been recognised in the statement(s) of
profit or loss and other comprehensive income relating to
balances that have been recovered (sometimes described as
amortised) or reversed in the current period and
(iii) other amounts separately identified that affected the regulatory
deferral account balances such as impairments items acquired
or assumed in a business combination items disposed of or the
effects of changes in foreign exchange rates or discount rates
(b) the rate of return or discount rate (including a zero rate or a range of
rates when applicable) used to reflect the time value of money that is
applicable to each class of regulatory deferral account balance and
(c) the remaining periods over which the entity expects to recover (or
amortise) the carrying amount of each class of regulatory deferral
account debit balance or to reverse each class of regulatory deferral
account credit balance
34 When rate regulation affects the amount and timing of an entity’s income tax
expense (income) the entity shall disclose the impact of the rate regulation on
the amounts of current and deferred tax recognised In addition the entity shall
separately disclose any regulatory deferral account balance that relates to
taxation and the related movement in that balance
35 When an entity provides disclosures in accordance with IFRS 12 Disclosure of
Interests in Other Entities for an interest in a subsidiary associate or joint venture
that has rateregulated activities and for which regulatory deferral account
balances are recognised in accordance with this Standard the entity shall
disclose the amounts that are included for the regulatory deferral account debit
and credit balances and the net movement in those balances for the interests
disclosed (see paragraphs B25–B28)
36 When an entity concludes that a regulatory deferral account balance is no
longer fully recoverable or reversible it shall disclose that fact the reason why it
is not recoverable or reversible and the amount by which the regulatory deferral
account balance has been reduced
IFRS 14
IFRS Foundation A661Appendix A
Defined terms
This appendix is an integral part of the Standard
first IFRS financial
statements
The first annual financial statements in which an entity adopts
International Financial Reporting Standards (IFRS) by an explicit
and unreserved statement of compliance with IFRS
firsttime adopter An entity that presents its first IFRS financial statements
previous GAAP The basis of accounting that a firsttime adopter used
immediately before adopting IFRS
rateregulated
activities
An entity’s activities that are subject to rate regulation
rate regulation A framework for establishing the prices that can be charged to
customers for goods or services and that framework is subject to
oversight andor approval by a rate regulator
rate regulator An authorised body that is empowered by statute or regulation to
establish the rate or a range of rates that bind an entity The rate
regulator may be a thirdparty body or a related party of the
entity including the entity’s own governing board if that body is
required by statute or regulation to set rates both in the interest
of the customers and to ensure the overall financial viability of
the entity
regulatory deferral
account balance
The balance of any expense (or income) account that would not
be recognised as an asset or a liability in accordance with other
Standards but that qualifies for deferral because it is included or
is expected to be included by the rate regulator in establishing
the rate(s) that can be charged to customers
IFRS 14
IFRS FoundationA662Appendix B
Application Guidance
This appendix is an integral part of the Standard
Rateregulated activities
B1 Historically rate regulation applied to all activities of an entity However with
acquisitions diversification and deregulation rate regulation may now apply to
only a portion of an entity’s activities resulting in it having both regulated and
nonregulated activities This Standard applies only to the rateregulated
activities that are subject to statutory or regulatory restrictions through the
actions of a rate regulator regardless of the type of entity or the industry to
which it belongs
B2 An entity shall not apply this Standard to activities that are selfregulated ie
activities that are not subject to a pricing framework that is overseen andor
approved by a rate regulator This does not prevent the entity from being
eligible to apply this Standard when
(a) the entity’s own governing body or a related party establishes rates both
in the interest of the customers and to ensure the overall financial
viability of the entity within a specified pricing framework and
(b) the framework is subject to oversight andor approval by an authorised
body that is empowered by statute or regulation
Continuation of existing accounting policies
B3 For the purposes of this Standard a regulatory deferral account balance is
defined as the balance of any expense (or income) account that would not be
recognised as an asset or a liability in accordance with other Standards but that
qualifies for deferral because it is included or is expected to be included by the
rate regulator in establishing the rate(s) that can be charged to customers Some
items of expense (income) may be outside the regulated rate(s) because for
example the amounts are not expected to be accepted by the rate regulator or
because they are not within the scope of the rate regulation Consequently such
an item is recognised as income or expense as incurred unless another Standard
permits or requires it to be included in the carrying amount of an asset or
liability
B4 In some cases other Standards explicitly prohibit an entity from recognising in
the statement of financial position regulatory deferral account balances that
might be recognised either separately or included within other line items such
as property plant and equipment in accordance with previous GAAP accounting
policies However in accordance with paragraph 11 of this Standard an entity
that elects to apply this Standard in its first IFRS financial statements applies the
exemption from paragraph 11 of IAS 8 in order to continue to apply its previous
GAAP accounting policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances Such accounting policies
may include for example the following practices
IFRS 14
IFRS Foundation A663(a) recognising a regulatory deferral account debit balance when the entity
has the right as a result of the actual or expected actions of the rate
regulator to increase rates in future periods in order to recover its
allowable costs (ie the costs for which the regulated rate(s) is intended to
provide recovery)
(b) recognising as a regulatory deferral account debit or credit balance an
amount that is equivalent to any loss or gain on the disposal or
retirement of both items of property plant and equipment and of
intangible assets which is expected to be recovered or reversed through
future rates
(c) recognising a regulatory deferral account credit balance when the entity
is required as a result of the actual or expected actions of the rate
regulator to decrease rates in future periods in order to reverse
overrecoveries of allowable costs (ie amounts in excess of the recoverable
amount specified by the rate regulator) and
(d) measuring regulatory deferral account balances on an undiscounted
basis or on a discounted basis that uses an interest or discount rate
specified by the rate regulator
B5 The following are examples of the types of costs that rate regulators might allow
in ratesetting decisions and that an entity might therefore recognise in
regulatory deferral account balances
(i) volume or purchase price variances
(ii) costs of approved green energy’ initiatives (in excess of amounts that are
capitalised as part of the cost of property plant and equipment in
accordance with IAS 16 Property Plant and Equipment)
(iii) nondirectlyattributable overhead costs that are treated as capital costs
for rate regulation purposes (but are not permitted in accordance with
IAS 16 to be included in the cost of an item of property plant and
equipment)
(iv) project cancellation costs
(v) storm damage costs and
(vi) deemed interest (including amounts allowed for funds that are used
during construction that provide the entity with a return on the owner’s
equity capital as well as borrowings)
B6 Regulatory deferral account balances usually represent timing differences
between the recognition of items of income or expenses for regulatory purposes
and the recognition of those items for financial reporting purposes When an
entity changes an accounting policy on the firsttime adoption of IFRS or on the
initial application of a new or revised Standard new or revised timing
differences may arise that create new or revised regulatory deferral account
balances The prohibition in paragraph 13 that prevents an entity from
changing its accounting policy in order to start to recognise regulatory deferral
account balances does not prohibit the recognition of the new or revised
regulatory deferral account balances that are created because of other changes
IFRS 14
IFRS FoundationA664in accounting policies required by IFRS This is because the recognition of
regulatory deferral account balances for such timing differences would be
consistent with the existing recognition policy applied in accordance with
paragraph 11 and would not represent the introduction of a new accounting
policy Similarly paragraph 13 does not prohibit the recognition of regulatory
deferral account balances arising from timing differences that did not exist
immediately prior to the date of transition to IFRS but are consistent with the
entity’s accounting policies established in accordance with paragraph 11 (for
example storm damage costs)
Applicability of other Standards
B7 An entity that is within the scope of and that elects to apply the requirements
of this Standard shall continue to apply its previous GAAP accounting policies
for the recognition measurement impairment and derecognition of regulatory
deferral account balances However paragraphs 16–17 state that in some
situations other Standards might also need to be applied to regulatory deferral
account balances in order to reflect them appropriately in the financial
statements The following paragraphs outline how some other Standards
interact with the requirements of this Standard In particular the following
paragraphs clarify specific exceptions to and exemptions from other Standards
and additional presentation and disclosure requirements that are expected to be
applicable
Application of IAS 10 Events after the Reporting Period
B8 An entity may need to use estimates and assumptions in the recognition and
measurement of its regulatory deferral account balances For events that occur
between the end of the reporting period and the date when the financial
statements are authorised for issue the entity shall apply IAS 10 to identify
whether those estimates and assumptions should be adjusted to reflect those
events
Application of IAS 12 Income Taxes
B9 IAS 12 requires with certain limited exceptions an entity to recognise a
deferred tax liability and (subject to certain conditions) a deferred tax asset for
all temporary differences A rateregulated entity shall apply IAS 12 to all of its
activities including its rateregulated activities to identify the amount of
income tax that is to be recognised
B10 In some rateregulatory schemes the rate regulator permits or requires an entity
to increase its future rates in order to recover some or all of the entity’s income
tax expense In such circumstances this might result in the entity recognising a
regulatory deferral account balance in the statement of financial position
related to income tax in accordance with its accounting policies established in
accordance with paragraphs 11–12 The recognition of this regulatory deferral
account balance that relates to income tax might itself create an additional
temporary difference for which a further deferred tax amount would be
recognised
IFRS 14
IFRS Foundation A665B11 Notwithstanding the presentation and disclosure requirements of IAS 12 when
an entity recognises a deferred tax asset or a deferred tax liability as a result of
recognising regulatory deferral account balances the entity shall not include
that deferred tax amount within the total deferred tax asset (liability) balances
Instead the entity shall present the deferred tax asset (liability) that arises as a
result of recognising regulatory deferral account balances either
(a) with the line items that are presented for the regulatory deferral account
debit balances and credit balances or
(b) as a separate line item alongside the related regulatory deferral account
debit balances and credit balances
B12 Similarly when an entity recognises the movement in a deferred tax asset
(liability) that arises as a result of recognising regulatory deferral account
balances the entity shall not include the movement in that deferred tax amount
within the tax expense (income) line item that is presented in the statement(s) of
profit or loss and other comprehensive income in accordance with IAS 12
Instead the entity shall present the movement in the deferred tax asset (liability)
that arises as a result of recognising regulatory deferral account balances either
(a) with the line items that are presented in the statement(s) of profit or loss
and other comprehensive income for the movements in regulatory
deferral account balances or
(b) as a separate line item alongside the related line items that are presented
in the statement(s) of profit or loss and other comprehensive income for
the movements in regulatory deferral account balances
Application of IAS 33 Earnings per Share
B13 Paragraph 66 of IAS 33 requires some entities to present in the statement of
profit or loss and other comprehensive income basic and diluted earnings per
share both for profit or loss from continuing operations and profit or loss that is
attributable to the ordinary equity holders of the parent entity In addition
paragraph 68 of IAS 33 requires an entity that reports a discontinued operation
to disclose the basic and diluted amounts per share for the discontinued
operation either in the statement of profit or loss and other comprehensive
income or in the notes
B14 For each earnings per share amount presented in accordance with IAS 33 an
entity applying this Standard shall present additional basic and diluted earnings
per share amounts that are calculated in the same way except that those
amounts shall exclude the net movement in the regulatory deferral account
balances Consistent with the requirement in paragraph 73 of IAS 33 an entity
shall present the earnings per share required by paragraph 26 of this Standard
with equal prominence to the earnings per share required by IAS 33 for all
periods presented
Application of IAS 36 Impairment of Assets
B15 Paragraphs 11–12 require an entity to continue to apply its previous GAAP
accounting policies for the identification recognition measurement and
IFRS 14
IFRS FoundationA666reversal of any impairment of its recognised regulatory deferral account
balances Consequently IAS 36 does not apply to the separate regulatory
deferral account balances recognised
B16 However IAS 36 might require an entity to perform an impairment test on a
cashgenerating unit (CGU) that includes regulatory deferral account balances
This test might be required because the CGU contains goodwill or because one
or more of the impairment indicators described in IAS 36 have been identified
relating to the CGU In such situations paragraphs 74–79 of IAS 36 contain
requirements for identifying the recoverable amount and the carrying amount
of a CGU An entity shall apply those requirements to decide whether any of the
regulatory deferral account balances recognised are included in the carrying
amount of the CGU for the purpose of the impairment test The remaining
requirements of IAS 36 shall then be applied to any impairment loss that is
recognised as a result of this test
Application of IFRS 3 Business Combinations
B17 The core principle of IFRS 3 is that an acquirer of a business recognises the assets
acquired and the liabilities assumed at their acquisitiondate fair values IFRS 3
provides limited exceptions to its recognition and measurement principles
Paragraph B18 of this Standard provides an additional exception
B18 Paragraphs 11–12 require an entity to continue to apply its previous GAAP
accounting policies for the recognition measurement impairment and
derecognition of regulatory deferral account balances Consequently if an
entity acquires a business it shall apply in its consolidated financial statements
its accounting policies established in accordance with paragraphs 11–12 for the
recognition and measurement of the acquiree’s regulatory deferral account
balances at the date of acquisition The acquiree’s regulatory deferral account
balances shall be recognised in the consolidated financial statements of the
acquirer in accordance with the acquirer’s policies irrespective of whether the
acquiree recognises those balances in its own financial statements
Application of IFRS 5 Noncurrent Assets Held for Sale
and Discontinued Operations
B19 Paragraphs 11–12 require an entity to continue to apply its previous accounting
policies for the recognition measurement impairment and derecognition of
regulatory deferral account balances Consequently the measurement
requirements of IFRS 5 shall not apply to the regulatory deferral account
balances recognised
B20 Paragraph 33 of IFRS 5 requires a single amount to be presented for
discontinued operations in the statement(s) of profit or loss and other
comprehensive income Notwithstanding the requirements of that paragraph
when an entity that elects to apply this Standard presents a discontinued
operation it shall not include the movement in regulatory deferral account
balances that arose from the rateregulated activities of the discontinued
operation within the line items that are required by paragraph 33 of IFRS 5
IFRS 14
IFRS Foundation A667Instead the entity shall present the movement in regulatory deferral account
balances that arose from the rateregulated activities of the discontinued
operation either
(a) within the line item that is presented for movements in the regulatory
deferral account balances related to profit or loss or
(b) as a separate line item alongside the related line item that is presented
for movements in the regulatory deferral account balances related to
profit or loss
B21 Similarly notwithstanding the requirements of paragraph 38 of IFRS 5 when an
entity presents a disposal group the entity shall not include the total of the
regulatory deferral account debit balances and credit balances that are part of
the disposal group within the line items that are required by paragraph 38 of
IFRS 5 Instead the entity shall present the total of the regulatory deferral
account debit balances and credit balances that are part of the disposal group
either
(a) within the line items that are presented for the regulatory deferral
account debit balances and credit balances or
(b) as separate line items alongside the other regulatory deferral account
debit balances and credit balances
B22 If the entity chooses to include the regulatory deferral account balances and
movements in those balances that are related to the disposal group or
discontinued operation within the related regulated deferral account line items
it may be necessary to disclose them separately as part of the analysis of the
regulatory deferral account line items described by paragraph 33 of this
Standard
Application of IFRS 10 Consolidated Financial
Statements and IAS 28 Investments in Associates and
Joint Ventures
B23 Paragraph 19 of IFRS 10 requires that a parent shall prepare consolidated
financial statements using uniform accounting policies for like transactions and
other events in similar circumstances Paragraph 8 of this Standard requires
that an entity that is within the scope of and elects to apply this Standard shall
apply all of its requirements to all regulatory deferral account balances arising
from all of the entity’s rateregulated activities Consequently if a parent
recognises regulatory deferral account balances in its consolidated financial
statements in accordance with this Standard it shall apply the same accounting
policies to the regulatory deferral account balances arising in all of its
subsidiaries This shall apply irrespective of whether the subsidiaries recognise
those balances in their own financial statements
B24 Similarly paragraphs 35–36 of IAS 28 require that in applying the equity
method an entity’s financial statements shall be prepared using uniform
accounting policies for like transactions and events in similar circumstances
Consequently adjustments shall be made to make the associate’s or joint
venture’s accounting policies for the recognition measurement impairment
IFRS 14
IFRS FoundationA668and derecognition of regulatory deferral account balances conform to those of
the investing entity in applying the equity method
Application of IFRS 12 Disclosure of Interests in Other
Entities
B25 Paragraph 12(e) of IFRS 12 requires an entity to disclose for each of its
subsidiaries that have noncontrolling interests that are material to the
reporting entity the profit or loss that was allocated to noncontrolling interests
of the subsidiary during the reporting period An entity that recognises
regulatory deferral account balances in accordance with this Standard shall
disclose the net movement in regulatory deferral account balances that is
included within the amounts that are required to be disclosed by
paragraph 12(e) of IFRS 12
B26 Paragraph 12(g) of IFRS 12 requires an entity to disclose for each of its
subsidiaries that have noncontrolling interests that are material to the
reporting entity summarised financial information about the subsidiary as
specified in paragraph B10 of IFRS 12 Similarly paragraph 21(b)(ii) of IFRS 12
requires an entity to disclose for each joint venture and associate that is
material to the reporting entity summarised financial information as specified
in paragraphs B12–B13 of IFRS 12 Paragraph B16 of IFRS 12 specifies the
summary financial information that an entity is required to disclose for all other
associates and joint ventures that are not individually material in accordance
with paragraph 21(c) of IFRS 12
B27 In addition to the information specified in paragraphs 12 21 B10 B12–B13 and
B16 of IFRS 12 an entity that recognises regulatory deferral account balances in
accordance with this Standard shall also disclose the total regulatory deferral
account debit balance the total regulatory deferral account credit balance and
the net movements in those balances split between amounts recognised in
profit or loss and amounts recognised in other comprehensive income for each
entity for which those IFRS 12 disclosures are required
B28 Paragraph 19 of IFRS 12 specifies the information that an entity is required to
disclose when the entity recognises a gain or loss on losing control of a
subsidiary calculated in accordance with paragraph 25 of IFRS 10 In addition to
the information required by paragraph 19 of IFRS 12 an entity that elects to
apply this Standard shall disclose the portion of that gain or loss that is
attributable to derecognising regulatory deferral account balances in the former
subsidiary at the date when control is lost
IFRS 14
IFRS Foundation A669Appendix C
Effective date and transition
This appendix is an integral part of the Standard
Effective date and transition
Effective date
C1 An entity shall apply this Standard if its first annual IFRS financial statements
are for a period beginning on or after 1 January 2016 Earlier application is
permitted If an entity applies this Standard in its first annual IFRS financial
statements for an earlier period it shall disclose that fact
IFRS 14
IFRS FoundationA670Appendix D
Consequential amendments to IFRS 1 Firsttime Adoption
of International Financial Reporting Standards
This appendix sets out an amendment to IFRS 1 Firsttime Adoption of International
Financial Reporting Standards that is a consequence of the IASB issuing IFRS 14 An entity
shall apply the amendment for annual periods beginning on or after 1 January 2016 Earlier
application is permitted If an entity applies IFRS 14 for an earlier period the amendment shall be
applied for that earlier period
*****
The amendment contained in this appendix when this IFRS was issued in 2014 has been incorporated into
the text of IFRS 1 published in this volume
IFRS 14
IFRS Foundation A671IFRS Standard 15
Revenue from Contracts with Customers
In April 2001 the International Accounting Standards Board (the Board) adopted IAS 11
Construction Contracts and IAS 18 Revenue both of which had originally been issued by the
International Accounting Standards Committee (IASC) in December 1993 IAS 18 replaced a
previous version Revenue Recognition (issued in December 1982) IAS 11 replaced parts of
IAS 11 Accounting for Construction Contracts (issued in March 1979)
In December 2001 the Board issued SIC31 Revenue—Barter Transactions Involving Advertising
Services The Interpretation was originally developed by the Standards Interpretations
Committee of the IASC to determine the circumstances in which a seller of advertising
services can reliably measure revenue at the fair value of advertising services provided in a
barter transaction
In June 2007 the Board issued IFRIC 13 Customer Loyalty Programmes The Interpretation was
developed by the IFRS Interpretations Committee (the Interpretations Committee’) to
address the accounting by the entity that grants award credits to its customers
In July 2008 the Board issued IFRIC 15 Agreements for the Construction of Real Estate The
Interpretation was developed by the Interpretations Committee to apply to the accounting
for revenue and associated expenses by entities that undertake the construction of real
estate directly or through subcontractors
In January 2009 the Board issued IFRIC 18 Transfers of Assets from Customers The
Interpretation was developed by the Interpretations Committee to apply to the accounting
for transfers of items of property plant and equipment by entities that receive such
transfers from their customers
In May 2014 the Board issued IFRS 15 Revenue from Contracts with Customers together with the
introduction of Topic 606 into the Financial Accounting Standards Board’s Accounting
Standards Codification® IFRS 15 replaces IAS 11 IAS 18 IFRIC 13 IFRIC 15 IFRIC 18 and
SIC31 IFRS 15 provides a comprehensive framework for recognising revenue from
contracts with customers
In September 2015 the mandatory effective date of IFRS 15 was deferred to 1 January 2018
by Effective Date of IFRS 15
Other Standards have made minor consequential amendments to IFRS 15 including IFRS 16
Leases (issued January 2016)
IFRS 15
IFRS Foundation A673CONTENTS
from paragraph
INTRODUCTION IN1
INTERNATIONAL FINANCIAL REPORTING STANDARD 15
REVENUE FROM CONTRACTS WITH CUSTOMERS
OBJECTIVE 1
Meeting the objective 2
SCOPE 5
RECOGNITION 9
Identifying the contract 9
Combination of contracts 17
Contract modifications 18
Identifying performance obligations 22
Satisfaction of performance obligations 31
MEASUREMENT 46
Determining the transaction price 47
Allocating the transaction price to performance obligations 73
Changes in the transaction price 87
CONTRACT COSTS 91
Incremental costs of obtaining a contract 91
Costs to fulfil a contract 95
Amortisation and impairment 99
PRESENTATION 105
DISCLOSURE 110
Contracts with customers 113
Significant judgements in the application of this Standard 123
Assets recognised from the costs to obtain or fulfil a contract with a
customer 127
Practical expedients 129
APPENDICES
A Defined terms
B Application Guidance
C Effective date and transition
D Amendments to other Standards
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW SEE PART B OF
THIS EDITION
APPROVAL BY THE BOARD OF IFRS 15 REVENUE FROM CONTRACTS WITH
CUSTOMERS ISSUED IN MAY 2014
BASIS FOR CONCLUSIONS
IFRS 15
IFRS FoundationA674APPENDICES
A Comparison of IFRS 15 and Topic 606
B Amendments to the Basis for Conclusions on other Standards
ILLUSTRATIVE EXAMPLES
APPENDIX
Amendments to the guidance on other Standards
IFRS 15
IFRS Foundation A675International Financial Reporting Standard 15 Revenue from Contracts with Customers
(IFRS 15) is set out in paragraphs 1–129 and Appendices A–D All the paragraphs have
equal authority Paragraphs in bold type state the main principles Terms defined in
Appendix A are in italics the first time that they appear in the Standard Definitions of
other terms are given in the Glossary for International Financial Reporting Standards
The Standard should be read in the context of its objective and the Basis for Conclusions
the Preface to International Financial Reporting Standards and the Conceptual Framework for
Financial Reporting IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
provides a basis for selecting and applying accounting policies in the absence of explicit
guidance
IFRS 15
IFRS FoundationA676Introduction
Overview
IN1 International Financial Reporting Standard 15 Revenue from Contracts with
Customers (IFRS 15) establishes principles for reporting useful information to
users of financial statements about the nature amount timing and uncertainty
of revenue and cash flows arising from an entity’s contracts with customers
IN2 IFRS 15 is effective for annual periods beginning on or after 1 January 2018
Earlier application is permitted
IN3 IFRS 15 supersedes
(a) IAS 11 Construction Contracts
(b) IAS 18 Revenue
(c) IFRIC 13 Customer Loyalty Programmes
(d) IFRIC 15 Agreements for the Construction of Real Estate
(e) IFRIC 18 Transfers of Assets from Customers and
(f) SIC31 Revenue—Barter Transactions Involving Advertising Services
Reasons for issuing the IFRS
IN4 Revenue is an important number to users of financial statements in assessing an
entity’s financial performance and position However previous revenue
recognition requirements in International Financial Reporting Standards (IFRS)
differed from those in US Generally Accepted Accounting Principles (US GAAP)
and both sets of requirements were in need of improvement Previous revenue
recognition requirements in IFRS provided limited guidance and consequently
the two main revenue recognition Standards IAS 18 and IAS 11 could be
difficult to apply to complex transactions In addition IAS 18 provided limited
guidance on many important revenue topics such as accounting for
multipleelement arrangements In contrast US GAAP comprised broad revenue
recognition concepts together with numerous revenue requirements for
particular industries or transactions which sometimes resulted in different
accounting for economically similar transactions
IN5 Accordingly the International Accounting Standards Board (IASB) and the US
national standardsetter the Financial Accounting Standards Board (FASB)
initiated a joint project to clarify the principles for recognising revenue and to
develop a common revenue standard for IFRS and US GAAP that would
(a) remove inconsistencies and weaknesses in previous revenue
requirements
(b) provide a more robust framework for addressing revenue issues
(c) improve comparability of revenue recognition practices across entities
industries jurisdictions and capital markets
IFRS 15
IFRS Foundation A677(d) provide more useful information to users of financial statements
through improved disclosure requirements and
(e) simplify the preparation of financial statements by reducing the number
of requirements to which an entity must refer
IN6 IFRS 15 together with Topic 606 that was introduced into the FASB Accounting
Standards Codification® by Accounting Standards Update 201409 Revenue from
Contracts with Customers (Topic 606) completes the joint effort by the IASB and the
FASB to meet those objectives and improve financial reporting by creating a
common revenue recognition standard for IFRS and US GAAP
Main features
IN7 The core principle of IFRS 15 is that an entity recognises revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for
those goods or services An entity recognises revenue in accordance with that
core principle by applying the following steps
(a) Step 1 Identify the contract(s) with a customer—a contract is an
agreement between two or more parties that creates enforceable rights
and obligations The requirements of IFRS 15 apply to each contract that
has been agreed upon with a customer and meets specified criteria In
some cases IFRS 15 requires an entity to combine contracts and account
for them as one contract IFRS 15 also provides requirements for the
accounting for contract modifications
(b) Step 2 Identify the performance obligations in the contract—a
contract includes promises to transfer goods or services to a customer If
those goods or services are distinct the promises are performance
obligations and are accounted for separately A good or service is distinct
if the customer can benefit from the good or service on its own or
together with other resources that are readily available to the customer
and the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract
(c) Step 3 Determine the transaction price—the transaction price is the
amount of consideration in a contract to which an entity expects to be
entitled in exchange for transferring promised goods or services to a
customer The transaction price can be a fixed amount of customer
consideration but it may sometimes include variable consideration or
consideration in a form other than cash The transaction price is also
adjusted for the effects of the time value of money if the contract
includes a significant financing component and for any consideration
payable to the customer If the consideration is variable an entity
estimates the amount of consideration to which it will be entitled in
exchange for the promised goods or services The estimated amount of
variable consideration will be included in the transaction price only to
the extent that it is highly probable that a significant reversal in the
IFRS 15
IFRS FoundationA678amount of cumulative revenue recognised will not occur when the
uncertainty associated with the variable consideration is subsequently
resolved
(d) Step 4 Allocate the transaction price to the performance
obligations in the contract—an entity typically allocates the
transaction price to each performance obligation on the basis of the
relative standalone selling prices of each distinct good or service
promised in the contract If a standalone selling price is not observable
an entity estimates it Sometimes the transaction price includes a
discount or a variable amount of consideration that relates entirely to a
part of the contract The requirements specify when an entity allocates
the discount or variable consideration to one or more but not all
performance obligations (or distinct goods or services) in the contract
(e) Step 5 Recognise revenue when (or as) the entity satisfies a
performance obligation—an entity recognises revenue when (or as) it
satisfies a performance obligation by transferring a promised good or
service to a customer (which is when the customer obtains control of
that good or service) The amount of revenue recognised is the amount
allocated to the satisfied performance obligation A performance
obligation may be satisfied at a point in time (typically for promises to
transfer goods to a customer) or over time (typically for promises to
transfer services to a customer) For performance obligations satisfied
over time an entity recognises revenue over time by selecting an
appropriate method for measuring the entity’s progress towards
complete satisfaction of that performance obligation
IN8 IFRS 15 also includes a cohesive set of disclosure requirements that would result
in an entity providing users of financial statements with comprehensive
information about the nature amount timing and uncertainty of revenue and
cash flows arising from the entity’s contracts with customers Specifically
IFRS 15 requires an entity to provide information about
(a) revenue recognised from contracts with customers including the
disaggregation of revenue into appropriate categories
(b) contract balances including the opening and closing balances of
receivables contract assets and contract liabilities
(c) performance obligations including when the entity typically satisfies its
performance obligations and the transaction price that is allocated to
the remaining performance obligations in a contract
(d) significant judgements and changes in judgements made in applying
the requirements to those contracts and
(e) assets recognised from the costs to obtain or fulfil a contract with a
customer
IN9 The IASB and the FASB achieved their goal of reaching the same conclusions on
all requirements for the accounting for revenue from contracts with customers
IFRS 15
IFRS Foundation A679As a result IFRS 15 and Topic 606 are substantially the same However there are
some minor differences which are outlined in the appendix to the Basis for
Conclusions
IFRS 15
IFRS FoundationA680International Financial Reporting Standard 15
Revenue from Contracts with Customers
Objective
1 The objective of this Standard is to establish the principles that an entity
shall apply to report useful information to users of financial statements
about the nature amount timing and uncertainty of revenue and cash
flows arising from a contract with a customer
Meeting the objective
2 To meet the objective in paragraph 1 the core principle of this Standard is that
an entity shall recognise revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services
3 An entity shall consider the terms of the contract and all relevant facts and
circumstances when applying this Standard An entity shall apply this Standard
including the use of any practical expedients consistently to contracts with
similar characteristics and in similar circumstances
4 This Standard specifies the accounting for an individual contract with a
customer However as a practical expedient an entity may apply this Standard
to a portfolio of contracts (or performance obligations) with similar characteristics
if the entity reasonably expects that the effects on the financial statements of
applying this Standard to the portfolio would not differ materially from
applying this Standard to the individual contracts (or performance obligations)
within that portfolio When accounting for a portfolio an entity shall use
estimates and assumptions that reflect the size and composition of the portfolio
Scope
5 An entity shall apply this Standard to all contracts with customers except the
following
(a) lease contracts within the scope of IFRS 16 Leases
(b) insurance contracts within the scope of IFRS 4 Insurance Contracts
(c) financial instruments and other contractual rights or obligations within
the scope of IFRS 9 Financial Instruments IFRS 10 Consolidated Financial
Statements IFRS 11 Joint Arrangements IAS 27 Separate Financial Statements
and IAS 28 Investments in Associates and Joint Ventures and
(d) nonmonetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers For example this
Standard would not apply to a contract between two oil companies that
agree to an exchange of oil to fulfil demand from their customers in
different specified locations on a timely basis
IFRS 15
IFRS Foundation A6816 An entity shall apply this Standard to a contract (other than a contract listed in
paragraph 5) only if the counterparty to the contract is a customer A customer
is a party that has contracted with an entity to obtain goods or services that are
an output of the entity’s ordinary activities in exchange for consideration A
counterparty to the contract would not be a customer if for example the
counterparty has contracted with the entity to participate in an activity or
process in which the parties to the contract share in the risks and benefits that
result from the activity or process (such as developing an asset in a collaboration
arrangement) rather than to obtain the output of the entity’s ordinary activities
7 A contract with a customer may be partially within the scope of this Standard
and partially within the scope of other Standards listed in paragraph 5
(a) If the other Standards specify how to separate andor initially measure
one or more parts of the contract then an entity shall first apply the
separation andor measurement requirements in those Standards An
entity shall exclude from the transaction price the amount of the part (or
parts) of the contract that are initially measured in accordance with
other Standards and shall apply paragraphs 73–86 to allocate the
amount of the transaction price that remains (if any) to each
performance obligation within the scope of this Standard and to any
other parts of the contract identified by paragraph 7(b)
(b) If the other Standards do not specify how to separate andor initially
measure one or more parts of the contract then the entity shall apply
this Standard to separate andor initially measure the part (or parts) of
the contract
8 This Standard specifies the accounting for the incremental costs of obtaining a
contract with a customer and for the costs incurred to fulfil a contract with a
customer if those costs are not within the scope of another Standard (see
paragraphs 91–104) An entity shall apply those paragraphs only to the costs
incurred that relate to a contract with a customer (or part of that contract) that
is within the scope of this Standard
Recognition
Identifying the contract
9 An entity shall account for a contract with a customer that is within the
scope of this Standard only when all of the following criteria are met
(a) the parties to the contract have approved the contract (in writing
orally or in accordance with other customary business practices)
and are committed to perform their respective obligations
(b) the entity can identify each party’s rights regarding the goods or
services to be transferred
(c) the entity can identify the payment terms for the goods or services
to be transferred
IFRS 15
IFRS FoundationA682(d) the contract has commercial substance (ie the risk timing or
amount of the entity’s future cash flows is expected to change as a
result of the contract) and
(e) it is probable that the entity will collect the consideration to which
it will be entitled in exchange for the goods or services that will be
transferred to the customer In evaluating whether collectability
of an amount of consideration is probable an entity shall consider
only the customer’s ability and intention to pay that amount of
consideration when it is due The amount of consideration to
which the entity will be entitled may be less than the price stated
in the contract if the consideration is variable because the entity
may offer the customer a price concession (see paragraph 52)
10 A contract is an agreement between two or more parties that creates enforceable
rights and obligations Enforceability of the rights and obligations in a contract
is a matter of law Contracts can be written oral or implied by an entity’s
customary business practices The practices and processes for establishing
contracts with customers vary across legal jurisdictions industries and entities
In addition they may vary within an entity (for example they may depend on
the class of customer or the nature of the promised goods or services) An entity
shall consider those practices and processes in determining whether and when
an agreement with a customer creates enforceable rights and obligations
11 Some contracts with customers may have no fixed duration and can be
terminated or modified by either party at any time Other contracts may
automatically renew on a periodic basis that is specified in the contract An
entity shall apply this Standard to the duration of the contract (ie the
contractual period) in which the parties to the contract have present enforceable
rights and obligations
12 For the purpose of applying this Standard a contract does not exist if each party
to the contract has the unilateral enforceable right to terminate a wholly
unperformed contract without compensating the other party (or parties) A
contract is wholly unperformed if both of the following criteria are met
(a) the entity has not yet transferred any promised goods or services to the
customer and
(b) the entity has not yet received and is not yet entitled to receive any
consideration in exchange for promised goods or services
13 If a contract with a customer meets the criteria in paragraph 9 at contract
inception an entity shall not reassess those criteria unless there is an indication
of a significant change in facts and circumstances For example if a customer’s
ability to pay the consideration deteriorates significantly an entity would
reassess whether it is probable that the entity will collect the consideration to
which the entity will be entitled in exchange for the remaining goods or services
that will be transferred to the customer
14 If a contract with a customer does not meet the criteria in paragraph 9 an entity
shall continue to assess the contract to determine whether the criteria in
paragraph 9 are subsequently met
IFRS 15
IFRS Foundation A68315 When a contract with a customer does not meet the criteria in paragraph 9 and
an entity receives consideration from the customer the entity shall recognise
the consideration received as revenue only when either of the following events
has occurred
(a) the entity has no remaining obligations to transfer goods or services to
the customer and all or substantially all of the consideration promised
by the customer has been received by the entity and is nonrefundable or
(b) the contract has been terminated and the consideration received from
the customer is nonrefundable
16 An entity shall recognise the consideration received from a customer as a
liability until one of the events in paragraph 15 occurs or until the criteria in
paragraph 9 are subsequently met (see paragraph 14) Depending on the facts
and circumstances relating to the contract the liability recognised represents
the entity’s obligation to either transfer goods or services in the future or refund
the consideration received In either case the liability shall be measured at the
amount of consideration received from the customer
Combination of contracts
17 An entity shall combine two or more contracts entered into at or near the same
time with the same customer (or related parties of the customer) and account for
the contracts as a single contract if one or more of the following criteria are met
(a) the contracts are negotiated as a package with a single commercial
objective
(b) the amount of consideration to be paid in one contract depends on the
price or performance of the other contract or
(c) the goods or services promised in the contracts (or some goods or services
promised in each of the contracts) are a single performance obligation in
accordance with paragraphs 22–30
Contract modifications
18 A contract modification is a change in the scope or price (or both) of a contract
that is approved by the parties to the contract In some industries and
jurisdictions a contract modification may be described as a change order a
variation or an amendment A contract modification exists when the parties to
a contract approve a modification that either creates new or changes existing
enforceable rights and obligations of the parties to the contract A contract
modification could be approved in writing by oral agreement or implied by
customary business practices If the parties to the contract have not approved a
contract modification an entity shall continue to apply this Standard to the
existing contract until the contract modification is approved
19 A contract modification may exist even though the parties to the contract have a
dispute about the scope or price (or both) of the modification or the parties have
approved a change in the scope of the contract but have not yet determined the
corresponding change in price In determining whether the rights and
obligations that are created or changed by a modification are enforceable an
entity shall consider all relevant facts and circumstances including the terms of
IFRS 15
IFRS FoundationA684the contract and other evidence If the parties to a contract have approved a
change in the scope of the contract but have not yet determined the
corresponding change in price an entity shall estimate the change to the
transaction price arising from the modification in accordance with
paragraphs 50–54 on estimating variable consideration and paragraphs 56–58
on constraining estimates of variable consideration
20 An entity shall account for a contract modification as a separate contract if both
of the following conditions are present
(a) the scope of the contract increases because of the addition of promised
goods or services that are distinct (in accordance with paragraphs 26–30)
and
(b) the price of the contract increases by an amount of consideration that
reflects the entity’s standalone selling prices of the additional promised
goods or services and any appropriate adjustments to that price to reflect
the circumstances of the particular contract For example an entity may
adjust the standalone selling price of an additional good or service for a
discount that the customer receives because it is not necessary for the
entity to incur the sellingrelated costs that it would incur when selling a
similar good or service to a new customer
21 If a contract modification is not accounted for as a separate contract in
accordance with paragraph 20 an entity shall account for the promised goods or
services not yet transferred at the date of the contract modification (ie the
remaining promised goods or services) in whichever of the following ways is
applicable
(a) An entity shall account for the contract modification as if it were a
termination of the existing contract and the creation of a new contract
if the remaining goods or services are distinct from the goods or services
transferred on or before the date of the contract modification The
amount of consideration to be allocated to the remaining performance
obligations (or to the remaining distinct goods or services in a single
performance obligation identified in accordance with paragraph 22(b)) is
the sum of
(i) the consideration promised by the customer (including amounts
already received from the customer) that was included in the
estimate of the transaction price and that had not been
recognised as revenue and
(ii) the consideration promised as part of the contract modification
(b) An entity shall account for the contract modification as if it were a part
of the existing contract if the remaining goods or services are not
distinct and therefore form part of a single performance obligation that
is partially satisfied at the date of the contract modification The effect
that the contract modification has on the transaction price and on the
entity’s measure of progress towards complete satisfaction of the
performance obligation is recognised as an adjustment to revenue
IFRS 15
IFRS Foundation A685(either as an increase in or a reduction of revenue) at the date of the
contract modification (ie the adjustment to revenue is made on a
cumulative catchup basis)
(c) If the remaining goods or services are a combination of items (a) and (b)
then the entity shall account for the effects of the modification on the
unsatisfied (including partially unsatisfied) performance obligations in
the modified contract in a manner that is consistent with the objectives
of this paragraph
Identifying performance obligations
22 At contract inception an entity shall assess the goods or services
promised in a contract with a customer and shall identify as a
performance obligation each promise to transfer to the customer either
(a) a good or service (or a bundle of goods or services) that is distinct
or
(b) a series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the customer
(see paragraph 23)
23 A series of distinct goods or services has the same pattern of transfer to the
customer if both of the following criteria are met
(a) each distinct good or service in the series that the entity promises to
transfer to the customer would meet the criteria in paragraph 35 to be a
performance obligation satisfied over time and
(b) in accordance with paragraphs 39–40 the same method would be used
to measure the entity’s progress towards complete satisfaction of the
performance obligation to transfer each distinct good or service in the
series to the customer
Promises in contracts with customers
24 A contract with a customer generally explicitly states the goods or services that
an entity promises to transfer to a customer However the performance
obligations identified in a contract with a customer may not be limited to the
goods or services that are explicitly stated in that contract This is because a
contract with a customer may also include promises that are implied by an
entity’s customary business practices published policies or specific statements
if at the time of entering into the contract those promises create a valid
expectation of the customer that the entity will transfer a good or service to the
customer
25 Performance obligations do not include activities that an entity must undertake
to fulfil a contract unless those activities transfer a good or service to a
customer For example a services provider may need to perform various
administrative tasks to set up a contract The performance of those tasks does
not transfer a service to the customer as the tasks are performed Therefore
those setup activities are not a performance obligation
IFRS 15
IFRS FoundationA686Distinct goods or services
26 Depending on the contract promised goods or services may include but are not
limited to the following
(a) sale of goods produced by an entity (for example inventory of a
manufacturer)
(b) resale of goods purchased by an entity (for example merchandise of a
retailer)
(c) resale of rights to goods or services purchased by an entity (for example
a ticket resold by an entity acting as a principal as described in
paragraphs B34–B38)
(d) performing a contractually agreedupon task (or tasks) for a customer
(e) providing a service of standing ready to provide goods or services (for
example unspecified updates to software that are provided on a
whenandifavailable basis) or of making goods or services available for a
customer to use as and when the customer decides
(f) providing a service of arranging for another party to transfer goods or
services to a customer (for example acting as an agent of another party
as described in paragraphs B34–B38)
(g) granting rights to goods or services to be provided in the future that a
customer can resell or provide to its customer (for example an entity
selling a product to a retailer promises to transfer an additional good or
service to an individual who purchases the product from the retailer)
(h) constructing manufacturing or developing an asset on behalf of a
customer
(i) granting licences (see paragraphs B52–B63) and
(j) granting options to purchase additional goods or services (when those
options provide a customer with a material right as described in
paragraphs B39–B43)
27 A good or service that is promised to a customer is distinct if both of the
following criteria are met
(a) the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer
(ie the good or service is capable of being distinct) and
(b) the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (ie the good
or service is distinct within the context of the contract)
28 A customer can benefit from a good or service in accordance with
paragraph 27(a) if the good or service could be used consumed sold for an
amount that is greater than scrap value or otherwise held in a way that
generates economic benefits For some goods or services a customer may be
able to benefit from a good or service on its own For other goods or services a
customer may be able to benefit from the good or service only in conjunction
with other readily available resources A readily available resource is a good or
IFRS 15
IFRS Foundation A687service that is sold separately (by the entity or another entity) or a resource that
the customer has already obtained from the entity (including goods or services
that the entity will have already transferred to the customer under the contract)
or from other transactions or events Various factors may provide evidence that
the customer can benefit from a good or service either on its own or in
conjunction with other readily available resources For example the fact that
the entity regularly sells a good or service separately would indicate that a
customer can benefit from the good or service on its own or with other readily
available resources
29 Factors that indicate that an entity’s promise to transfer a good or service to a
customer is separately identifiable (in accordance with paragraph 27(b)) include
but are not limited to the following
(a) the entity does not provide a significant service of integrating the good
or service with other goods or services promised in the contract into a
bundle of goods or services that represent the combined output for
which the customer has contracted In other words the entity is not
using the good or service as an input to produce or deliver the combined
output specified by the customer
(b) the good or service does not significantly modify or customise another
good or service promised in the contract
(c) the good or service is not highly dependent on or highly interrelated
with other goods or services promised in the contract For example the
fact that a customer could decide to not purchase the good or service
without significantly affecting the other promised goods or services in
the contract might indicate that the good or service is not highly
dependent on or highly interrelated with those other promised goods
or services
30 If a promised good or service is not distinct an entity shall combine that good or
service with other promised goods or services until it identifies a bundle of
goods or services that is distinct In some cases that would result in the entity
accounting for all the goods or services promised in a contract as a single
performance obligation
Satisfaction of performance obligations
31 An entity shall recognise revenue when (or as) the entity satisfies a
performance obligation by transferring a promised good or service (ie an
asset) to a customer An asset is transferred when (or as) the customer
obtains control of that asset
32 For each performance obligation identified in accordance with
paragraphs 22–30 an entity shall determine at contract inception whether it
satisfies the performance obligation over time (in accordance with
paragraphs 35–37) or satisfies the performance obligation at a point in time (in
accordance with paragraph 38) If an entity does not satisfy a performance
obligation over time the performance obligation is satisfied at a point in time
33 Goods and services are assets even if only momentarily when they are received
and used (as in the case of many services) Control of an asset refers to the ability
IFRS 15
IFRS FoundationA688to direct the use of and obtain substantially all of the remaining benefits from
the asset Control includes the ability to prevent other entities from directing
the use of and obtaining the benefits from an asset The benefits of an asset are
the potential cash flows (inflows or savings in outflows) that can be obtained
directly or indirectly in many ways such as by
(a) using the asset to produce goods or provide services (including public
services)
(b) using the asset to enhance the value of other assets
(c) using the asset to settle liabilities or reduce expenses
(d) selling or exchanging the asset
(e) pledging the asset to secure a loan and
(f) holding the asset
34 When evaluating whether a customer obtains control of an asset an entity shall
consider any agreement to repurchase the asset (see paragraphs B64–B76)
Performance obligations satisfied over time
35 An entity transfers control of a good or service over time and therefore satisfies
a performance obligation and recognises revenue over time if one of the
following criteria is met
(a) the customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs (see
paragraphs B3–B4)
(b) the entity’s performance creates or enhances an asset (for example work
in progress) that the customer controls as the asset is created or
enhanced (see paragraph B5) or
(c) the entity’s performance does not create an asset with an alternative use
to the entity (see paragraph 36) and the entity has an enforceable right to
payment for performance completed to date (see paragraph 37)
36 An asset created by an entity’s performance does not have an alternative use to
an entity if the entity is either restricted contractually from readily directing the
asset for another use during the creation or enhancement of that asset or
limited practically from readily directing the asset in its completed state for
another use The assessment of whether an asset has an alternative use to the
entity is made at contract inception After contract inception an entity shall
not update the assessment of the alternative use of an asset unless the parties to
the contract approve a contract modification that substantively changes the
performance obligation Paragraphs B6–B8 provide guidance for assessing
whether an asset has an alternative use to an entity
37 An entity shall consider the terms of the contract as well as any laws that apply
to the contract when evaluating whether it has an enforceable right to payment
for performance completed to date in accordance with paragraph 35(c) The
right to payment for performance completed to date does not need to be for a
fixed amount However at all times throughout the duration of the contract
the entity must be entitled to an amount that at least compensates the entity for
IFRS 15
IFRS Foundation A689performance completed to date if the contract is terminated by the customer or
another party for reasons other than the entity’s failure to perform as promised
Paragraphs B9–B13 provide guidance for assessing the existence and
enforceability of a right to payment and whether an entity’s right to payment
would entitle the entity to be paid for its performance completed to date
Performance obligations satisfied at a point in time
38 If a performance obligation is not satisfied over time in accordance with
paragraphs 35–37 an entity satisfies the performance obligation at a point in
time To determine the point in time at which a customer obtains control of a
promised asset and the entity satisfies a performance obligation the entity shall
consider the requirements for control in paragraphs 31–34 In addition an
entity shall consider indicators of the transfer of control which include but are
not limited to the following
(a) The entity has a present right to payment for the asset—if a customer is
presently obliged to pay for an asset then that may indicate that the
customer has obtained the ability to direct the use of and obtain
substantially all of the remaining benefits from the asset in exchange
(b) The customer has legal title to the asset—legal title may indicate which
party to a contract has the ability to direct the use of and obtain
substantially all of the remaining benefits from an asset or to restrict
the access of other entities to those benefits Therefore the transfer of
legal title of an asset may indicate that the customer has obtained
control of the asset If an entity retains legal title solely as protection
against the customer’s failure to pay those rights of the entity would not
preclude the customer from obtaining control of an asset
(c) The entity has transferred physical possession of the asset—the
customer’s physical possession of an asset may indicate that the
customer has the ability to direct the use of and obtain substantially all
of the remaining benefits from the asset or to restrict the access of other
entities to those benefits However physical possession may not coincide
with control of an asset For example in some repurchase agreements
and in some consignment arrangements a customer or consignee may
have physical possession of an asset that the entity controls Conversely
in some billandhold arrangements the entity may have physical
possession of an asset that the customer controls Paragraphs B64–B76
B77–B78 and B79–B82 provide guidance on accounting for repurchase
agreements consignment arrangements and billandhold arrangements
respectively
(d) The customer has the significant risks and rewards of ownership of the
asset—the transfer of the significant risks and rewards of ownership of an
asset to the customer may indicate that the customer has obtained the
ability to direct the use of and obtain substantially all of the remaining
benefits from the asset However when evaluating the risks and
rewards of ownership of a promised asset an entity shall exclude any
risks that give rise to a separate performance obligation in addition to
the performance obligation to transfer the asset For example an entity
IFRS 15
IFRS FoundationA690may have transferred control of an asset to a customer but not yet
satisfied an additional performance obligation to provide maintenance
services related to the transferred asset
(e) The customer has accepted the asset—the customer’s acceptance of an
asset may indicate that it has obtained the ability to direct the use of
and obtain substantially all of the remaining benefits from the asset To
evaluate the effect of a contractual customer acceptance clause on when
control of an asset is transferred an entity shall consider the guidance in
paragraphs B83–B86
Measuring progress towards complete satisfaction of a
performance obligation
39 For each performance obligation satisfied over time in accordance with
paragraphs 35–37 an entity shall recognise revenue over time by measuring the
progress towards complete satisfaction of that performance obligation The
objective when measuring progress is to depict an entity’s performance in
transferring control of goods or services promised to a customer (ie the
satisfaction of an entity’s performance obligation)
40 An entity shall apply a single method of measuring progress for each
performance obligation satisfied over time and the entity shall apply that
method consistently to similar performance obligations and in similar
circumstances At the end of each reporting period an entity shall remeasure its
progress towards complete satisfaction of a performance obligation satisfied
over time
Methods for measuring progress
41 Appropriate methods of measuring progress include output methods and input
methods Paragraphs B14–B19 provide guidance for using output methods and
input methods to measure an entity’s progress towards complete satisfaction of
a performance obligation In determining the appropriate method for
measuring progress an entity shall consider the nature of the good or service
that the entity promised to transfer to the customer
42 When applying a method for measuring progress an entity shall exclude from
the measure of progress any goods or services for which the entity does not
transfer control to a customer Conversely an entity shall include in the
measure of progress any goods or services for which the entity does transfer
control to a customer when satisfying that performance obligation
43 As circumstances change over time an entity shall update its measure of
progress to reflect any changes in the outcome of the performance obligation
Such changes to an entity’s measure of progress shall be accounted for as a
change in accounting estimate in accordance with IAS 8 Accounting Policies
Changes in Accounting Estimates and Errors
Reasonable measures of progress
44 An entity shall recognise revenue for a performance obligation satisfied over
time only if the entity can reasonably measure its progress towards complete
satisfaction of the performance obligation An entity would not be able to
IFRS 15
IFRS Foundation A691reasonably measure its progress towards complete satisfaction of a performance
obligation if it lacks reliable information that would be required to apply an
appropriate method of measuring progress
45 In some circumstances (for example in the early stages of a contract) an entity
may not be able to reasonably measure the outcome of a performance
obligation but the entity expects to recover the costs incurred in satisfying the
performance obligation In those circumstances the entity shall recognise
revenue only to the extent of the costs incurred until such time that it can
reasonably measure the outcome of the performance obligation
Measurement
46 When (or as) a performance obligation is satisfied an entity shall
recognise as revenue the amount of the transaction price (which excludes
estimates of variable consideration that are constrained in accordance
with paragraphs 56–58) that is allocated to that performance obligation
Determining the transaction price
47 An entity shall consider the terms of the contract and its customary
business practices to determine the transaction price The transaction
price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a
customer excluding amounts collected on behalf of third parties (for
example some sales taxes) The consideration promised in a contract
with a customer may include fixed amounts variable amounts or both
48 The nature timing and amount of consideration promised by a customer affect
the estimate of the transaction price When determining the transaction price
an entity shall consider the effects of all of the following
(a) variable consideration (see paragraphs 50–55 and 59)
(b) constraining estimates of variable consideration (see paragraphs 56–58)
(c) the existence of a significant financing component in the contract (see
paragraphs 60–65)
(d) noncash consideration (see paragraphs 66–69) and
(e) consideration payable to a customer (see paragraphs 70–72)
49 For the purpose of determining the transaction price an entity shall assume
that the goods or services will be transferred to the customer as promised in
accordance with the existing contract and that the contract will not be
cancelled renewed or modified
Variable consideration
50 If the consideration promised in a contract includes a variable amount an entity
shall estimate the amount of consideration to which the entity will be entitled
in exchange for transferring the promised goods or services to a customer
51 An amount of consideration can vary because of discounts rebates refunds
credits price concessions incentives performance bonuses penalties or other
IFRS 15
IFRS FoundationA692similar items The promised consideration can also vary if an entity’s
entitlement to the consideration is contingent on the occurrence or
nonoccurrence of a future event For example an amount of consideration
would be variable if either a product was sold with a right of return or a fixed
amount is promised as a performance bonus on achievement of a specified
milestone
52 The variability relating to the consideration promised by a customer may be
explicitly stated in the contract In addition to the terms of the contract the
promised consideration is variable if either of the following circumstances
exists
(a) the customer has a valid expectation arising from an entity’s customary
business practices published policies or specific statements that the
entity will accept an amount of consideration that is less than the price
stated in the contract That is it is expected that the entity will offer a
price concession Depending on the jurisdiction industry or customer
this offer may be referred to as a discount rebate refund or credit
(b) other facts and circumstances indicate that the entity’s intention when
entering into the contract with the customer is to offer a price
concession to the customer
53 An entity shall estimate an amount of variable consideration by using either of
the following methods depending on which method the entity expects to better
predict the amount of consideration to which it will be entitled
(a) The expected value—the expected value is the sum of
probabilityweighted amounts in a range of possible consideration
amounts An expected value may be an appropriate estimate of the
amount of variable consideration if an entity has a large number of
contracts with similar characteristics
(b) The most likely amount—the most likely amount is the single most likely
amount in a range of possible consideration amounts (ie the single most
likely outcome of the contract) The most likely amount may be an
appropriate estimate of the amount of variable consideration if the
contract has only two possible outcomes (for example an entity either
achieves a performance bonus or does not)
54 An entity shall apply one method consistently throughout the contract when
estimating the effect of an uncertainty on an amount of variable consideration
to which the entity will be entitled In addition an entity shall consider all the
information (historical current and forecast) that is reasonably available to the
entity and shall identify a reasonable number of possible consideration
amounts The information that an entity uses to estimate the amount of
variable consideration would typically be similar to the information that the
entity’s management uses during the bidandproposal process and in
establishing prices for promised goods or services
Refund liabilities
55 An entity shall recognise a refund liability if the entity receives consideration
from a customer and expects to refund some or all of that consideration to the
IFRS 15
IFRS Foundation A693customer A refund liability is measured at the amount of consideration
received (or receivable) for which the entity does not expect to be entitled
(ie amounts not included in the transaction price) The refund liability (and
corresponding change in the transaction price and therefore the contract
liability) shall be updated at the end of each reporting period for changes in
circumstances To account for a refund liability relating to a sale with a right of
return an entity shall apply the guidance in paragraphs B20–B27
Constraining estimates of variable consideration
56 An entity shall include in the transaction price some or all of an amount of
variable consideration estimated in accordance with paragraph 53 only to the
extent that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur when the uncertainty associated
with the variable consideration is subsequently resolved
57 In assessing whether it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur once the uncertainty
related to the variable consideration is subsequently resolved an entity shall
consider both the likelihood and the magnitude of the revenue reversal Factors
that could increase the likelihood or the magnitude of a revenue reversal
include but are not limited to any of the following
(a) the amount of consideration is highly susceptible to factors outside the
entity’s influence Those factors may include volatility in a market the
judgement or actions of third parties weather conditions and a high risk
of obsolescence of the promised good or service
(b) the uncertainty about the amount of consideration is not expected to be
resolved for a long period of time
(c) the entity’s experience (or other evidence) with similar types of contracts
is limited or that experience (or other evidence) has limited predictive
value
(d) the entity has a practice of either offering a broad range of price
concessions or changing the payment terms and conditions of similar
contracts in similar circumstances
(e) the contract has a large number and broad range of possible
consideration amounts
58 An entity shall apply paragraph B63 to account for consideration in the form of
a salesbased or usagebased royalty that is promised in exchange for a licence of
intellectual property
Reassessment of variable consideration
59 At the end of each reporting period an entity shall update the estimated
transaction price (including updating its assessment of whether an estimate of
variable consideration is constrained) to represent faithfully the circumstances
present at the end of the reporting period and the changes in circumstances
during the reporting period The entity shall account for changes in the
transaction price in accordance with paragraphs 87–90
IFRS 15
IFRS FoundationA694The existence of a significant financing component in the contract
60 In determining the transaction price an entity shall adjust the promised
amount of consideration for the effects of the time value of money if the timing
of payments agreed to by the parties to the contract (either explicitly or
implicitly) provides the customer or the entity with a significant benefit of
financing the transfer of goods or services to the customer In those
circumstances the contract contains a significant financing component A
significant financing component may exist regardless of whether the promise of
financing is explicitly stated in the contract or implied by the payment terms
agreed to by the parties to the contract
61 The objective when adjusting the promised amount of consideration for a
significant financing component is for an entity to recognise revenue at an
amount that reflects the price that a customer would have paid for the promised
goods or services if the customer had paid cash for those goods or services when
(or as) they transfer to the customer (ie the cash selling price) An entity shall
consider all relevant facts and circumstances in assessing whether a contract
contains a financing component and whether that financing component is
significant to the contract including both of the following
(a) the difference if any between the amount of promised consideration
and the cash selling price of the promised goods or services and
(b) the combined effect of both of the following
(i) the expected length of time between when the entity transfers
the promised goods or services to the customer and when the
customer pays for those goods or services and
(ii) the prevailing interest rates in the relevant market
62 Notwithstanding the assessment in paragraph 61 a contract with a customer
would not have a significant financing component if any of the following factors
exist
(a) the customer paid for the goods or services in advance and the timing of
the transfer of those goods or services is at the discretion of the
customer
(b) a substantial amount of the consideration promised by the customer is
variable and the amount or timing of that consideration varies on the
basis of the occurrence or nonoccurrence of a future event that is not
substantially within the control of the customer or the entity (for
example if the consideration is a salesbased royalty)
(c) the difference between the promised consideration and the cash selling
price of the good or service (as described in paragraph 61) arises for
reasons other than the provision of finance to either the customer or the
entity and the difference between those amounts is proportional to the
reason for the difference For example the payment terms might
provide the entity or the customer with protection from the other party
failing to adequately complete some or all of its obligations under the
contract
IFRS 15
IFRS Foundation A69563 As a practical expedient an entity need not adjust the promised amount of
consideration for the effects of a significant financing component if the entity
expects at contract inception that the period between when the entity transfers
a promised good or service to a customer and when the customer pays for that
good or service will be one year or less
64 To meet the objective in paragraph 61 when adjusting the promised amount of
consideration for a significant financing component an entity shall use the
discount rate that would be reflected in a separate financing transaction
between the entity and its customer at contract inception That rate would
reflect the credit characteristics of the party receiving financing in the contract
as well as any collateral or security provided by the customer or the entity
including assets transferred in the contract An entity may be able to determine
that rate by identifying the rate that discounts the nominal amount of the
promised consideration to the price that the customer would pay in cash for the
goods or services when (or as) they transfer to the customer After contract
inception an entity shall not update the discount rate for changes in interest
rates or other circumstances (such as a change in the assessment of the
customer’s credit risk)
65 An entity shall present the effects of financing (interest revenue or interest
expense) separately from revenue from contracts with customers in the
statement of comprehensive income Interest revenue or interest expense is
recognised only to the extent that a contract asset (or receivable) or a contract
liability is recognised in accounting for a contract with a customer
Noncash consideration
66 To determine the transaction price for contracts in which a customer promises
consideration in a form other than cash an entity shall measure the noncash
consideration (or promise of noncash consideration) at fair value
67 If an entity cannot reasonably estimate the fair value of the noncash
consideration the entity shall measure the consideration indirectly by reference
to the standalone selling price of the goods or services promised to the customer
(or class of customer) in exchange for the consideration
68 The fair value of the noncash consideration may vary because of the form of the
consideration (for example a change in the price of a share to which an entity is
entitled to receive from a customer) If the fair value of the noncash
consideration promised by a customer varies for reasons other than only the
form of the consideration (for example the fair value could vary because of the
entity’s performance) an entity shall apply the requirements in
paragraphs 56–58
69 If a customer contributes goods or services (for example materials equipment
or labour) to facilitate an entity’s fulfilment of the contract the entity shall
assess whether it obtains control of those contributed goods or services If so
the entity shall account for the contributed goods or services as noncash
consideration received from the customer
IFRS 15
IFRS FoundationA696Consideration payable to a customer
70 Consideration payable to a customer includes cash amounts that an entity pays
or expects to pay to the customer (or to other parties that purchase the entity’s
goods or services from the customer) Consideration payable to a customer also
includes credit or other items (for example a coupon or voucher) that can be
applied against amounts owed to the entity (or to other parties that purchase
the entity’s goods or services from the customer) An entity shall account for
consideration payable to a customer as a reduction of the transaction price and
therefore of revenue unless the payment to the customer is in exchange for a
distinct good or service (as described in paragraphs 26–30) that the customer
transfers to the entity If the consideration payable to a customer includes a
variable amount an entity shall estimate the transaction price (including
assessing whether the estimate of variable consideration is constrained) in
accordance with paragraphs 50–58
71 If consideration payable to a customer is a payment for a distinct good or service
from the customer then an entity shall account for the purchase of the good or
service in the same way that it accounts for other purchases from suppliers If
the amount of consideration payable to the customer exceeds the fair value of
the distinct good or service that the entity receives from the customer then the
entity shall account for such an excess as a reduction of the transaction price If
the entity cannot reasonably estimate the fair value of the good or service
received from the customer it shall account for all of the consideration payable
to the customer as a reduction of the transaction price
72 Accordingly if consideration payable to a customer is accounted for as a
reduction of the transaction price an entity shall recognise the reduction of
revenue when (or as) the later of either of the following events occurs
(a) the entity recognises revenue for the transfer of the related goods or
services to the customer and
(b) the entity pays or promises to pay the consideration (even if the payment
is conditional on a future event) That promise might be implied by the
entity’s customary business practices
Allocating the transaction price to performance
obligations
73 The objective when allocating the transaction price is for an entity to
allocate the transaction price to each performance obligation (or distinct
good or service) in an amount that depicts the amount of consideration
to which the entity expects to be entitled in exchange for transferring the
promised goods or services to the customer
74 To meet the allocation objective an entity shall allocate the transaction price to
each performance obligation identified in the contract on a relative standalone
selling price basis in accordance with paragraphs 76–80 except as specified in
paragraphs 81–83 (for allocating discounts) and paragraphs 84–86 (for allocating
consideration that includes variable amounts)
75 Paragraphs 76–86 do not apply if a contract has only one performance
obligation However paragraphs 84–86 may apply if an entity promises to
IFRS 15
IFRS Foundation A697transfer a series of distinct goods or services identified as a single performance
obligation in accordance with paragraph 22(b) and the promised consideration
includes variable amounts
Allocation based on standalone selling prices
76 To allocate the transaction price to each performance obligation on a relative
standalone selling price basis an entity shall determine the standalone selling
price at contract inception of the distinct good or service underlying each
performance obligation in the contract and allocate the transaction price in
proportion to those standalone selling prices
77 The standalone selling price is the price at which an entity would sell a
promised good or service separately to a customer The best evidence of a
standalone selling price is the observable price of a good or service when the
entity sells that good or service separately in similar circumstances and to
similar customers A contractually stated price or a list price for a good or
service may be (but shall not be presumed to be) the standalone selling price of
that good or service
78 If a standalone selling price is not directly observable an entity shall estimate
the standalone selling price at an amount that would result in the allocation of
the transaction price meeting the allocation objective in paragraph 73 When
estimating a standalone selling price an entity shall consider all information
(including market conditions entityspecific factors and information about the
customer or class of customer) that is reasonably available to the entity In
doing so an entity shall maximise the use of observable inputs and apply
estimation methods consistently in similar circumstances
79 Suitable methods for estimating the standalone selling price of a good or service
include but are not limited to the following
(a) Adjusted market assessment approach—an entity could evaluate the
market in which it sells goods or services and estimate the price that a
customer in that market would be willing to pay for those goods or
services That approach might also include referring to prices from the
entity’s competitors for similar goods or services and adjusting those
prices as necessary to reflect the entity’s costs and margins
(b) Expected cost plus a margin approach—an entity could forecast its
expected costs of satisfying a performance obligation and then add an
appropriate margin for that good or service
(c) Residual approach—an entity may estimate the standalone selling price
by reference to the total transaction price less the sum of the observable
standalone selling prices of other goods or services promised in the
contract However an entity may use a residual approach to estimate in
accordance with paragraph 78 the standalone selling price of a good or
service only if one of the following criteria is met
(i) the entity sells the same good or service to different customers (at
or near the same time) for a broad range of amounts (ie the
selling price is highly variable because a representative
IFRS 15
IFRS FoundationA698standalone selling price is not discernible from past transactions
or other observable evidence) or
(ii) the entity has not yet established a price for that good or service
and the good or service has not previously been sold on a
standalone basis (ie the selling price is uncertain)
80 A combination of methods may need to be used to estimate the standalone
selling prices of the goods or services promised in the contract if two or more of
those goods or services have highly variable or uncertain standalone selling
prices For example an entity may use a residual approach to estimate the
aggregate standalone selling price for those promised goods or services with
highly variable or uncertain standalone selling prices and then use another
method to estimate the standalone selling prices of the individual goods or
services relative to that estimated aggregate standalone selling price
determined by the residual approach When an entity uses a combination of
methods to estimate the standalone selling price of each promised good or
service in the contract the entity shall evaluate whether allocating the
transaction price at those estimated standalone selling prices would be
consistent with the allocation objective in paragraph 73 and the requirements
for estimating standalone selling prices in paragraph 78
Allocation of a discount
81 A customer receives a discount for purchasing a bundle of goods or services if
the sum of the standalone selling prices of those promised goods or services in
the contract exceeds the promised consideration in a contract Except when an
entity has observable evidence in accordance with paragraph 82 that the entire
discount relates to only one or more but not all performance obligations in a
contract the entity shall allocate a discount proportionately to all performance
obligations in the contract The proportionate allocation of the discount in
those circumstances is a consequence of the entity allocating the transaction
price to each performance obligation on the basis of the relative standalone
selling prices of the underlying distinct goods or services
82 An entity shall allocate a discount entirely to one or more but not all
performance obligations in the contract if all of the following criteria are met
(a) the entity regularly sells each distinct good or service (or each bundle of
distinct goods or services) in the contract on a standalone basis
(b) the entity also regularly sells on a standalone basis a bundle (or bundles)
of some of those distinct goods or services at a discount to the
standalone selling prices of the goods or services in each bundle and
(c) the discount attributable to each bundle of goods or services described in
paragraph 82(b) is substantially the same as the discount in the contract
and an analysis of the goods or services in each bundle provides
observable evidence of the performance obligation (or performance
obligations) to which the entire discount in the contract belongs
83 If a discount is allocated entirely to one or more performance obligations in the
contract in accordance with paragraph 82 an entity shall allocate the discount
IFRS 15
IFRS Foundation A699before using the residual approach to estimate the standalone selling price of a
good or service in accordance with paragraph 79(c)
Allocation of variable consideration
84 Variable consideration that is promised in a contract may be attributable to the
entire contract or to a specific part of the contract such as either of the
following
(a) one or more but not all performance obligations in the contract (for
example a bonus may be contingent on an entity transferring a
promised good or service within a specified period of time) or
(b) one or more but not all distinct goods or services promised in a series of
distinct goods or services that forms part of a single performance
obligation in accordance with paragraph 22(b) (for example the
consideration promised for the second year of a twoyear cleaning service
contract will increase on the basis of movements in a specified inflation
index)
85 An entity shall allocate a variable amount (and subsequent changes to that
amount) entirely to a performance obligation or to a distinct good or service that
forms part of a single performance obligation in accordance with
paragraph 22(b) if both of the following criteria are met
(a) the terms of a variable payment relate specifically to the entity’s efforts
to satisfy the performance obligation or transfer the distinct good or
service (or to a specific outcome from satisfying the performance
obligation or transferring the distinct good or service) and
(b) allocating the variable amount of consideration entirely to the
performance obligation or the distinct good or service is consistent with
the allocation objective in paragraph 73 when considering all of the
performance obligations and payment terms in the contract
86 The allocation requirements in paragraphs 73–83 shall be applied to allocate the
remaining amount of the transaction price that does not meet the criteria in
paragraph 85
Changes in the transaction price
87 After contract inception the transaction price can change for various reasons
including the resolution of uncertain events or other changes in circumstances
that change the amount of consideration to which an entity expects to be
entitled in exchange for the promised goods or services
88 An entity shall allocate to the performance obligations in the contract any
subsequent changes in the transaction price on the same basis as at contract
inception Consequently an entity shall not reallocate the transaction price to
reflect changes in standalone selling prices after contract inception Amounts
allocated to a satisfied performance obligation shall be recognised as revenue or
as a reduction of revenue in the period in which the transaction price changes
89 An entity shall allocate a change in the transaction price entirely to one or more
but not all performance obligations or distinct goods or services promised in a
IFRS 15
IFRS FoundationA700series that forms part of a single performance obligation in accordance with
paragraph 22(b) only if the criteria in paragraph 85 on allocating variable
consideration are met
90 An entity shall account for a change in the transaction price that arises as a
result of a contract modification in accordance with paragraphs 18–21
However for a change in the transaction price that occurs after a contract
modification an entity shall apply paragraphs 87–89 to allocate the change in
the transaction price in whichever of the following ways is applicable
(a) An entity shall allocate the change in the transaction price to the
performance obligations identified in the contract before the
modification if and to the extent that the change in the transaction
price is attributable to an amount of variable consideration promised
before the modification and the modification is accounted for in
accordance with paragraph 21(a)
(b) In all other cases in which the modification was not accounted for as a
separate contract in accordance with paragraph 20 an entity shall
allocate the change in the transaction price to the performance
obligations in the modified contract (ie the performance obligations that
were unsatisfied or partially unsatisfied immediately after the
modification)
Contract costs
Incremental costs of obtaining a contract
91 An entity shall recognise as an asset the incremental costs of obtaining a
contract with a customer if the entity expects to recover those costs
92 The incremental costs of obtaining a contract are those costs that an entity
incurs to obtain a contract with a customer that it would not have incurred if
the contract had not been obtained (for example a sales commission)
93 Costs to obtain a contract that would have been incurred regardless of whether
the contract was obtained shall be recognised as an expense when incurred
unless those costs are explicitly chargeable to the customer regardless of
whether the contract is obtained
94 As a practical expedient an entity may recognise the incremental costs of
obtaining a contract as an expense when incurred if the amortisation period of
the asset that the entity otherwise would have recognised is one year or less
Costs to fulfil a contract
95 If the costs incurred in fulfilling a contract with a customer are not
within the scope of another Standard (for example IAS 2 Inventories
IAS 16 Property Plant and Equipment or IAS 38 Intangible Assets) an
entity shall recognise an asset from the costs incurred to fulfil a contract
only if those costs meet all of the following criteria
IFRS 15
IFRS Foundation A701(a) the costs relate directly to a contract or to an anticipated contract
that the entity can specifically identify (for example costs relating
to services to be provided under renewal of an existing contract or
costs of designing an asset to be transferred under a specific
contract that has not yet been approved)
(b) the costs generate or enhance resources of the entity that will be
used in satisfying (or in continuing to satisfy) performance
obligations in the future and
(c) the costs are expected to be recovered
96 For costs incurred in fulfilling a contract with a customer that are within the
scope of another Standard an entity shall account for those costs in accordance
with those other Standards
97 Costs that relate directly to a contract (or a specific anticipated contract) include
any of the following
(a) direct labour (for example salaries and wages of employees who provide
the promised services directly to the customer)
(b) direct materials (for example supplies used in providing the promised
services to a customer)
(c) allocations of costs that relate directly to the contract or to contract
activities (for example costs of contract management and supervision
insurance and depreciation of tools equipment and rightofuse assets
used in fulfilling the contract)
(d) costs that are explicitly chargeable to the customer under the contract
and
(e) other costs that are incurred only because an entity entered into the
contract (for example payments to subcontractors)
98 An entity shall recognise the following costs as expenses when incurred
(a) general and administrative costs (unless those costs are explicitly
chargeable to the customer under the contract in which case an entity
shall evaluate those costs in accordance with paragraph 97)
(b) costs of wasted materials labour or other resources to fulfil the contract
that were not reflected in the price of the contract
(c) costs that relate to satisfied performance obligations (or partially
satisfied performance obligations) in the contract (ie costs that relate to
past performance) and
(d) costs for which an entity cannot distinguish whether the costs relate to
unsatisfied performance obligations or to satisfied performance
obligations (or partially satisfied performance obligations)
Amortisation and impairment
99 An asset recognised in accordance with paragraph 91 or 95 shall be amortised on
a systematic basis that is consistent with the transfer to the customer of the
IFRS 15
IFRS FoundationA702goods or services to which the asset relates The asset may relate to goods or
services to be transferred under a specific anticipated contract (as described in
paragraph 95(a))
100 An entity shall update the amortisation to reflect a significant change in the
entity’s expected timing of transfer to the customer of the goods or services to
which the asset relates Such a change shall be accounted for as a change in
accounting estimate in accordance with IAS 8
101 An entity shall recognise an impairment loss in profit or loss to the extent that
the carrying amount of an asset recognised in accordance with paragraph 91
or 95 exceeds
(a) the remaining amount of consideration that the entity expects to receive
in exchange for the goods or services to which the asset relates less
(b) the costs that relate directly to providing those goods or services and that
have not been recognised as expenses (see paragraph 97)
102 For the purposes of applying paragraph 101 to determine the amount of
consideration that an entity expects to receive an entity shall use the principles
for determining the transaction price (except for the requirements in
paragraphs 56–58 on constraining estimates of variable consideration) and
adjust that amount to reflect the effects of the customer’s credit risk
103 Before an entity recognises an impairment loss for an asset recognised in
accordance with paragraph 91 or 95 the entity shall recognise any impairment
loss for assets related to the contract that are recognised in accordance with
another Standard (for example IAS 2 IAS 16 and IAS 38) After applying the
impairment test in paragraph 101 an entity shall include the resulting carrying
amount of the asset recognised in accordance with paragraph 91 or 95 in the
carrying amount of the cashgenerating unit to which it belongs for the purpose
of applying IAS 36 Impairment of Assets to that cashgenerating unit
104 An entity shall recognise in profit or loss a reversal of some or all of an
impairment loss previously recognised in accordance with paragraph 101 when
the impairment conditions no longer exist or have improved The increased
carrying amount of the asset shall not exceed the amount that would have been
determined (net of amortisation) if no impairment loss had been recognised
previously
Presentation
105 When either party to a contract has performed an entity shall present the
contract in the statement of financial position as a contract asset or a
contract liability depending on the relationship between the entity’s
performance and the customer’s payment An entity shall present any
unconditional rights to consideration separately as a receivable
106 If a customer pays consideration or an entity has a right to an amount of
consideration that is unconditional (ie a receivable) before the entity transfers a
good or service to the customer the entity shall present the contract as a
contract liability when the payment is made or the payment is due (whichever is
IFRS 15
IFRS Foundation A703earlier) A contract liability is an entity’s obligation to transfer goods or services
to a customer for which the entity has received consideration (or an amount of
consideration is due) from the customer
107 If an entity performs by transferring goods or services to a customer before the
customer pays consideration or before payment is due the entity shall present
the contract as a contract asset excluding any amounts presented as a
receivable A contract asset is an entity’s right to consideration in exchange for
goods or services that the entity has transferred to a customer An entity shall
assess a contract asset for impairment in accordance with IFRS 9 An
impairment of a contract asset shall be measured presented and disclosed on
the same basis as a financial asset that is within the scope of IFRS 9 (see also
paragraph 113(b))
108 A receivable is an entity’s right to consideration that is unconditional A right to
consideration is unconditional if only the passage of time is required before
payment of that consideration is due For example an entity would recognise a
receivable if it has a present right to payment even though that amount may be
subject to refund in the future An entity shall account for a receivable in
accordance with IFRS 9 Upon initial recognition of a receivable from a contract
with a customer any difference between the measurement of the receivable in
accordance with IFRS 9 and the corresponding amount of revenue recognised
shall be presented as an expense (for example as an impairment loss)
109 This Standard uses the terms contract asset’ and contract liability’ but does not
prohibit an entity from using alternative descriptions in the statement of
financial position for those items If an entity uses an alternative description for
a contract asset the entity shall provide sufficient information for a user of the
financial statements to distinguish between receivables and contract assets
Disclosure
110 The objective of the disclosure requirements is for an entity to disclose
sufficient information to enable users of financial statements to
understand the nature amount timing and uncertainty of revenue and
cash flows arising from contracts with customers To achieve that
objective an entity shall disclose qualitative and quantitative
information about all of the following
(a) its contracts with customers (see paragraphs 113–122)
(b) the significant judgements and changes in the judgements made
in applying this Standard to those contracts (see
paragraphs 123–126) and
(c) any assets recognised from the costs to obtain or fulfil a contract
with a customer in accordance with paragraph 91 or 95 (see
paragraphs 127–128)
111 An entity shall consider the level of detail necessary to satisfy the disclosure
objective and how much emphasis to place on each of the various requirements
An entity shall aggregate or disaggregate disclosures so that useful information
IFRS 15
IFRS FoundationA704is not obscured by either the inclusion of a large amount of insignificant detail
or the aggregation of items that have substantially different characteristics
112 An entity need not disclose information in accordance with this Standard if it
has provided the information in accordance with another Standard
Contracts with customers
113 An entity shall disclose all of the following amounts for the reporting period
unless those amounts are presented separately in the statement of
comprehensive income in accordance with other Standards
(a) revenue recognised from contracts with customers which the entity
shall disclose separately from its other sources of revenue and
(b) any impairment losses recognised (in accordance with IFRS 9) on any
receivables or contract assets arising from an entity’s contracts with
customers which the entity shall disclose separately from impairment
losses from other contracts
Disaggregation of revenue
114 An entity shall disaggregate revenue recognised from contracts with customers
into categories that depict how the nature amount timing and uncertainty of
revenue and cash flows are affected by economic factors An entity shall apply
the guidance in paragraphs B87–B89 when selecting the categories to use to
disaggregate revenue
115 In addition an entity shall disclose sufficient information to enable users of
financial statements to understand the relationship between the disclosure of
disaggregated revenue (in accordance with paragraph 114) and revenue
information that is disclosed for each reportable segment if the entity applies
IFRS 8 Operating Segments
Contract balances
116 An entity shall disclose all of the following
(a) the opening and closing balances of receivables contract assets and
contract liabilities from contracts with customers if not otherwise
separately presented or disclosed
(b) revenue recognised in the reporting period that was included in the
contract liability balance at the beginning of the period and
(c) revenue recognised in the reporting period from performance
obligations satisfied (or partially satisfied) in previous periods (for
example changes in transaction price)
117 An entity shall explain how the timing of satisfaction of its performance
obligations (see paragraph 119(a)) relates to the typical timing of payment (see
paragraph 119(b)) and the effect that those factors have on the contract asset and
the contract liability balances The explanation provided may use qualitative
information
118 An entity shall provide an explanation of the significant changes in the contract
asset and the contract liability balances during the reporting period The
IFRS 15
IFRS Foundation A705explanation shall include qualitative and quantitative information Examples of
changes in the entity’s balances of contract assets and contract liabilities include
any of the following
(a) changes due to business combinations
(b) cumulative catchup adjustments to revenue that affect the
corresponding contract asset or contract liability including adjustments
arising from a change in the measure of progress a change in an
estimate of the transaction price (including any changes in the
assessment of whether an estimate of variable consideration is
constrained) or a contract modification
(c) impairment of a contract asset
(d) a change in the time frame for a right to consideration to become
unconditional (ie for a contract asset to be reclassified to a receivable)
and
(e) a change in the time frame for a performance obligation to be satisfied
(ie for the recognition of revenue arising from a contract liability)
Performance obligations
119 An entity shall disclose information about its performance obligations in
contracts with customers including a description of all of the following
(a) when the entity typically satisfies its performance obligations (for
example upon shipment upon delivery as services are rendered or
upon completion of service) including when performance obligations
are satisfied in a billandhold arrangement
(b) the significant payment terms (for example when payment is typically
due whether the contract has a significant financing component
whether the consideration amount is variable and whether the estimate
of variable consideration is typically constrained in accordance with
paragraphs 56–58)
(c) the nature of the goods or services that the entity has promised to
transfer highlighting any performance obligations to arrange for
another party to transfer goods or services (ie if the entity is acting as an
agent)
(d) obligations for returns refunds and other similar obligations and
(e) types of warranties and related obligations
Transaction price allocated to the remaining performance
obligations
120 An entity shall disclose the following information about its remaining
performance obligations
(a) the aggregate amount of the transaction price allocated to the
performance obligations that are unsatisfied (or partially unsatisfied) as
of the end of the reporting period and
IFRS 15
IFRS FoundationA706(b) an explanation of when the entity expects to recognise as revenue the
amount disclosed in accordance with paragraph 120(a) which the entity
shall disclose in either of the following ways
(i) on a quantitative basis using the time bands that would be most
appropriate for the duration of the remaining performance
obligations or
(ii) by using qualitative information
121 As a practical expedient an entity need not disclose the information in
paragraph 120 for a performance obligation if either of the following conditions
is met
(a) the performance obligation is part of a contract that has an original
expected duration of one year or less or
(b) the entity recognises revenue from the satisfaction of the performance
obligation in accordance with paragraph B16
122 An entity shall explain qualitatively whether it is applying the practical
expedient in paragraph 121 and whether any consideration from contracts with
customers is not included in the transaction price and therefore not included
in the information disclosed in accordance with paragraph 120 For example an
estimate of the transaction price would not include any estimated amounts of
variable consideration that are constrained (see paragraphs 56–58)
Significant judgements in the application of this
Standard
123 An entity shall disclose the judgements and changes in the judgements made
in applying this Standard that significantly affect the determination of the
amount and timing of revenue from contracts with customers In particular an
entity shall explain the judgements and changes in the judgements used in
determining both of the following
(a) the timing of satisfaction of performance obligations (see
paragraphs 124–125) and
(b) the transaction price and the amounts allocated to performance
obligations (see paragraph 126)
Determining the timing of satisfaction of performance obligations
124 For performance obligations that an entity satisfies over time an entity shall
disclose both of the following
(a) the methods used to recognise revenue (for example a description of the
output methods or input methods used and how those methods are
applied) and
(b) an explanation of why the methods used provide a faithful depiction of
the transfer of goods or services
125 For performance obligations satisfied at a point in time an entity shall disclose
the significant judgements made in evaluating when a customer obtains control
of promised goods or services
IFRS 15
IFRS Foundation A707Determining the transaction price and the amounts allocated to
performance obligations
126 An entity shall disclose information about the methods inputs and assumptions
used for all of the following
(a) determining the transaction price which includes but is not limited to
estimating variable consideration adjusting the consideration for the
effects of the time value of money and measuring noncash
consideration
(b) assessing whether an estimate of variable consideration is constrained
(c) allocating the transaction price including estimating standalone selling
prices of promised goods or services and allocating discounts and
variable consideration to a specific part of the contract (if applicable)
and
(d) measuring obligations for returns refunds and other similar obligations
Assets recognised from the costs to obtain or fulfil a
contract with a customer
127 An entity shall describe both of the following
(a) the judgements made in determining the amount of the costs incurred
to obtain or fulfil a contract with a customer (in accordance with
paragraph 91 or 95) and
(b) the method it uses to determine the amortisation for each reporting
period
128 An entity shall disclose all of the following
(a) the closing balances of assets recognised from the costs incurred to
obtain or fulfil a contract with a customer (in accordance with
paragraph 91 or 95) by main category of asset (for example costs to
obtain contracts with customers precontract costs and setup costs) and
(b) the amount of amortisation and any impairment losses recognised in the
reporting period
Practical expedients
129 If an entity elects to use the practical expedient in either paragraph 63 (about
the existence of a significant financing component) or paragraph 94 (about the
incremental costs of obtaining a contract) the entity shall disclose that fact
IFRS 15
IFRS FoundationA708Appendix A
Defined terms
This appendix is an integral part of the Standard
contract An agreement between two or more parties that creates
enforceable rights and obligations
contract asset An entity’s right to consideration in exchange for goods or
services that the entity has transferred to a customer when that
right is conditioned on something other than the passage of time
(for example the entity’s future performance)
contract liability An entity’s obligation to transfer goods or services to a customer
for which the entity has received consideration (or the amount is
due) from the customer
customer A party that has contracted with an entity to obtain goods or
services that are an output of the entity’s ordinary activities in
exchange for consideration
income Increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of
liabilities that result in an increase in equity other than those
relating to contributions from equity participants
performance
obligation
A promise in a contract with a customer to transfer to the
customer either
(a) a good or service (or a bundle of goods or services) that is
distinct or
(b) a series of distinct goods or services that are substantially
the same and that have the same pattern of transfer to the
customer
revenue Income arising in the course of an entity’s ordinary activities
standalone selling
price
(of a good or service)
The price at which an entity would sell a promised good or
service separately to a customer
transaction price
(for a contract with a
customer)
The amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services
to a customer excluding amounts collected on behalf of third
parties
IFRS 15
IFRS Foundation A709Appendix B
Application Guidance
This appendix is an integral part of the Standard It describes the application of paragraphs 1–129
and has the same authority as the other parts of the Standard
B1 This application guidance is organised into the following categories
(a) performance obligations satisfied over time (paragraphs B2–B13)
(b) methods for measuring progress towards complete satisfaction of a
performance obligation (paragraphs B14–B19)
(c) sale with a right of return (paragraphs B20–B27)
(d) warranties (paragraphs B28–B33)
(e) principal versus agent considerations (paragraphs B34–B38)
(f) customer options for additional goods or services (paragraphs B39–B43)
(g) customers’ unexercised rights (paragraphs B44–B47)
(h) nonrefundable upfront fees (and some related costs)
(paragraphs B48–B51)
(i) licensing (paragraphs B52–B63)
(j) repurchase agreements (paragraphs B64–B76)
(k) consignment arrangements (paragraphs B77–B78)
(l) billandhold arrangements (paragraphs B79–B82)
(m) customer acceptance (paragraphs B83–B86) and
(n) disclosure of disaggregated revenue (paragraphs B87–B89)
Performance obligations satisfied over time
B2 In accordance with paragraph 35 a performance obligation is satisfied over time
if one of the following criteria is met
(a) the customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs (see
paragraphs B3–B4)
(b) the entity’s performance creates or enhances an asset (for example work
in progress) that the customer controls as the asset is created or
enhanced (see paragraph B5) or
(c) the entity’s performance does not create an asset with an alternative use
to the entity (see paragraphs B6–B8) and the entity has an enforceable
right to payment for performance completed to date (see
paragraphs B9–B13)
Simultaneous receipt and consumption of the benefits of the
entity’s performance (paragraph 35(a))
B3 For some types of performance obligations the assessment of whether a
customer receives the benefits of an entity’s performance as the entity performs
IFRS 15
IFRS FoundationA710and simultaneously consumes those benefits as they are received will be
straightforward Examples include routine or recurring services (such as a
cleaning service) in which the receipt and simultaneous consumption by the
customer of the benefits of the entity’s performance can be readily identified
B4 For other types of performance obligations an entity may not be able to readily
identify whether a customer simultaneously receives and consumes the benefits
from the entity’s performance as the entity performs In those circumstances a
performance obligation is satisfied over time if an entity determines that
another entity would not need to substantially reperform the work that the
entity has completed to date if that other entity were to fulfil the remaining
performance obligation to the customer In determining whether another
entity would not need to substantially reperform the work the entity has
completed to date an entity shall make both of the following assumptions
(a) disregard potential contractual restrictions or practical limitations that
otherwise would prevent the entity from transferring the remaining
performance obligation to another entity and
(b) presume that another entity fulfilling the remainder of the performance
obligation would not have the benefit of any asset that is presently
controlled by the entity and that would remain controlled by the entity
if the performance obligation were to transfer to another entity
Customer controls the asset as it is created or enhanced
(paragraph 35(b))
B5 In determining whether a customer controls an asset as it is created or enhanced
in accordance with paragraph 35(b) an entity shall apply the requirements for
control in paragraphs 31–34 and 38 The asset that is being created or enhanced
(for example a workinprogress asset) could be either tangible or intangible
Entity’s performance does not create an asset with an alternative
use (paragraph 35(c))
B6 In assessing whether an asset has an alternative use to an entity in accordance
with paragraph 36 an entity shall consider the effects of contractual restrictions
and practical limitations on the entity’s ability to readily direct that asset for
another use such as selling it to a different customer The possibility of the
contract with the customer being terminated is not a relevant consideration in
assessing whether the entity would be able to readily direct the asset for another
use
B7 A contractual restriction on an entity’s ability to direct an asset for another use
must be substantive for the asset not to have an alternative use to the entity A
contractual restriction is substantive if a customer could enforce its rights to the
promised asset if the entity sought to direct the asset for another use In
contrast a contractual restriction is not substantive if for example an asset is
largely interchangeable with other assets that the entity could transfer to
another customer without breaching the contract and without incurring
significant costs that otherwise would not have been incurred in relation to that
contract
IFRS 15
IFRS Foundation A711B8 A practical limitation on an entity’s ability to direct an asset for another use
exists if an entity would incur significant economic losses to direct the asset for
another use A significant economic loss could arise because the entity either
would incur significant costs to rework the asset or would only be able to sell the
asset at a significant loss For example an entity may be practically limited from
redirecting assets that either have design specifications that are unique to a
customer or are located in remote areas
Right to payment for performance completed to date
(paragraph 35(c))
B9 In accordance with paragraph 37 an entity has a right to payment for
performance completed to date if the entity would be entitled to an amount that
at least compensates the entity for its performance completed to date in the
event that the customer or another party terminates the contract for reasons
other than the entity’s failure to perform as promised An amount that would
compensate an entity for performance completed to date would be an amount
that approximates the selling price of the goods or services transferred to date
(for example recovery of the costs incurred by an entity in satisfying the
performance obligation plus a reasonable profit margin) rather than
compensation for only the entity’s potential loss of profit if the contract were to
be terminated Compensation for a reasonable profit margin need not equal the
profit margin expected if the contract was fulfilled as promised but an entity
should be entitled to compensation for either of the following amounts
(a) a proportion of the expected profit margin in the contract that
reasonably reflects the extent of the entity’s performance under the
contract before termination by the customer (or another party) or
(b) a reasonable return on the entity’s cost of capital for similar contracts (or
the entity’s typical operating margin for similar contracts) if the
contractspecific margin is higher than the return the entity usually
generates from similar contracts
B10 An entity’s right to payment for performance completed to date need not be a
present unconditional right to payment In many cases an entity will have an
unconditional right to payment only at an agreedupon milestone or upon
complete satisfaction of the performance obligation In assessing whether it has
a right to payment for performance completed to date an entity shall consider
whether it would have an enforceable right to demand or retain payment for
performance completed to date if the contract were to be terminated before
completion for reasons other than the entity’s failure to perform as promised
B11 In some contracts a customer may have a right to terminate the contract only at
specified times during the life of the contract or the customer might not have
any right to terminate the contract If a customer acts to terminate a contract
without having the right to terminate the contract at that time (including when
a customer fails to perform its obligations as promised) the contract (or other
laws) might entitle the entity to continue to transfer to the customer the goods
or services promised in the contract and require the customer to pay the
consideration promised in exchange for those goods or services In those
circumstances an entity has a right to payment for performance completed to
IFRS 15
IFRS FoundationA712date because the entity has a right to continue to perform its obligations in
accordance with the contract and to require the customer to perform its
obligations (which include paying the promised consideration)
B12 In assessing the existence and enforceability of a right to payment for
performance completed to date an entity shall consider the contractual terms
as well as any legislation or legal precedent that could supplement or override
those contractual terms This would include an assessment of whether
(a) legislation administrative practice or legal precedent confers upon the
entity a right to payment for performance to date even though that right
is not specified in the contract with the customer
(b) relevant legal precedent indicates that similar rights to payment for
performance completed to date in similar contracts have no binding
legal effect or
(c) an entity’s customary business practices of choosing not to enforce a
right to payment has resulted in the right being rendered unenforceable
in that legal environment However notwithstanding that an entity may
choose to waive its right to payment in similar contracts an entity would
continue to have a right to payment to date if in the contract with the
customer its right to payment for performance to date remains
enforceable
B13 The payment schedule specified in a contract does not necessarily indicate
whether an entity has an enforceable right to payment for performance
completed to date Although the payment schedule in a contract specifies the
timing and amount of consideration that is payable by a customer the payment
schedule might not necessarily provide evidence of the entity’s right to payment
for performance completed to date This is because for example the contract
could specify that the consideration received from the customer is refundable
for reasons other than the entity failing to perform as promised in the contract
Methods for measuring progress towards complete
satisfaction of a performance obligation
B14 Methods that can be used to measure an entity’s progress towards complete
satisfaction of a performance obligation satisfied over time in accordance with
paragraphs 35–37 include the following
(a) output methods (see paragraphs B15–B17) and
(b) input methods (see paragraphs B18–B19)
Output methods
B15 Output methods recognise revenue on the basis of direct measurements of the
value to the customer of the goods or services transferred to date relative to the
remaining goods or services promised under the contract Output methods
include methods such as surveys of performance completed to date appraisals
of results achieved milestones reached time elapsed and units produced or
units delivered When an entity evaluates whether to apply an output method
to measure its progress the entity shall consider whether the output selected
would faithfully depict the entity’s performance towards complete satisfaction
IFRS 15
IFRS Foundation A713of the performance obligation An output method would not provide a faithful
depiction of the entity’s performance if the output selected would fail to
measure some of the goods or services for which control has transferred to the
customer For example output methods based on units produced or units
delivered would not faithfully depict an entity’s performance in satisfying a
performance obligation if at the end of the reporting period the entity’s
performance has produced work in progress or finished goods controlled by the
customer that are not included in the measurement of the output
B16 As a practical expedient if an entity has a right to consideration from a
customer in an amount that corresponds directly with the value to the customer
of the entity’s performance completed to date (for example a service contract in
which an entity bills a fixed amount for each hour of service provided) the
entity may recognise revenue in the amount to which the entity has a right to
invoice
B17 The disadvantages of output methods are that the outputs used to measure
progress may not be directly observable and the information required to apply
them may not be available to an entity without undue cost Therefore an input
method may be necessary
Input methods
B18 Input methods recognise revenue on the basis of the entity’s efforts or inputs to
the satisfaction of a performance obligation (for example resources consumed
labour hours expended costs incurred time elapsed or machine hours used)
relative to the total expected inputs to the satisfaction of that performance
obligation If the entity’s efforts or inputs are expended evenly throughout the
performance period it may be appropriate for the entity to recognise revenue on
a straightline basis
B19 A shortcoming of input methods is that there may not be a direct relationship
between an entity’s inputs and the transfer of control of goods or services to a
customer Therefore an entity shall exclude from an input method the effects of
any inputs that in accordance with the objective of measuring progress in
paragraph 39 do not depict the entity’s performance in transferring control of
goods or services to the customer For instance when using a costbased input
method an adjustment to the measure of progress may be required in the
following circumstances
(a) When a cost incurred does not contribute to an entity’s progress in
satisfying the performance obligation For example an entity would not
recognise revenue on the basis of costs incurred that are attributable to
significant inefficiencies in the entity’s performance that were not
reflected in the price of the contract (for example the costs of
unexpected amounts of wasted materials labour or other resources that
were incurred to satisfy the performance obligation)
(b) When a cost incurred is not proportionate to the entity’s progress in
satisfying the performance obligation In those circumstances the best
depiction of the entity’s performance may be to adjust the input method
to recognise revenue only to the extent of that cost incurred For
example a faithful depiction of an entity’s performance might be to
IFRS 15
IFRS FoundationA714recognise revenue at an amount equal to the cost of a good used to
satisfy a performance obligation if the entity expects at contract
inception that all of the following conditions would be met
(i) the good is not distinct
(ii) the customer is expected to obtain control of the good
significantly before receiving services related to the good
(iii) the cost of the transferred good is significant relative to the total
expected costs to completely satisfy the performance obligation
and
(iv) the entity procures the good from a third party and is not
significantly involved in designing and manufacturing the good
(but the entity is acting as a principal in accordance with
paragraphs B34–B38)
Sale with a right of return
B20 In some contracts an entity transfers control of a product to a customer and also
grants the customer the right to return the product for various reasons (such as
dissatisfaction with the product) and receive any combination of the following
(a) a full or partial refund of any consideration paid
(b) a credit that can be applied against amounts owed or that will be owed
to the entity and
(c) another product in exchange
B21 To account for the transfer of products with a right of return (and for some
services that are provided subject to a refund) an entity shall recognise all of the
following
(a) revenue for the transferred products in the amount of consideration to
which the entity expects to be entitled (therefore revenue would not be
recognised for the products expected to be returned)
(b) a refund liability and
(c) an asset (and corresponding adjustment to cost of sales) for its right to
recover products from customers on settling the refund liability
B22 An entity’s promise to stand ready to accept a returned product during the
return period shall not be accounted for as a performance obligation in addition
to the obligation to provide a refund
B23 An entity shall apply the requirements in paragraphs 47–72 (including the
requirements for constraining estimates of variable consideration in
paragraphs 56–58) to determine the amount of consideration to which the entity
expects to be entitled (ie excluding the products expected to be returned) For
any amounts received (or receivable) for which an entity does not expect to be
entitled the entity shall not recognise revenue when it transfers products to
customers but shall recognise those amounts received (or receivable) as a refund
liability Subsequently at the end of each reporting period the entity shall
update its assessment of amounts for which it expects to be entitled in exchange
IFRS 15
IFRS Foundation A715for the transferred products and make a corresponding change to the
transaction price and therefore in the amount of revenue recognised
B24 An entity shall update the measurement of the refund liability at the end of each
reporting period for changes in expectations about the amount of refunds An
entity shall recognise corresponding adjustments as revenue (or reductions of
revenue)
B25 An asset recognised for an entity’s right to recover products from a customer on
settling a refund liability shall initially be measured by reference to the former
carrying amount of the product (for example inventory) less any expected costs
to recover those products (including potential decreases in the value to the
entity of returned products) At the end of each reporting period an entity shall
update the measurement of the asset arising from changes in expectations about
products to be returned An entity shall present the asset separately from the
refund liability
B26 Exchanges by customers of one product for another of the same type quality
condition and price (for example one colour or size for another) are not
considered returns for the purposes of applying this Standard
B27 Contracts in which a customer may return a defective product in exchange for a
functioning product shall be evaluated in accordance with the guidance on
warranties in paragraphs B28–B33
Warranties
B28 It is common for an entity to provide (in accordance with the contract the law
or the entity’s customary business practices) a warranty in connection with the
sale of a product (whether a good or service) The nature of a warranty can vary
significantly across industries and contracts Some warranties provide a
customer with assurance that the related product will function as the parties
intended because it complies with agreedupon specifications Other warranties
provide the customer with a service in addition to the assurance that the
product complies with agreedupon specifications
B29 If a customer has the option to purchase a warranty separately (for example
because the warranty is priced or negotiated separately) the warranty is a
distinct service because the entity promises to provide the service to the
customer in addition to the product that has the functionality described in the
contract In those circumstances an entity shall account for the promised
warranty as a performance obligation in accordance with paragraphs 22–30 and
allocate a portion of the transaction price to that performance obligation in
accordance with paragraphs 73–86
B30 If a customer does not have the option to purchase a warranty separately an
entity shall account for the warranty in accordance with IAS 37 Provisions
Contingent Liabilities and Contingent Assets unless the promised warranty or a part
of the promised warranty provides the customer with a service in addition to
the assurance that the product complies with agreedupon specifications
B31 In assessing whether a warranty provides a customer with a service in addition
to the assurance that the product complies with agreedupon specifications an
entity shall consider factors such as
IFRS 15
IFRS FoundationA716(a) Whether the warranty is required by law—if the entity is required by law
to provide a warranty the existence of that law indicates that the
promised warranty is not a performance obligation because such
requirements typically exist to protect customers from the risk of
purchasing defective products
(b) The length of the warranty coverage period—the longer the coverage
period the more likely it is that the promised warranty is a performance
obligation because it is more likely to provide a service in addition to the
assurance that the product complies with agreedupon specifications
(c) The nature of the tasks that the entity promises to perform—if it is
necessary for an entity to perform specified tasks to provide the
assurance that a product complies with agreedupon specifications (for
example a return shipping service for a defective product) then those
tasks likely do not give rise to a performance obligation
B32 If a warranty or a part of a warranty provides a customer with a service in
addition to the assurance that the product complies with agreedupon
specifications the promised service is a performance obligation Therefore an
entity shall allocate the transaction price to the product and the service If an
entity promises both an assurancetype warranty and a servicetype warranty but
cannot reasonably account for them separately the entity shall account for both
of the warranties together as a single performance obligation
B33 A law that requires an entity to pay compensation if its products cause harm or
damage does not give rise to a performance obligation For example a
manufacturer might sell products in a jurisdiction in which the law holds the
manufacturer liable for any damages (for example to personal property) that
might be caused by a consumer using a product for its intended purpose
Similarly an entity’s promise to indemnify the customer for liabilities and
damages arising from claims of patent copyright trademark or other
infringement by the entity’s products does not give rise to a performance
obligation The entity shall account for such obligations in accordance with
IAS 37
Principal versus agent considerations
B34 When another party is involved in providing goods or services to a customer the
entity shall determine whether the nature of its promise is a performance
obligation to provide the specified goods or services itself (ie the entity is a
principal) or to arrange for the other party to provide those goods or services
(ie the entity is an agent)
B35 An entity is a principal if the entity controls a promised good or service before
the entity transfers the good or service to a customer However an entity is not
necessarily acting as a principal if the entity obtains legal title of a product only
momentarily before legal title is transferred to a customer An entity that is a
principal in a contract may satisfy a performance obligation by itself or it may
engage another party (for example a subcontractor) to satisfy some or all of a
performance obligation on its behalf When an entity that is a principal satisfies
IFRS 15
IFRS Foundation A717a performance obligation the entity recognises revenue in the gross amount of
consideration to which it expects to be entitled in exchange for those goods or
services transferred
B36 An entity is an agent if the entity’s performance obligation is to arrange for the
provision of goods or services by another party When an entity that is an agent
satisfies a performance obligation the entity recognises revenue in the amount
of any fee or commission to which it expects to be entitled in exchange for
arranging for the other party to provide its goods or services An entity’s fee or
commission might be the net amount of consideration that the entity retains
after paying the other party the consideration received in exchange for the
goods or services to be provided by that party
B37 Indicators that an entity is an agent (and therefore does not control the good or
service before it is provided to a customer) include the following
(a) another party is primarily responsible for fulfilling the contract
(b) the entity does not have inventory risk before or after the goods have
been ordered by a customer during shipping or on return
(c) the entity does not have discretion in establishing prices for the other
party’s goods or services and therefore the benefit that the entity can
receive from those goods or services is limited
(d) the entity’s consideration is in the form of a commission and
(e) the entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party’s goods or services
B38 If another entity assumes the entity’s performance obligations and contractual
rights in the contract so that the entity is no longer obliged to satisfy the
performance obligation to transfer the promised good or service to the customer
(ie the entity is no longer acting as the principal) the entity shall not recognise
revenue for that performance obligation Instead the entity shall evaluate
whether to recognise revenue for satisfying a performance obligation to obtain a
contract for the other party (ie whether the entity is acting as an agent)
Customer options for additional goods or services
B39 Customer options to acquire additional goods or services for free or at a discount
come in many forms including sales incentives customer award credits (or
points) contract renewal options or other discounts on future goods or services
B40 If in a contract an entity grants a customer the option to acquire additional
goods or services that option gives rise to a performance obligation in the
contract only if the option provides a material right to the customer that it
would not receive without entering into that contract (for example a discount
that is incremental to the range of discounts typically given for those goods or
services to that class of customer in that geographical area or market) If the
option provides a material right to the customer the customer in effect pays the
entity in advance for future goods or services and the entity recognises revenue
when those future goods or services are transferred or when the option expires
IFRS 15
IFRS FoundationA718B41 If a customer has the option to acquire an additional good or service at a price
that would reflect the standalone selling price for that good or service that
option does not provide the customer with a material right even if the option
can be exercised only by entering into a previous contract In those cases the
entity has made a marketing offer that it shall account for in accordance with
this Standard only when the customer exercises the option to purchase the
additional goods or services
B42 Paragraph 74 requires an entity to allocate the transaction price to performance
obligations on a relative standalone selling price basis If the standalone selling
price for a customer’s option to acquire additional goods or services is not
directly observable an entity shall estimate it That estimate shall reflect the
discount that the customer would obtain when exercising the option adjusted
for both of the following
(a) any discount that the customer could receive without exercising the
option and
(b) the likelihood that the option will be exercised
B43 If a customer has a material right to acquire future goods or services and those
goods or services are similar to the original goods or services in the contract and
are provided in accordance with the terms of the original contract then an
entity may as a practical alternative to estimating the standalone selling price
of the option allocate the transaction price to the optional goods or services by
reference to the goods or services expected to be provided and the corresponding
expected consideration Typically those types of options are for contract
renewals
Customers’ unexercised rights
B44 In accordance with paragraph 106 upon receipt of a prepayment from a
customer an entity shall recognise a contract liability in the amount of the
prepayment for its performance obligation to transfer or to stand ready to
transfer goods or services in the future An entity shall derecognise that
contract liability (and recognise revenue) when it transfers those goods or
services and therefore satisfies its performance obligation
B45 A customer’s nonrefundable prepayment to an entity gives the customer a right
to receive a good or service in the future (and obliges the entity to stand ready to
transfer a good or service) However customers may not exercise all of their
contractual rights Those unexercised rights are often referred to as breakage
B46 If an entity expects to be entitled to a breakage amount in a contract liability
the entity shall recognise the expected breakage amount as revenue in
proportion to the pattern of rights exercised by the customer If an entity does
not expect to be entitled to a breakage amount the entity shall recognise the
expected breakage amount as revenue when the likelihood of the customer
exercising its remaining rights becomes remote To determine whether an
entity expects to be entitled to a breakage amount the entity shall consider the
requirements in paragraphs 56–58 on constraining estimates of variable
consideration
IFRS 15
IFRS Foundation A719B47 An entity shall recognise a liability (and not revenue) for any consideration
received that is attributable to a customer’s unexercised rights for which the
entity is required to remit to another party for example a government entity in
accordance with applicable unclaimed property laws
Nonrefundable upfront fees (and some related costs)
B48 In some contracts an entity charges a customer a nonrefundable upfront fee at
or near contract inception Examples include joining fees in health club
membership contracts activation fees in telecommunication contracts setup
fees in some services contracts and initial fees in some supply contracts
B49 To identify performance obligations in such contracts an entity shall assess
whether the fee relates to the transfer of a promised good or service In many
cases even though a nonrefundable upfront fee relates to an activity that the
entity is required to undertake at or near contract inception to fulfil the
contract that activity does not result in the transfer of a promised good or
service to the customer (see paragraph 25) Instead the upfront fee is an
advance payment for future goods or services and therefore would be
recognised as revenue when those future goods or services are provided The
revenue recognition period would extend beyond the initial contractual period
if the entity grants the customer the option to renew the contract and that
option provides the customer with a material right as described in
paragraph B40
B50 If the nonrefundable upfront fee relates to a good or service the entity shall
evaluate whether to account for the good or service as a separate performance
obligation in accordance with paragraphs 22–30
B51 An entity may charge a nonrefundable fee in part as compensation for costs
incurred in setting up a contract (or other administrative tasks as described in
paragraph 25) If those setup activities do not satisfy a performance obligation
the entity shall disregard those activities (and related costs) when measuring
progress in accordance with paragraph B19 That is because the costs of setup
activities do not depict the transfer of services to the customer The entity shall
assess whether costs incurred in setting up a contract have resulted in an asset
that shall be recognised in accordance with paragraph 95
Licensing
B52 A licence establishes a customer’s rights to the intellectual property of an entity
Licences of intellectual property may include but are not limited to any of the
following
(a) software and technology
(b) motion pictures music and other forms of media and entertainment
(c) franchises and
(d) patents trademarks and copyrights
B53 In addition to a promise to grant a licence to a customer an entity may also
promise to transfer other goods or services to the customer Those promises may
be explicitly stated in the contract or implied by an entity’s customary business
IFRS 15
IFRS FoundationA720practices published policies or specific statements (see paragraph 24) As with
other types of contracts when a contract with a customer includes a promise to
grant a licence in addition to other promised goods or services an entity applies
paragraphs 22–30 to identify each of the performance obligations in the
contract
B54 If the promise to grant a licence is not distinct from other promised goods or
services in the contract in accordance with paragraphs 26–30 an entity shall
account for the promise to grant a licence and those other promised goods or
services together as a single performance obligation Examples of licences that
are not distinct from other goods or services promised in the contract include
the following
(a) a licence that forms a component of a tangible good and that is integral
to the functionality of the good and
(b) a licence that the customer can benefit from only in conjunction with a
related service (such as an online service provided by the entity that
enables by granting a licence the customer to access content)
B55 If the licence is not distinct an entity shall apply paragraphs 31–38 to determine
whether the performance obligation (which includes the promised licence) is a
performance obligation that is satisfied over time or satisfied at a point in time
B56 If the promise to grant the licence is distinct from the other promised goods or
services in the contract and therefore the promise to grant the licence is a
separate performance obligation an entity shall determine whether the licence
transfers to a customer either at a point in time or over time In making this
determination an entity shall consider whether the nature of the entity’s
promise in granting the licence to a customer is to provide the customer with
either
(a) a right to access the entity’s intellectual property as it exists throughout
the licence period or
(b) a right to use the entity’s intellectual property as it exists at the point in
time at which the licence is granted
Determining the nature of the entity’s promise
B57 To determine whether an entity’s promise to grant a licence provides a customer
with either a right to access an entity’s intellectual property or a right to use an
entity’s intellectual property an entity shall consider whether a customer can
direct the use of and obtain substantially all of the remaining benefits from a
licence at the point in time at which the licence is granted A customer cannot
direct the use of and obtain substantially all of the remaining benefits from a
licence at the point in time at which the licence is granted if the intellectual
property to which the customer has rights changes throughout the licence
period The intellectual property will change (and thus affect the entity’s
assessment of when the customer controls the licence) when the entity
continues to be involved with its intellectual property and the entity undertakes
activities that significantly affect the intellectual property to which the
customer has rights In these cases the licence provides the customer with a
right to access the entity’s intellectual property (see paragraph B58) In contrast
IFRS 15
IFRS Foundation A721a customer can direct the use of and obtain substantially all of the remaining
benefits from the licence at the point in time at which the licence is granted if
the intellectual property to which the customer has rights will not change (see
paragraph B61) In those cases any activities undertaken by the entity merely
change its own asset (ie the underlying intellectual property) which may affect
the entity’s ability to provide future licences however those activities would not
affect the determination of what the licence provides or what the customer
controls
B58 The nature of an entity’s promise in granting a licence is a promise to provide a
right to access the entity’s intellectual property if all of the following criteria are
met
(a) the contract requires or the customer reasonably expects that the entity
will undertake activities that significantly affect the intellectual property
to which the customer has rights (see paragraph B59)
(b) the rights granted by the licence directly expose the customer to any
positive or negative effects of the entity’s activities identified in
paragraph B58(a) and
(c) those activities do not result in the transfer of a good or a service to the
customer as those activities occur (see paragraph 25)
B59 Factors that may indicate that a customer could reasonably expect that an entity
will undertake activities that significantly affect the intellectual property
include the entity’s customary business practices published policies or specific
statements Although not determinative the existence of a shared economic
interest (for example a salesbased royalty) between the entity and the customer
related to the intellectual property to which the customer has rights may also
indicate that the customer could reasonably expect that the entity will
undertake such activities
B60 If the criteria in paragraph B58 are met an entity shall account for the promise
to grant a licence as a performance obligation satisfied over time because the
customer will simultaneously receive and consume the benefit from the entity’s
performance of providing access to its intellectual property as the performance
occurs (see paragraph 35(a)) An entity shall apply paragraphs 39–45 to select an
appropriate method to measure its progress towards complete satisfaction of
that performance obligation to provide access
B61 If the criteria in paragraph B58 are not met the nature of an entity’s promise is
to provide a right to use the entity’s intellectual property as that intellectual
property exists (in terms of form and functionality) at the point in time at which
the licence is granted to the customer This means that the customer can direct
the use of and obtain substantially all of the remaining benefits from the
licence at the point in time at which the licence transfers An entity shall
account for the promise to provide a right to use the entity’s intellectual
property as a performance obligation satisfied at a point in time An entity shall
apply paragraph 38 to determine the point in time at which the licence transfers
to the customer However revenue cannot be recognised for a licence that
provides a right to use the entity’s intellectual property before the beginning of
the period during which the customer is able to use and benefit from the
IFRS 15
IFRS FoundationA722licence For example if a software licence period begins before an entity
provides (or otherwise makes available) to the customer a code that enables the
customer to immediately use the software the entity would not recognise
revenue before that code has been provided (or otherwise made available)
B62 An entity shall disregard the following factors when determining whether a
licence provides a right to access the entity’s intellectual property or a right to
use the entity’s intellectual property
(a) Restrictions of time geographical region or use—those restrictions define
the attributes of the promised licence rather than define whether the
entity satisfies its performance obligation at a point in time or over time
(b) Guarantees provided by the entity that it has a valid patent to
intellectual property and that it will defend that patent from
unauthorised use—a promise to defend a patent right is not a
performance obligation because the act of defending a patent protects
the value of the entity’s intellectual property assets and provides
assurance to the customer that the licence transferred meets the
specifications of the licence promised in the contract
Salesbased or usagebased royalties
B63 Notwithstanding the requirements in paragraphs 56–59 an entity shall
recognise revenue for a salesbased or usagebased royalty promised in exchange
for a licence of intellectual property only when (or as) the later of the following
events occurs
(a) the subsequent sale or usage occurs and
(b) the performance obligation to which some or all of the salesbased or
usagebased royalty has been allocated has been satisfied (or partially
satisfied)
Repurchase agreements
B64 A repurchase agreement is a contract in which an entity sells an asset and also
promises or has the option (either in the same contract or in another contract)
to repurchase the asset The repurchased asset may be the asset that was
originally sold to the customer an asset that is substantially the same as that
asset or another asset of which the asset that was originally sold is a component
B65 Repurchase agreements generally come in three forms
(a) an entity’s obligation to repurchase the asset (a forward)
(b) an entity’s right to repurchase the asset (a call option) and
(c) an entity’s obligation to repurchase the asset at the customer’s request
(a put option)
A forward or a call option
B66 If an entity has an obligation or a right to repurchase the asset (a forward or a
call option) a customer does not obtain control of the asset because the
customer is limited in its ability to direct the use of and obtain substantially all
IFRS 15
IFRS Foundation A723of the remaining benefits from the asset even though the customer may have
physical possession of the asset Consequently the entity shall account for the
contract as either of the following
(a) a lease in accordance with IFRS 16 Leases if the entity can or must
repurchase the asset for an amount that is less than the original selling
price of the asset unless the contract is part of a sale and leaseback
transaction If the contract is part of a sale and leaseback transaction
the entity shall continue to recognise the asset and shall recognise a
financial liability for any consideration received from the customer The
entity shall account for the financial liability in accordance with IFRS 9
or
(b) a financing arrangement in accordance with paragraph B68 if the entity
can or must repurchase the asset for an amount that is equal to or more
than the original selling price of the asset
B67 When comparing the repurchase price with the selling price an entity shall
consider the time value of money
B68 If the repurchase agreement is a financing arrangement the entity shall
continue to recognise the asset and also recognise a financial liability for any
consideration received from the customer The entity shall recognise the
difference between the amount of consideration received from the customer and
the amount of consideration to be paid to the customer as interest and if
applicable as processing or holding costs (for example insurance)
B69 If the option lapses unexercised an entity shall derecognise the liability and
recognise revenue
A put option
B70 If an entity has an obligation to repurchase the asset at the customer’s request
(a put option) at a price that is lower than the original selling price of the asset
the entity shall consider at contract inception whether the customer has a
significant economic incentive to exercise that right The customer’s exercising
of that right results in the customer effectively paying the entity consideration
for the right to use a specified asset for a period of time Therefore if the
customer has a significant economic incentive to exercise that right the entity
shall account for the agreement as a lease in accordance with IFRS 16 unless the
contract is part of a sale and leaseback transaction If the contract is part of a
sale and leaseback transaction the entity shall continue to recognise the asset
and shall recognise a financial liability for any consideration received from the
customer The entity shall account for the financial liability in accordance with
IFRS 9
B71 To determine whether a customer has a significant economic incentive to
exercise its right an entity shall consider various factors including the
relationship of the repurchase price to the expected market value of the asset at
the date of the repurchase and the amount of time until the right expires For
example if the repurchase price is expected to significantly exceed the market
value of the asset this may indicate that the customer has a significant
economic incentive to exercise the put option
IFRS 15
IFRS FoundationA724B72 If the customer does not have a significant economic incentive to exercise its
right at a price that is lower than the original selling price of the asset the entity
shall account for the agreement as if it were the sale of a product with a right of
return as described in paragraphs B20–B27
B73 If the repurchase price of the asset is equal to or greater than the original selling
price and is more than the expected market value of the asset the contract is in
effect a financing arrangement and therefore shall be accounted for as
described in paragraph B68
B74 If the repurchase price of the asset is equal to or greater than the original selling
price and is less than or equal to the expected market value of the asset and the
customer does not have a significant economic incentive to exercise its right
then the entity shall account for the agreement as if it were the sale of a product
with a right of return as described in paragraphs B20–B27
B75 When comparing the repurchase price with the selling price an entity shall
consider the time value of money
B76 If the option lapses unexercised an entity shall derecognise the liability and
recognise revenue
Consignment arrangements
B77 When an entity delivers a product to another party (such as a dealer or a
distributor) for sale to end customers the entity shall evaluate whether that
other party has obtained control of the product at that point in time A product
that has been delivered to another party may be held in a consignment
arrangement if that other party has not obtained control of the product
Accordingly an entity shall not recognise revenue upon delivery of a product to
another party if the delivered product is held on consignment
B78 Indicators that an arrangement is a consignment arrangement include but are
not limited to the following
(a) the product is controlled by the entity until a specified event occurs
such as the sale of the product to a customer of the dealer or until a
specified period expires
(b) the entity is able to require the return of the product or transfer the
product to a third party (such as another dealer) and
(c) the dealer does not have an unconditional obligation to pay for the
product (although it might be required to pay a deposit)
Billandhold arrangements
B79 A billandhold arrangement is a contract under which an entity bills a customer
for a product but the entity retains physical possession of the product until it is
transferred to the customer at a point in time in the future For example a
customer may request an entity to enter into such a contract because of the
customer’s lack of available space for the product or because of delays in the
customer’s production schedules
B80 An entity shall determine when it has satisfied its performance obligation to
transfer a product by evaluating when a customer obtains control of that
IFRS 15
IFRS Foundation A725product (see paragraph 38) For some contracts control is transferred either
when the product is delivered to the customer’s site or when the product is
shipped depending on the terms of the contract (including delivery and
shipping terms) However for some contracts a customer may obtain control of
a product even though that product remains in an entity’s physical possession
In that case the customer has the ability to direct the use of and obtain
substantially all of the remaining benefits from the product even though it has
decided not to exercise its right to take physical possession of that product
Consequently the entity does not control the product Instead the entity
provides custodial services to the customer over the customer’s asset
B81 In addition to applying the requirements in paragraph 38 for a customer to
have obtained control of a product in a billandhold arrangement all of the
following criteria must be met
(a) the reason for the billandhold arrangement must be substantive
(for example the customer has requested the arrangement)
(b) the product must be identified separately as belonging to the customer
(c) the product currently must be ready for physical transfer to the
customer and
(d) the entity cannot have the ability to use the product or to direct it to
another customer
B82 If an entity recognises revenue for the sale of a product on a billandhold basis
the entity shall consider whether it has remaining performance obligations
(for example for custodial services) in accordance with paragraphs 22–30 to
which the entity shall allocate a portion of the transaction price in accordance
with paragraphs 73–86
Customer acceptance
B83 In accordance with paragraph 38(e) a customer’s acceptance of an asset may
indicate that the customer has obtained control of the asset Customer
acceptance clauses allow a customer to cancel a contract or require an entity to
take remedial action if a good or service does not meet agreedupon
specifications An entity shall consider such clauses when evaluating when a
customer obtains control of a good or service
B84 If an entity can objectively determine that control of a good or service has been
transferred to the customer in accordance with the agreedupon specifications
in the contract then customer acceptance is a formality that would not affect
the entity’s determination of when the customer has obtained control of the
good or service For example if the customer acceptance clause is based on
meeting specified size and weight characteristics an entity would be able to
determine whether those criteria have been met before receiving confirmation
of the customer’s acceptance The entity’s experience with contracts for similar
goods or services may provide evidence that a good or service provided to the
customer is in accordance with the agreedupon specifications in the contract If
revenue is recognised before customer acceptance the entity still must consider
whether there are any remaining performance obligations (for example
installation of equipment) and evaluate whether to account for them separately
IFRS 15
IFRS FoundationA726B85 However if an entity cannot objectively determine that the good or service
provided to the customer is in accordance with the agreedupon specifications in
the contract then the entity would not be able to conclude that the customer
has obtained control until the entity receives the customer’s acceptance That is
because in that circumstance the entity cannot determine that the customer has
the ability to direct the use of and obtain substantially all of the remaining
benefits from the good or service
B86 If an entity delivers products to a customer for trial or evaluation purposes and
the customer is not committed to pay any consideration until the trial period
lapses control of the product is not transferred to the customer until either the
customer accepts the product or the trial period lapses
Disclosure of disaggregated revenue
B87 Paragraph 114 requires an entity to disaggregate revenue from contracts with
customers into categories that depict how the nature amount timing and
uncertainty of revenue and cash flows are affected by economic factors
Consequently the extent to which an entity’s revenue is disaggregated for the
purposes of this disclosure depends on the facts and circumstances that pertain
to the entity’s contracts with customers Some entities may need to use more
than one type of category to meet the objective in paragraph 114 for
disaggregating revenue Other entities may meet the objective by using only one
type of category to disaggregate revenue
B88 When selecting the type of category (or categories) to use to disaggregate
revenue an entity shall consider how information about the entity’s revenue
has been presented for other purposes including all of the following
(a) disclosures presented outside the financial statements (for example in
earnings releases annual reports or investor presentations)
(b) information regularly reviewed by the chief operating decision maker
for evaluating the financial performance of operating segments and
(c) other information that is similar to the types of information identified in
paragraph B88(a) and (b) and that is used by the entity or users of the
entity’s financial statements to evaluate the entity’s financial
performance or make resource allocation decisions
B89 Examples of categories that might be appropriate include but are not limited to
all of the following
(a) type of good or service (for example major product lines)
(b) geographical region (for example country or region)
(c) market or type of customer (for example government and
nongovernment customers)
(d) type of contract (for example fixedprice and timeandmaterials
contracts)
(e) contract duration (for example shortterm and longterm contracts)
IFRS 15
IFRS Foundation A727(f) timing of transfer of goods or services (for example revenue from goods
or services transferred to customers at a point in time and revenue from
goods or services transferred over time) and
(g) sales channels (for example goods sold directly to consumers and goods
sold through intermediaries)
IFRS 15
IFRS FoundationA728Appendix C
Effective date and transition
This appendix is an integral part of the Standard and has the same authority as the other parts of
the Standard
Effective date
C1 An entity shall apply this Standard for annual reporting periods beginning on or
after 1 January 2018 Earlier application is permitted If an entity applies this
Standard earlier it shall disclose that fact
C1A IFRS 16 Leases issued in January 2016 amended paragraphs 5 97 B66 and B70
An entity shall apply those amendments when it applies IFRS 16
Transition
C2 For the purposes of the transition requirements in paragraphs C3–C8
(a) the date of initial application is the start of the reporting period in
which an entity first applies this Standard and
(b) a completed contract is a contract for which the entity has transferred all
of the goods or services identified in accordance with IAS 11 Construction
Contracts IAS 18 Revenue and related Interpretations
C3 An entity shall apply this Standard using one of the following two methods
(a) retrospectively to each prior reporting period presented in accordance
with IAS 8 Accounting Policies Changes in Accounting Estimates and Errors
subject to the expedients in paragraph C5 or
(b) retrospectively with the cumulative effect of initially applying this
Standard recognised at the date of initial application in accordance with
paragraphs C7–C8
C4 Notwithstanding the requirements of paragraph 28 of IAS 8 when this Standard
is first applied an entity need only present the quantitative information
required by paragraph 28(f) of IAS 8 for the annual period immediately
preceding the first annual period for which this Standard is applied (the
immediately preceding period’) and only if the entity applies this Standard
retrospectively in accordance with paragraph C3(a) An entity may also present
this information for the current period or for earlier comparative periods but is
not required to do so
C5 An entity may use one or more of the following practical expedients when
applying this Standard retrospectively in accordance with paragraph C3(a)
(a) for completed contracts an entity need not restate contracts that begin
and end within the same annual reporting period
(b) for completed contracts that have variable consideration an entity may
use the transaction price at the date the contract was completed rather
than estimating variable consideration amounts in the comparative
reporting periods and
IFRS 15
IFRS Foundation A729(c) for all reporting periods presented before the date of initial application
an entity need not disclose the amount of the transaction price allocated
to the remaining performance obligations and an explanation of when
the entity expects to recognise that amount as revenue (see
paragraph 120)
C6 For any of the practical expedients in paragraph C5 that an entity uses the
entity shall apply that expedient consistently to all contracts within all
reporting periods presented In addition the entity shall disclose all of the
following information
(a) the expedients that have been used and
(b) to the extent reasonably possible a qualitative assessment of the
estimated effect of applying each of those expedients
C7 If an entity elects to apply this Standard retrospectively in accordance with
paragraph C3(b) the entity shall recognise the cumulative effect of initially
applying this Standard as an adjustment to the opening balance of retained
earnings (or other component of equity as appropriate) of the annual reporting
period that includes the date of initial application Under this transition
method an entity shall apply this Standard retrospectively only to contracts that
are not completed contracts at the date of initial application (for example
1 January 2018 for an entity with a 31 December yearend)
C8 For reporting periods that include the date of initial application an entity shall
provide both of the following additional disclosures if this Standard is applied
retrospectively in accordance with paragraph C3(b)
(a) the amount by which each financial statement line item is affected in
the current reporting period by the application of this Standard as
compared to IAS 11 IAS 18 and related Interpretations that were in effect
before the change and
(b) an explanation of the reasons for significant changes identified in C8(a)
References to IFRS 9
C9 If an entity applies this Standard but does not yet apply IFRS 9 Financial
Instruments any reference in this Standard to IFRS 9 shall be read as a reference
to IAS 39 Financial Instruments Recognition and Measurement
Withdrawal of other Standards
C10 This Standard supersedes the following Standards
(a) IAS 11 Construction Contracts
(b) IAS 18 Revenue
(c) IFRIC 13 Customer Loyalty Programmes
(d) IFRIC 15 Agreements for the Construction of Real Estate
(e) IFRIC 18 Transfers of Assets from Customers and
(f) SIC31 Revenue—Barter Transactions Involving Advertising Services
IFRS 15
IFRS FoundationA730Appendix D
Amendments to other Standards
This Appendix describes the amendments to other Standards that the IASB made when it finalised
IFRS 15 An entity shall apply the amendments for annual periods beginning on or after 1 January
2017 If an entity applies IFRS 15 for an earlier period these amendments shall be applied for that
earlier period
*****
The amendments contained in this appendix when this Standard was issued in 2014 have been
incorporated into the text of the relevant Standards included in this volume
IFRS 15
IFRS Foundation A731IFRS Standard 16
Leases
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 17 Leases
which had originally been issued by the International Accounting Standards Committee
(IASC) in December 1997 IAS 17 Leases replaced IAS 17 Accounting for Leases that was issued in
September 1982
In April 2001 the IASB adopted SIC15 Operating Leases—Incentives which had originally been
issued by the Standing Interpretations Committee of the IASC in December 1998
In December 2001 the IASB issued SIC27 Evaluating the Substance of Transactions Involving the
Legal Form of a Lease SIC27 had originally been developed by the Standing Interpretations
Committee of the IASC to provide guidance on determining amongst other things whether
an arrangement that involves the legal form of a lease meet the definition of a lease under
IAS 17
In December 2003 the IASB issued a revised IAS 17 as part of its initial agenda of technical
projects
In December 2004 the IASB issued IFRIC 4 Determining whether an Arrangement contains a Lease
The Interpretation was developed by the Interpretations Committee to provide guidance on
determining whether transactions that do not take the legal form of a lease but convey the
right to use an asset in return for a payment or series of payments are or contain leases
that should be accounted for in accordance with IAS 17
In January 2016 the IASB issued IFRS 16 Leases IFRS 16 replaces IAS 17 IFRIC 4 SIC15 and
SIC27 IFRS 16 sets out the principles for the recognition measurement presentation and
disclosure of leases
IFRS 16
IFRS Foundation A733CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 16
LEASES
INTRODUCTION
OBJECTIVE 1
SCOPE 3
RECOGNITION EXEMPTIONS 5
IDENTIFYING A LEASE 9
Separating components of a contract 12
LEASE TERM 18
LESSEE 22
Recognition 22
Measurement 22
Presentation 47
Disclosure 51
LESSOR 61
Classification of leases 61
Finance leases 67
Operating leases 81
Disclosure 89
SALE AND LEASEBACK TRANSACTIONS 98
Assessing whether the transfer of the asset is a sale 99
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other Standards
IFRS 16
IFRS FoundationA734International Financial Reporting Standard 16 Leases (IFRS 16) is set out in paragraphs
1–103 and Appendices A–D All the paragraphs have equal authority Paragraphs in
bold type state the main principles Terms defined in Appendix A are in italics the first
time that they appear in the Standard Definitions of other terms are given in the
Glossary for International Financial Reporting Standards The Standard should be read
in the context of its objective and the Basis for Conclusions the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting IAS 8
Accounting Policies Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance
IFRS 16
IFRS Foundation A735Introduction
Overview
IN1 International Financial Reporting Standard 16 Leases (IFRS 16) sets out the
principles for the recognition measurement presentation and disclosure of
leases The objective is to ensure that lessees and lessors provide relevant
information in a manner that faithfully represents those transactions This
information gives a basis for users of financial statements to assess the effect
that leases have on the financial position financial performance and cash flows
of the entity
IN2 IFRS 16 is effective for annual periods beginning on or after 1 January 2019
Earlier application is permitted for entities that apply IFRS 15 Revenue from
Contracts with Customers at or before the date of initial application of IFRS 16
IN3 IFRS 16 supersedes
(a) IAS 17 Leases
(b) IFRIC 4 Determining whether an Arrangement contains a Lease
(c) SIC15 Operating Leases—Incentives and
(d) SIC27 Evaluating the Substance of Transactions Involving the Legal Form of a
Lease
Reasons for issuing IFRS 16
IN4 Leasing is an important activity for many entities It is a means of gaining access
to assets of obtaining finance and of reducing an entity’s exposure to the risks
of asset ownership The prevalence of leasing means that it is important that
users of financial statements have a complete and understandable picture of an
entity’s leasing activities
IN5 The previous accounting model for leases required lessees and lessors to classify
their leases as either finance leases or operating leases and account for those two
types of leases differently That model was criticised for failing to meet the
needs of users of financial statements because it did not always provide a
faithful representation of leasing transactions In particular it did not require
lessees to recognise assets and liabilities arising from operating leases
IN6 Accordingly the International Accounting Standards Board (IASB) and the US
national standardsetter the Financial Accounting Standards Board (FASB)
initiated a joint project to develop a new approach to lease accounting that
requires a lessee to recognise assets and liabilities for the rights and obligations
created by leases This approach will result in a more faithful representation of
a lessee’s assets and liabilities and together with enhanced disclosures will
provide greater transparency of a lessee’s financial leverage and capital
employed
IN7 Both Boards decided that a lessee should be required to recognise assets and
liabilities for all leases (with limited exceptions) and both Boards have defined
IFRS 16
IFRS FoundationA736leases in the same way The Boards reached similar decisions regarding the
measurement of lease liabilities and how to account for leases that were
formerly classified as finance leases In addition both Boards decided not to
substantially change lessor accounting
IN8 However the Boards reached different decisions for leases that were formerly
classified as operating leases with respect to the recognition of lease expenses
and the reporting of leaserelated cash flows The IASB decided to adopt a single
lessee accounting model whereby a lessee accounts for all leases in the same
way The FASB decided to adopt a dual lessee accounting model classifying
leases in a similar manner to the previous requirements in US Generally
Accepted Accounting Principles (US GAAP) for distinguishing between operating
leases and capital leases and to account for those two types of leases differently
IN9 IFRS 16 completes the IASB’s project to improve the financial reporting of leases
Main features
Lessee accounting
IN10 IFRS 16 introduces a single lessee accounting model and requires a lessee to
recognise assets and liabilities for all leases with a term of more than 12 months
unless the underlying asset is of low value A lessee is required to recognise a
rightofuse asset representing its right to use the underlying leased asset and a
lease liability representing its obligation to make lease payments
IN11 A lessee measures rightofuse assets similarly to other nonfinancial assets (such
as property plant and equipment) and lease liabilities similarly to other
financial liabilities As a consequence a lessee recognises depreciation of the
rightofuse asset and interest on the lease liability and also classifies cash
repayments of the lease liability into a principal portion and an interest portion
and presents them in the statement of cash flows applying IAS 7 Statement of Cash
Flows
IN12 Assets and liabilities arising from a lease are initially measured on a present
value basis The measurement includes noncancellable lease payments
(including inflationlinked payments) and also includes payments to be made in
optional periods if the lessee is reasonably certain to exercise an option to
extend the lease or not to exercise an option to terminate the lease
IN13 IFRS 16 contains disclosure requirements for lessees Lessees will need to apply
judgement in deciding upon the information to disclose to meet the objective of
providing a basis for users of financial statements to assess the effect that leases
have on the financial position financial performance and cash flows of the
lessee
Lessor accounting
IN14 IFRS 16 substantially carries forward the lessor accounting requirements in
IAS 17 Accordingly a lessor continues to classify its leases as operating leases or
finance leases and to account for those two types of leases differently
IFRS 16
IFRS Foundation A737IN15 IFRS 16 also requires enhanced disclosures to be provided by lessors that will
improve information disclosed about a lessor’s risk exposure particularly to
residual value risk
IFRS 16
IFRS FoundationA738International Financial Reporting Standard 16
Leases
Objective
1 This Standard sets out the principles for the recognition measurement
presentation and disclosure of leases The objective is to ensure that
lessees and lessors provide relevant information in a manner that
faithfully represents those transactions This information gives a basis
for users of financial statements to assess the effect that leases have on
the financial position financial performance and cash flows of an entity
2 An entity shall consider the terms and conditions of contracts and all relevant
facts and circumstances when applying this Standard An entity shall apply this
Standard consistently to contracts with similar characteristics and in similar
circumstances
Scope
3 An entity shall apply this Standard to all leases including leases of rightofuse
assets in a sublease except for
(a) leases to explore for or use minerals oil natural gas and similar
nonregenerative resources
(b) leases of biological assets within the scope of IAS 41 Agriculture held by a
lessee
(c) service concession arrangements within the scope of IFRIC 12 Service
Concession Arrangements
(d) licences of intellectual property granted by a lessor within the scope of
IFRS 15 Revenue from Contracts with Customers and
(e) rights held by a lessee under licensing agreements within the scope of
IAS 38 Intangible Assets for such items as motion picture films video
recordings plays manuscripts patents and copyrights
4 A lessee may but is not required to apply this Standard to leases of intangible
assets other than those described in paragraph 3(e)
Recognition exemptions (paragraphs B3–B8)
5 A lessee may elect not to apply the requirements in paragraphs 22–49 to
(a) shortterm leases and
(b) leases for which the underlying asset is of low value (as described in
paragraphs B3–B8)
6 If a lessee elects not to apply the requirements in paragraphs 22–49 to either
shortterm leases or leases for which the underlying asset is of low value the
lessee shall recognise the lease payments associated with those leases as an
IFRS 16
IFRS Foundation A739expense on either a straightline basis over the lease term or another systematic
basis The lessee shall apply another systematic basis if that basis is more
representative of the pattern of the lessee’s benefit
7 If a lessee accounts for shortterm leases applying paragraph 6 the lessee shall
consider the lease to be a new lease for the purposes of this Standard if
(a) there is a lease modificationor
(b) there is any change in the lease term (for example the lessee exercises an
option not previously included in its determination of the lease term)
8 The election for shortterm leases shall be made by class of underlying asset to
which the right of use relates A class of underlying asset is a grouping of
underlying assets of a similar nature and use in an entity’s operations The
election for leases for which the underlying asset is of low value can be made on
a leasebylease basis
Identifying a lease (paragraphs B9–B33)
9 At inception of a contract an entity shall assess whether the contract is
or contains a lease A contract is or contains a lease if the contract
conveys the right to control the use of an identified asset for a period of
time in exchange for consideration Paragraphs B9–B31 set out guidance
on the assessment of whether a contract is or contains a lease
10 A period of time may be described in terms of the amount of use of an identified
asset (for example the number of production units that an item of equipment
will be used to produce)
11 An entity shall reassess whether a contract is or contains a lease only if the
terms and conditions of the contract are changed
Separating components of a contract
12 For a contract that is or contains a lease an entity shall account for each lease
component within the contract as a lease separately from nonlease components
of the contract unless the entity applies the practical expedient in
paragraph 15 Paragraphs B32–B33 set out guidance on separating components
of a contract
Lessee
13 For a contract that contains a lease component and one or more additional lease
or nonlease components a lessee shall allocate the consideration in the contract
to each lease component on the basis of the relative standalone price of the
lease component and the aggregate standalone price of the nonlease
components
14 The relative standalone price of lease and nonlease components shall be
determined on the basis of the price the lessor or a similar supplier would
charge an entity for that component or a similar component separately If an
observable standalone price is not readily available the lessee shall estimate the
standalone price maximising the use of observable information
IFRS 16
IFRS FoundationA74015 As a practical expedient a lessee may elect by class of underlying asset not to
separate nonlease components from lease components and instead account for
each lease component and any associated nonlease components as a single lease
component A lessee shall not apply this practical expedient to embedded
derivatives that meet the criteria in paragraph 433 of IFRS 9 Financial
Instruments
16 Unless the practical expedient in paragraph 15 is applied a lessee shall account
for nonlease components applying other applicable Standards
Lessor
17 For a contract that contains a lease component and one or more additional lease
or nonlease components a lessor shall allocate the consideration in the contract
applying paragraphs 73–90 of IFRS 15
Lease term (paragraphs B34–B41)
18 An entity shall determine the lease term as the noncancellable period of a lease
together with both
(a) periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option and
(b) periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option
19 In assessing whether a lessee is reasonably certain to exercise an option to
extend a lease or not to exercise an option to terminate a lease an entity shall
consider all relevant facts and circumstances that create an economic incentive
for the lessee to exercise the option to extend the lease or not to exercise the
option to terminate the lease as described in paragraphs B37–B40
20 A lessee shall reassess whether it is reasonably certain to exercise an extension
option or not to exercise a termination option upon the occurrence of either a
significant event or a significant change in circumstances that
(a) is within the control of the lessee and
(b) affects whether the lessee is reasonably certain to exercise an option not
previously included in its determination of the lease term or not to
exercise an option previously included in its determination of the lease
term (as described in paragraph B41)
21 An entity shall revise the lease term if there is a change in the noncancellable
period of a lease For example the noncancellable period of a lease will change
if
(a) the lessee exercises an option not previously included in the entity’s
determination of the lease term
(b) the lessee does not exercise an option previously included in the entity’s
determination of the lease term
IFRS 16
IFRS Foundation A741(c) an event occurs that contractually obliges the lessee to exercise an option
not previously included in the entity’s determination of the lease term
or
(d) an event occurs that contractually prohibits the lessee from exercising
an option previously included in the entity’s determination of the lease
term
Lessee
Recognition
22 At the commencement date a lessee shall recognise a rightofuse asset
and a lease liability
Measurement
Initial measurement
Initial measurement of the rightofuse asset
23 At the commencement date a lessee shall measure the rightofuse asset
at cost
24 The cost of the rightofuse asset shall comprise
(a) the amount of the initial measurement of the lease liability as described
in paragraph 26
(b) any lease payments made at or before the commencement date less any
lease incentives received
(c) any initial direct costs incurred by the lessee and
(d) an estimate of costs to be incurred by the lessee in dismantling and
removing the underlying asset restoring the site on which it is located
or restoring the underlying asset to the condition required by the terms
and conditions of the lease unless those costs are incurred to produce
inventories The lessee incurs the obligation for those costs either at the
commencement date or as a consequence of having used the underlying
asset during a particular period
25 A lessee shall recognise the costs described in paragraph 24(d) as part of the cost
of the rightofuse asset when it incurs an obligation for those costs A lessee
applies IAS 2 Inventories to costs that are incurred during a particular period as a
consequence of having used the rightofuse asset to produce inventories during
that period The obligations for such costs accounted for applying this Standard
or IAS 2 are recognised and measured applying IAS 37 Provisions Contingent
Liabilities and Contingent Assets
Initial measurement of the lease liability
26 At the commencement date a lessee shall measure the lease liability at
the present value of the lease payments that are not paid at that date The
lease payments shall be discounted using the interest rate implicit in the
IFRS 16
IFRS FoundationA742lease if that rate can be readily determined If that rate cannot be readily
determined the lessee shall use the lessee’s incremental borrowing rate
27 At the commencement date the lease payments included in the measurement of
the lease liability comprise the following payments for the right to use the
underlying asset during the lease term that are not paid at the commencement
date
(a) fixed payments (including insubstance fixed payments as described in
paragraph B42) less any lease incentives receivable
(b) variable lease payments that depend on an index or a rate initially
measured using the index or rate as at the commencement date (as
described in paragraph 28)
(c) amounts expected to be payable by the lessee under residual value
guarantees
(d) the exercise price of a purchase option if the lessee is reasonably certain
to exercise that option (assessed considering the factors described in
paragraphs B37–B40) and
(e) payments of penalties for terminating the lease if the lease term reflects
the lessee exercising an option to terminate the lease
28 Variable lease payments that depend on an index or a rate described in
paragraph 27(b) include for example payments linked to a consumer price
index payments linked to a benchmark interest rate (such as LIBOR) or
payments that vary to reflect changes in market rental rates
Subsequent measurement
Subsequent measurement of the rightofuse asset
29 After the commencement date a lessee shall measure the rightofuse
asset applying a cost model unless it applies either of the measurement
models described in paragraphs 34 and 35
Cost model
30 To apply a cost model a lessee shall measure the rightofuse asset at cost
(a) less any accumulated depreciation and any accumulated impairment
losses and
(b) adjusted for any remeasurement of the lease liability specified in
paragraph 36(c)
31 A lessee shall apply the depreciation requirements in IAS 16 Property Plant and
Equipment in depreciating the rightofuse asset subject to the requirements in
paragraph 32
32 If the lease transfers ownership of the underlying asset to the lessee by the end
of the lease term or if the cost of the rightofuse asset reflects that the lessee will
exercise a purchase option the lessee shall depreciate the rightofuse asset from
the commencement date to the end of the useful life of the underlying asset
IFRS 16
IFRS Foundation A743Otherwise the lessee shall depreciate the rightofuse asset from the
commencement date to the earlier of the end of the useful life of the rightofuse
asset or the end of the lease term
33 A lessee shall apply IAS 36 Impairment of Assets to determine whether the
rightofuse asset is impaired and to account for any impairment loss identified
Other measurement models
34 If a lessee applies the fair value model in IAS 40 Investment Property to its
investment property the lessee shall also apply that fair value model to
rightofuse assets that meet the definition of investment property in IAS 40
35 If rightofuse assets relate to a class of property plant and equipment to which
the lessee applies the revaluation model in IAS 16 a lessee may elect to apply
that revaluation model to all of the rightofuse assets that relate to that class of
property plant and equipment
Subsequent measurement of the lease liability
36 After the commencement date a lessee shall measure the lease liability
by
(a) increasing the carrying amount to reflect interest on the lease
liability
(b) reducing the carrying amount to reflect the lease payments made
and
(c) remeasuring the carrying amount to reflect any reassessment or
lease modifications specified in paragraphs 39–46 or to reflect
revised insubstance fixed lease payments (see paragraph B42)
37 Interest on the lease liability in each period during the lease term shall be the
amount that produces a constant periodic rate of interest on the remaining
balance of the lease liability The periodic rate of interest is the discount rate
described in paragraph 26 or if applicable the revised discount rate described in
paragraph 41 paragraph 43 or paragraph 45(c)
38 After the commencement date a lessee shall recognise in profit or loss unless
the costs are included in the carrying amount of another asset applying other
applicable Standards both
(a) interest on the lease liability and
(b) variable lease payments not included in the measurement of the lease
liability in the period in which the event or condition that triggers those
payments occurs
Reassessment of the lease liability
39 After the commencement date a lessee shall apply paragraphs 40–43 to
remeasure the lease liability to reflect changes to the lease payments A lessee
shall recognise the amount of the remeasurement of the lease liability as an
adjustment to the rightofuse asset However if the carrying amount of the
rightofuse asset is reduced to zero and there is a further reduction in the
IFRS 16
IFRS FoundationA744measurement of the lease liability a lessee shall recognise any remaining
amount of the remeasurement in profit or loss
40 A lessee shall remeasure the lease liability by discounting the revised lease
payments using a revised discount rate if either
(a) there is a change in the lease term as described in paragraphs 20–21 A
lessee shall determine the revised lease payments on the basis of the
revised lease term or
(b) there is a change in the assessment of an option to purchase the
underlying asset assessed considering the events and circumstances
described in paragraphs 20–21 in the context of a purchase option A
lessee shall determine the revised lease payments to reflect the change in
amounts payable under the purchase option
41 In applying paragraph 40 a lessee shall determine the revised discount rate as
the interest rate implicit in the lease for the remainder of the lease term if that
rate can be readily determined or the lessee’s incremental borrowing rate at the
date of reassessment if the interest rate implicit in the lease cannot be readily
determined
42 A lessee shall remeasure the lease liability by discounting the revised lease
payments if either
(a) there is a change in the amounts expected to be payable under a residual
value guarantee A lessee shall determine the revised lease payments to
reflect the change in amounts expected to be payable under the residual
value guarantee
(b) there is a change in future lease payments resulting from a change in an
index or a rate used to determine those payments including for example
a change to reflect changes in market rental rates following a market
rent review The lessee shall remeasure the lease liability to reflect those
revised lease payments only when there is a change in the cash flows (ie
when the adjustment to the lease payments takes effect) A lessee shall
determine the revised lease payments for the remainder of the lease term
based on the revised contractual payments
43 In applying paragraph 42 a lessee shall use an unchanged discount rate unless
the change in lease payments results from a change in floating interest rates In
that case the lessee shall use a revised discount rate that reflects changes in the
interest rate
Lease modifications
44 A lessee shall account for a lease modification as a separate lease if both
(a) the modification increases the scope of the lease by adding the right to
use one or more underlying assets and
(b) the consideration for the lease increases by an amount commensurate
with the standalone price for the increase in scope and any appropriate
adjustments to that standalone price to reflect the circumstances of the
particular contract
IFRS 16
IFRS Foundation A74545 For a lease modification that is not accounted for as a separate lease at the
effective date of the lease modification a lessee shall
(a) allocate the consideration in the modified contract applying paragraphs
13–16
(b) determine the lease term of the modified lease applying paragraphs
18–19 and
(c) remeasure the lease liability by discounting the revised lease payments
using a revised discount rate The revised discount rate is determined as
the interest rate implicit in the lease for the remainder of the lease term
if that rate can be readily determined or the lessee’s incremental
borrowing rate at the effective date of the modification if the interest
rate implicit in the lease cannot be readily determined
46 For a lease modification that is not accounted for as a separate lease the lessee
shall account for the remeasurement of the lease liability by
(a) decreasing the carrying amount of the rightofuse asset to reflect the
partial or full termination of the lease for lease modifications that
decrease the scope of the lease The lessee shall recognise in profit or loss
any gain or loss relating to the partial or full termination of the lease
(b) making a corresponding adjustment to the rightofuse asset for all other
lease modifications
Presentation
47 A lessee shall either present in the statement of financial position or disclose in
the notes
(a) rightofuse assets separately from other assets If a lessee does not
present rightofuse assets separately in the statement of financial
position the lessee shall
(i) include rightofuse assets within the same line item as that
within which the corresponding underlying assets would be
presented if they were owned and
(ii) disclose which line items in the statement of financial position
include those rightofuse assets
(b) lease liabilities separately from other liabilities If the lessee does not
present lease liabilities separately in the statement of financial position
the lessee shall disclose which line items in the statement of financial
position include those liabilities
48 The requirement in paragraph 47(a) does not apply to rightofuse assets that
meet the definition of investment property which shall be presented in the
statement of financial position as investment property
49 In the statement of profit or loss and other comprehensive income a lessee shall
present interest expense on the lease liability separately from the depreciation
charge for the rightofuse asset Interest expense on the lease liability is a
component of finance costs which paragraph 82(b) of IAS 1 Presentation of
IFRS 16
IFRS FoundationA746Financial Statements requires to be presented separately in the statement of profit
or loss and other comprehensive income
50 In the statement of cash flows a lessee shall classify
(a) cash payments for the principal portion of the lease liability within
financing activities
(b) cash payments for the interest portion of the lease liability applying the
requirements in IAS 7 Statement of Cash Flows for interest paid and
(c) shortterm lease payments payments for leases of lowvalue assets and
variable lease payments not included in the measurement of the lease
liability within operating activities
Disclosure
51 The objective of the disclosures is for lessees to disclose information in
the notes that together with the information provided in the statement
of financial position statement of profit or loss and statement of cash
flows gives a basis for users of financial statements to assess the effect
that leases have on the financial position financial performance and cash
flows of the lessee Paragraphs 52–60 specify requirements on how to
meet this objective
52 A lessee shall disclose information about its leases for which it is a lessee in a
single note or separate section in its financial statements However a lessee
need not duplicate information that is already presented elsewhere in the
financial statements provided that the information is incorporated by
crossreference in the single note or separate section about leases
53 A lessee shall disclose the following amounts for the reporting period
(a) depreciation charge for rightofuse assets by class of underlying asset
(b) interest expense on lease liabilities
(c) the expense relating to shortterm leases accounted for applying
paragraph 6 This expense need not include the expense relating to
leases with a lease term of one month or less
(d) the expense relating to leases of lowvalue assets accounted for applying
paragraph 6 This expense shall not include the expense relating to
shortterm leases of lowvalue assets included in paragraph 53(c)
(e) the expense relating to variable lease payments not included in the
measurement of lease liabilities
(f) income from subleasing rightofuse assets
(g) total cash outflow for leases
(h) additions to rightofuse assets
(i) gains or losses arising from sale and leaseback transactions and
(j) the carrying amount of rightofuse assets at the end of the reporting
period by class of underlying asset
IFRS 16
IFRS Foundation A74754 A lessee shall provide the disclosures specified in paragraph 53 in a tabular
format unless another format is more appropriate The amounts disclosed shall
include costs that a lessee has included in the carrying amount of another asset
during the reporting period
55 A lessee shall disclose the amount of its lease commitments for shortterm leases
accounted for applying paragraph 6 if the portfolio of shortterm leases to which
it is committed at the end of the reporting period is dissimilar to the portfolio of
shortterm leases to which the shortterm lease expense disclosed applying
paragraph 53(c) relates
56 If rightofuse assets meet the definition of investment property a lessee shall
apply the disclosure requirements in IAS 40 In that case a lessee is not required
to provide the disclosures in paragraph 53(a) (f) (h) or (j) for those rightofuse
assets
57 If a lessee measures rightofuse assets at revalued amounts applying IAS 16 the
lessee shall disclose the information required by paragraph 77 of IAS 16 for
those rightofuse assets
58 A lessee shall disclose a maturity analysis of lease liabilities applying paragraphs
39 and B11 of IFRS 7 Financial Instruments Disclosures separately from the maturity
analyses of other financial liabilities
59 In addition to the disclosures required in paragraphs 53–58 a lessee shall
disclose additional qualitative and quantitative information about its leasing
activities necessary to meet the disclosure objective in paragraph 51 (as
described in paragraph B48) This additional information may include but is
not limited to information that helps users of financial statements to assess
(a) the nature of the lessee’s leasing activities
(b) future cash outflows to which the lessee is potentially exposed that are
not reflected in the measurement of lease liabilities This includes
exposure arising from
(i) variable lease payments (as described in paragraph B49)
(ii) extension options and termination options (as described in
paragraph B50)
(iii) residual value guarantees (as described in paragraph B51) and
(iv) leases not yet commenced to which the lessee is committed
(c) restrictions or covenants imposed by leases and
(d) sale and leaseback transactions (as described in paragraph B52)
60 A lessee that accounts for shortterm leases or leases of lowvalue assets applying
paragraph 6 shall disclose that fact
Lessor
Classification of leases (paragraphs B53–B58)
61 A lessor shall classify each of its leases as either an operating lease or a
finance lease
IFRS 16
IFRS FoundationA74862 A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incidental to ownership of an underlying asset A lease
is classified as an operating lease if it does not transfer substantially all
the risks and rewards incidental to ownership of an underlying asset
63 Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the contract Examples of
situations that individually or in combination would normally lead to a lease
being classified as a finance lease are
(a) the lease transfers ownership of the underlying asset to the lessee by the
end of the lease term
(b) the lessee has the option to purchase the underlying asset at a price that
is expected to be sufficiently lower than the fair value at the date the
option becomes exercisable for it to be reasonably certain at the inception
date that the option will be exercised
(c) the lease term is for the major part of the economic life of the underlying
asset even if title is not transferred
(d) at the inception date the present value of the lease payments amounts to
at least substantially all of the fair value of the underlying asset and
(e) the underlying asset is of such a specialised nature that only the lessee
can use it without major modifications
64 Indicators of situations that individually or in combination could also lead to a
lease being classified as a finance lease are
(a) if the lessee can cancel the lease the lessor’s losses associated with the
cancellation are borne by the lessee
(b) gains or losses from the fluctuation in the fair value of the residual
accrue to the lessee (for example in the form of a rent rebate equaling
most of the sales proceeds at the end of the lease) and
(c) the lessee has the ability to continue the lease for a secondary period at a
rent that is substantially lower than market rent
65 The examples and indicators in paragraphs 63–64 are not always conclusive If it
is clear from other features that the lease does not transfer substantially all the
risks and rewards incidental to ownership of an underlying asset the lease is
classified as an operating lease For example this may be the case if ownership
of the underlying asset transfers at the end of the lease for a variable payment
equal to its then fair value or if there are variable lease payments as a result of
which the lessor does not transfer substantially all such risks and rewards
66 Lease classification is made at the inception date and is reassessed only if there is
a lease modification Changes in estimates (for example changes in estimates of
the economic life or of the residual value of the underlying asset) or changes in
circumstances (for example default by the lessee) do not give rise to a new
classification of a lease for accounting purposes
IFRS 16
IFRS Foundation A749Finance leases
Recognition and measurement
67 At the commencement date a lessor shall recognise assets held under a
finance lease in its statement of financial position and present them as a
receivable at an amount equal to the net investment in the lease
Initial measurement
68 The lessor shall use the interest rate implicit in the lease to measure the net
investment in the lease In the case of a sublease if the interest rate implicit in
the sublease cannot be readily determined an intermediate lessor may use the
discount rate used for the head lease (adjusted for any initial direct costs
associated with the sublease) to measure the net investment in the sublease
69 Initial direct costs other than those incurred by manufacturer or dealer lessors
are included in the initial measurement of the net investment in the lease and
reduce the amount of income recognised over the lease term The interest rate
implicit in the lease is defined in such a way that the initial direct costs are
included automatically in the net investment in the lease there is no need to
add them separately
Initial measurement of the lease payments included in the net investment
in the lease
70 At the commencement date the lease payments included in the measurement of
the net investment in the lease comprise the following payments for the right to
use the underlying asset during the lease term that are not received at the
commencement date
(a) fixed payments (including insubstance fixed payments as described in
paragraph B42) less any lease incentives payable
(b) variable lease payments that depend on an index or a rate initially
measured using the index or rate as at the commencement date
(c) any residual value guarantees provided to the lessor by the lessee a party
related to the lessee or a third party unrelated to the lessor that is
financially capable of discharging the obligations under the guarantee
(d) the exercise price of a purchase option if the lessee is reasonably certain
to exercise that option (assessed considering the factors described in
paragraph B37) and
(e) payments of penalties for terminating the lease if the lease term reflects
the lessee exercising an option to terminate the lease
Manufacturer or dealer lessors
71 At the commencement date a manufacturer or dealer lessor shall recognise the
following for each of its finance leases
(a) revenue being the fair value of the underlying asset or if lower the
present value of the lease payments accruing to the lessor discounted
using a market rate of interest
IFRS 16
IFRS FoundationA750(b) the cost of sale being the cost or carrying amount if different of the
underlying asset less the present value of the unguaranteed residual value
and
(c) selling profit or loss (being the difference between revenue and the cost
of sale) in accordance with its policy for outright sales to which IFRS 15
applies A manufacturer or dealer lessor shall recognise selling profit or
loss on a finance lease at the commencement date regardless of whether
the lessor transfers the underlying asset as described in IFRS 15
72 Manufacturers or dealers often offer to customers the choice of either buying or
leasing an asset A finance lease of an asset by a manufacturer or dealer lessor
gives rise to profit or loss equivalent to the profit or loss resulting from an
outright sale of the underlying asset at normal selling prices reflecting any
applicable volume or trade discounts
73 Manufacturer or dealer lessors sometimes quote artificially low rates of interest
in order to attract customers The use of such a rate would result in a lessor
recognising an excessive portion of the total income from the transaction at the
commencement date If artificially low rates of interest are quoted a
manufacturer or dealer lessor shall restrict selling profit to that which would
apply if a market rate of interest were charged
74 A manufacturer or dealer lessor shall recognise as an expense costs incurred in
connection with obtaining a finance lease at the commencement date because
they are mainly related to earning the manufacturer or dealer’s selling profit
Costs incurred by manufacturer or dealer lessors in connection with obtaining a
finance lease are excluded from the definition of initial direct costs and thus
are excluded from the net investment in the lease
Subsequent measurement
75 A lessor shall recognise finance income over the lease term based on a
pattern reflecting a constant periodic rate of return on the lessor’s net
investment in the lease
76 A lessor aims to allocate finance income over the lease term on a systematic and
rational basis A lessor shall apply the lease payments relating to the period
against the gross investment in the lease to reduce both the principal and the
unearned finance income
77 A lessor shall apply the derecognition and impairment requirements in IFRS 9 to
the net investment in the lease A lessor shall review regularly estimated
unguaranteed residual values used in computing the gross investment in the
lease If there has been a reduction in the estimated unguaranteed residual
value the lessor shall revise the income allocation over the lease term and
recognise immediately any reduction in respect of amounts accrued
78 A lessor that classifies an asset under a finance lease as held for sale (or includes
it in a disposal group that is classified as held for sale) applying IFRS 5 Noncurrent
Assets Held for Sale and Discontinued Operations shall account for the asset in
accordance with that Standard
IFRS 16
IFRS Foundation A751Lease modifications
79 A lessor shall account for a modification to a finance lease as a separate lease if
both
(a) the modification increases the scope of the lease by adding the right to
use one or more underlying assets and
(b) the consideration for the lease increases by an amount commensurate
with the standalone price for the increase in scope and any appropriate
adjustments to that standalone price to reflect the circumstances of the
particular contract
80 For a modification to a finance lease that is not accounted for as a separate lease
a lessor shall account for the modification as follows
(a) if the lease would have been classified as an operating lease had the
modification been in effect at the inception date the lessor shall
(i) account for the lease modification as a new lease from the
effective date of the modification and
(ii) measure the carrying amount of the underlying asset as the net
investment in the lease immediately before the effective date of
the lease modification
(b) otherwise the lessor shall apply the requirements of IFRS 9
Operating leases
Recognition and measurement
81 A lessor shall recognise lease payments from operating leases as income
on either a straightline basis or another systematic basis The lessor
shall apply another systematic basis if that basis is more representative of
the pattern in which benefit from the use of the underlying asset is
diminished
82 A lessor shall recognise costs including depreciation incurred in earning the
lease income as an expense
83 A lessor shall add initial direct costs incurred in obtaining an operating lease to
the carrying amount of the underlying asset and recognise those costs as an
expense over the lease term on the same basis as the lease income
84 The depreciation policy for depreciable underlying assets subject to operating
leases shall be consistent with the lessor’s normal depreciation policy for similar
assets A lessor shall calculate depreciation in accordance with IAS 16 and
IAS 38
85 A lessor shall apply IAS 36 to determine whether an underlying asset subject to
an operating lease is impaired and to account for any impairment loss
identified
86 A manufacturer or dealer lessor does not recognise any selling profit on entering
into an operating lease because it is not the equivalent of a sale
IFRS 16
IFRS FoundationA752Lease modifications
87 A lessor shall account for a modification to an operating lease as a new lease
from the effective date of the modification considering any prepaid or accrued
lease payments relating to the original lease as part of the lease payments for the
new lease
Presentation
88 A lessor shall present underlying assets subject to operating leases in its
statement of financial position according to the nature of the underlying asset
Disclosure
89 The objective of the disclosures is for lessors to disclose information in
the notes that together with the information provided in the statement
of financial position statement of profit or loss and statement of cash
flows gives a basis for users of financial statements to assess the effect
that leases have on the financial position financial performance and cash
flows of the lessor Paragraphs 90–97 specify requirements on how to
meet this objective
90 A lessor shall disclose the following amounts for the reporting period
(a) for finance leases
(i) selling profit or loss
(ii) finance income on the net investment in the lease and
(iii) income relating to variable lease payments not included in the
measurement of the net investment in the lease
(b) for operating leases lease income separately disclosing income relating
to variable lease payments that do not depend on an index or a rate
91 A lessor shall provide the disclosures specified in paragraph 90 in a tabular
format unless another format is more appropriate
92 A lessor shall disclose additional qualitative and quantitative information about
its leasing activities necessary to meet the disclosure objective in paragraph 89
This additional information includes but is not limited to information that
helps users of financial statements to assess
(a) the nature of the lessor’s leasing activities and
(b) how the lessor manages the risk associated with any rights it retains in
underlying assets In particular a lessor shall disclose its risk
management strategy for the rights it retains in underlying assets
including any means by which the lessor reduces that risk Such means
may include for example buyback agreements residual value
guarantees or variable lease payments for use in excess of specified
limits
IFRS 16
IFRS Foundation A753Finance leases
93 A lessor shall provide a qualitative and quantitative explanation of the
significant changes in the carrying amount of the net investment in finance
leases
94 A lessor shall disclose a maturity analysis of the lease payments receivable
showing the undiscounted lease payments to be received on an annual basis for
a minimum of each of the first five years and a total of the amounts for the
remaining years A lessor shall reconcile the undiscounted lease payments to
the net investment in the lease The reconciliation shall identify the unearned
finance income relating to the lease payments receivable and any discounted
unguaranteed residual value
Operating leases
95 For items of property plant and equipment subject to an operating lease a
lessor shall apply the disclosure requirements of IAS 16 In applying the
disclosure requirements in IAS 16 a lessor shall disaggregate each class of
property plant and equipment into assets subject to operating leases and assets
not subject to operating leases Accordingly a lessor shall provide the
disclosures required by IAS 16 for assets subject to an operating lease (by class of
underlying asset) separately from owned assets held and used by the lessor
96 A lessor shall apply the disclosure requirements in IAS 36 IAS 38 IAS 40 and
IAS 41 for assets subject to operating leases
97 A lessor shall disclose a maturity analysis of lease payments showing the
undiscounted lease payments to be received on an annual basis for a minimum
of each of the first five years and a total of the amounts for the remaining years
Sale and leaseback transactions
98 If an entity (the sellerlessee) transfers an asset to another entity (the
buyerlessor) and leases that asset back from the buyerlessor both the
sellerlessee and the buyerlessor shall account for the transfer contract and the
lease applying paragraphs 99–103
Assessing whether the transfer of the asset is a sale
99 An entity shall apply the requirements for determining when a performance
obligation is satisfied in IFRS 15 to determine whether the transfer of an asset is
accounted for as a sale of that asset
Transfer of the asset is a sale
100 If the transfer of an asset by the sellerlessee satisfies the requirements of IFRS 15
to be accounted for as a sale of the asset
(a) the sellerlessee shall measure the rightofuse asset arising from the
leaseback at the proportion of the previous carrying amount of the asset
that relates to the right of use retained by the sellerlessee Accordingly
the sellerlessee shall recognise only the amount of any gain or loss that
relates to the rights transferred to the buyerlessor
IFRS 16
IFRS FoundationA754(b) the buyerlessor shall account for the purchase of the asset applying
applicable Standards and for the lease applying the lessor accounting
requirements in this Standard
101 If the fair value of the consideration for the sale of an asset does not equal the
fair value of the asset or if the payments for the lease are not at market rates an
entity shall make the following adjustments to measure the sale proceeds at fair
value
(a) any belowmarket terms shall be accounted for as a prepayment of lease
payments and
(b) any abovemarket terms shall be accounted for as additional financing
provided by the buyerlessor to the sellerlessee
102 The entity shall measure any potential adjustment required by paragraph 101
on the basis of the more readily determinable of
(a) the difference between the fair value of the consideration for the sale
and the fair value of the asset and
(b) the difference between the present value of the contractual payments for
the lease and the present value of payments for the lease at market rates
Transfer of the asset is not a sale
103 If the transfer of an asset by the sellerlessee does not satisfy the requirements of
IFRS 15 to be accounted for as a sale of the asset
(a) the sellerlessee shall continue to recognise the transferred asset and
shall recognise a financial liability equal to the transfer proceeds It shall
account for the financial liability applying IFRS 9
(b) the buyerlessor shall not recognise the transferred asset and shall
recognise a financial asset equal to the transfer proceeds It shall
account for the financial asset applying IFRS 9
IFRS 16
IFRS Foundation A755Appendix A
Defined terms
This appendix is an integral part of the Standard
commencement date
of the lease
(commencement date)
The date on which a lessor makes an underlying asset available
for use by a lessee
economic life Either the period over which an asset is expected to be
economically usable by one or more users or the number of
production or similar units expected to be obtained from an asset
by one or more users
effective date of the
modification
The date when both parties agree to a lease modification
fair value For the purpose of applying the lessor accounting requirements
in this Standard the amount for which an asset could be
exchanged or a liability settled between knowledgeable willing
parties in an arm’s length transaction
finance lease A lease that transfers substantially all the risks and rewards
incidental to ownership of an underlying asset
fixed payments Payments made by a lessee to a lessor for the right to use an
underlying asset during the lease term excluding variable
lease payments
gross investment in
the lease
The sum of
(a) the lease payments receivable by a lessor under a
finance lease and
(b) any unguaranteed residual value accruing to the lessor
inception date of the
lease (inception date)
The earlier of the date of a lease agreement and the date of
commitment by the parties to the principal terms and conditions
of the lease
initial direct costs Incremental costs of obtaining a lease that would not have been
incurred if the lease had not been obtained except for such costs
incurred by a manufacturer or dealer lessor in connection with a
finance lease
interest rate implicit
in the lease
The rate of interest that causes the present value of (a) the lease
payments and (b) the unguaranteed residual value to equal
the sum of (i) the fair value of the underlying asset and (ii) any
initial direct costs of the lessor
lease A contract or part of a contract that conveys the right to use an
asset (the underlying asset) for a period of time in exchange for
consideration
lease incentives Payments made by a lessor to a lessee associated with a leaseor
the reimbursement or assumption by a lessor of costs of a lessee
IFRS 16
IFRS FoundationA756lease modification A change in the scope of a lease or the consideration for a lease
that was not part of the original terms and conditions of the lease
(for example adding or terminating the right to use one or more
underlying assets or extending or shortening the contractual
lease term)
lease payments Payments made by a lessee to a lessor relating to the right to use
an underlying asset during the lease term comprising the
following
(a) fixed payments (including insubstance fixed payments)
less any lease incentives
(b) variable lease payments that depend on an index or a
rate
(c) the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option and
(d) payments of penalties for terminating the leaseifthe
lease term reflects the lessee exercising an option to
terminate the lease
For the lessee lease payments also include amounts expected to
be payable by the lessee under residual value guarantees Lease
payments do not include payments allocated to nonlease
components of a contract unless the lessee elects to combine
nonlease components with a lease component and to account for
them as a single lease component
For the lessor lease payments also include any residual value
guarantees provided to the lessor by the lessee a party related to
the lessee or a third party unrelated to the lessor that is
financially capable of discharging the obligations under the
guarantee Lease payments do not include payments allocated to
nonlease components
lease term The noncancellable period for which a lessee has the right to use
an underlying asset together with both
(a) periods covered by an option to extend the lease if the
lessee is reasonably certain to exercise that option and
(b) periods covered by an option to terminate the lease if the
lessee is reasonably certain not to exercise that option
lessee An entity that obtains the right to use an underlying asset for a
period of time in exchange for consideration
lessee’s incremental
borrowing rate
The rate of interest that a lessee would have to pay to borrow
over a similar term and with a similar security the funds
necessary to obtain an asset of a similar value to the rightofuse
asset in a similar economic environment
lessor An entity that provides the right to use an underlying asset for
a period of time in exchange for consideration
IFRS 16
IFRS Foundation A757net investment in the
lease
The gross investment in the lease discounted at the interest
rate implicit in the lease
operating lease A lease that does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset
optional lease
payments
Payments to be made by a lessee to a lessor for the right to use
an underlying asset during periods covered by an option to
extend or terminate a lease that are not included in the lease
term
period of use The total period of time that an asset is used to fulfil a contract
with a customer (including any nonconsecutive periods of time)
residual value
guarantee
A guarantee made to a lessor by a party unrelated to the lessor
that the value (or part of the value) of an underlying asset at the
end of a lease will be at least a specified amount
rightofuse asset An asset that represents a lessee’s right to use an underlying
asset for the lease term
shortterm lease A lease that at the commencement date has a lease term of
12 months or less A lease that contains a purchase option is not
a shortterm lease
sublease A transaction for which an underlying asset is released by a
lessee (intermediate lessor’) to a third party and the lease
(head lease’) between the head lessor and lessee remains in effect
underlying asset An asset that is the subject of a lease for which the right to use
that asset has been provided by a lessor to a lessee
unearned finance
income
The difference between
(a) the gross investment in the lease and
(b) the net investment in the lease
unguaranteed residual
value
That portion of the residual value of the underlying asset the
realisation of which by a lessor is not assured or is guaranteed
solely by a party related to the lessor
variable lease
payments
The portion of payments made by a lessee to a lessor for the
right to use an underlying asset during the lease term that
varies because of changes in facts or circumstances occurring
after the commencement date other than the passage of time
Terms defined in other Standards and used in this Standard with
the same meaning
contract An agreement between two or more parties that creates
enforceable rights and obligations
useful life The period over which an asset is expected to be available for use
by an entity or the number of production or similar units
expected to be obtained from an asset by an entity
IFRS 16
IFRS FoundationA758Appendix B
Application guidance
This appendix is an integral part of the Standard It describes the application of paragraphs 1–103 and
has the same authority as the other parts of the Standard
Portfolio application
B1 This Standard specifies the accounting for an individual lease However as a
practical expedient an entity may apply this Standard to a portfolio of leases
with similar characteristics if the entity reasonably expects that the effects on
the financial statements of applying this Standard to the portfolio would not
differ materially from applying this Standard to the individual leases within
that portfolio If accounting for a portfolio an entity shall use estimates and
assumptions that reflect the size and composition of the portfolio
Combination of contracts
B2 In applying this Standard an entity shall combine two or more contracts
entered into at or near the same time with the same counterparty (or related
parties of the counterparty) and account for the contracts as a single contract if
one or more of the following criteria are met
(a) the contracts are negotiated as a package with an overall commercial
objective that cannot be understood without considering the contracts
together
(b) the amount of consideration to be paid in one contract depends on the
price or performance of the other contract or
(c) the rights to use underlying assets conveyed in the contracts (or some
rights to use underlying assets conveyed in each of the contracts) form a
single lease component as described in paragraph B32
Recognition exemption leases for which the underlying
asset is of low value (paragraphs 5–8)
B3 Except as specified in paragraph B7 this Standard permits a lessee to apply
paragraph 6 to account for leases for which the underlying asset is of low value
A lessee shall assess the value of an underlying asset based on the value of the
asset when it is new regardless of the age of the asset being leased
B4 The assessment of whether an underlying asset is of low value is performed on
an absolute basis Leases of lowvalue assets qualify for the accounting treatment
in paragraph 6 regardless of whether those leases are material to the lessee The
assessment is not affected by the size nature or circumstances of the lessee
Accordingly different lessees are expected to reach the same conclusions about
whether a particular underlying asset is of low value
B5 An underlying asset can be of low value only if
(a) the lessee can benefit from use of the underlying asset on its own or
together with other resources that are readily available to the lessee and
(b) the underlying asset is not highly dependent on or highly interrelated
with other assets
IFRS 16
IFRS Foundation A759B6 A lease of an underlying asset does not qualify as a lease of a lowvalue asset if
the nature of the asset is such that when new the asset is typically not of low
value For example leases of cars would not qualify as leases of lowvalue assets
because a new car would typically not be of low value
B7 If a lessee subleases an asset or expects to sublease an asset the head lease does
not qualify as a lease of a lowvalue asset
B8 Examples of lowvalue underlying assets can include tablet and personal
computers small items of office furniture and telephones
Identifying a lease (paragraphs 9–11)
B9 To assess whether a contract conveys the right to control the use of an identified
asset (see paragraphs B13–B20) for a period of time an entity shall assess
whether throughout the period of use the customer has both of the following
(a) the right to obtain substantially all of the economic benefits from use of
the identified asset (as described in paragraphs B21–B23) and
(b) the right to direct the use of the identified asset (as described in
paragraphs B24–B30)
B10 If the customer has the right to control the use of an identified asset for only a
portion of the term of the contract the contract contains a lease for that portion
of the term
B11 A contract to receive goods or services may be entered into by a joint
arrangement or on behalf of a joint arrangement as defined in IFRS 11 Joint
Arrangements In this case the joint arrangement is considered to be the
customer in the contract Accordingly in assessing whether such a contract
contains a lease an entity shall assess whether the joint arrangement has the
right to control the use of an identified asset throughout the period of use
B12 An entity shall assess whether a contract contains a lease for each potential
separate lease component Refer to paragraph B32 for guidance on separate
lease components
Identified asset
B13 An asset is typically identified by being explicitly specified in a contract
However an asset can also be identified by being implicitly specified at the time
that the asset is made available for use by the customer
Substantive substitution rights
B14 Even if an asset is specified a customer does not have the right to use an
identified asset if the supplier has the substantive right to substitute the asset
throughout the period of use A supplier’s right to substitute an asset is
substantive only if both of the following conditions exist
(a) the supplier has the practical ability to substitute alternative assets
throughout the period of use (for example the customer cannot prevent
the supplier from substituting the asset and alternative assets are readily
available to the supplier or could be sourced by the supplier within a
reasonable period of time) and
IFRS 16
IFRS FoundationA760(b) the supplier would benefit economically from the exercise of its right to
substitute the asset (ie the economic benefits associated with
substituting the asset are expected to exceed the costs associated with
substituting the asset)
B15 If the supplier has a right or an obligation to substitute the asset only on or after
either a particular date or the occurrence of a specified event the supplier’s
substitution right is not substantive because the supplier does not have the
practical ability to substitute alternative assets throughout the period of use
B16 An entity’s evaluation of whether a supplier’s substitution right is substantive is
based on facts and circumstances at inception of the contract and shall exclude
consideration of future events that at inception of the contract are not
considered likely to occur Examples of future events that at inception of the
contract would not be considered likely to occur and thus should be excluded
from the evaluation include
(a) an agreement by a future customer to pay an above market rate for use
of the asset
(b) the introduction of new technology that is not substantially developed at
inception of the contract
(c) a substantial difference between the customer’s use of the asset or the
performance of the asset and the use or performance considered likely
at inception of the contract and
(d) a substantial difference between the market price of the asset during the
period of use and the market price considered likely at inception of the
contract
B17 If the asset is located at the customer’s premises or elsewhere the costs
associated with substitution are generally higher than when located at the
supplier’s premises and therefore are more likely to exceed the benefits
associated with substituting the asset
B18 The supplier’s right or obligation to substitute the asset for repairs and
maintenance if the asset is not operating properly or if a technical upgrade
becomes available does not preclude the customer from having the right to use
an identified asset
B19 If the customer cannot readily determine whether the supplier has a substantive
substitution right the customer shall presume that any substitution right is not
substantive
Portions of assets
B20 A capacity portion of an asset is an identified asset if it is physically distinct (for
example a floor of a building) A capacity or other portion of an asset that is not
physically distinct (for example a capacity portion of a fibre optic cable) is not
an identified asset unless it represents substantially all of the capacity of the
asset and thereby provides the customer with the right to obtain substantially
all of the economic benefits from use of the asset
IFRS 16
IFRS Foundation A761Right to obtain economic benefits from use
B21 To control the use of an identified asset a customer is required to have the right
to obtain substantially all of the economic benefits from use of the asset
throughout the period of use (for example by having exclusive use of the asset
throughout that period) A customer can obtain economic benefits from use of
an asset directly or indirectly in many ways such as by using holding or
subleasing the asset The economic benefits from use of an asset include its
primary output and byproducts (including potential cash flows derived from
these items) and other economic benefits from using the asset that could be
realised from a commercial transaction with a third party
B22 When assessing the right to obtain substantially all of the economic benefits
from use of an asset an entity shall consider the economic benefits that result
from use of the asset within the defined scope of a customer’s right to use the
asset (see paragraph B30) For example
(a) if a contract limits the use of a motor vehicle to only one particular
territory during the period of use an entity shall consider only the
economic benefits from use of the motor vehicle within that territory
and not beyond
(b) if a contract specifies that a customer can drive a motor vehicle only up
to a particular number of miles during the period of use an entity shall
consider only the economic benefits from use of the motor vehicle for
the permitted mileage and not beyond
B23 If a contract requires a customer to pay the supplier or another party a portion
of the cash flows derived from use of an asset as consideration those cash flows
paid as consideration shall be considered to be part of the economic benefits
that the customer obtains from use of the asset For example if the customer is
required to pay the supplier a percentage of sales from use of retail space as
consideration for that use that requirement does not prevent the customer from
having the right to obtain substantially all of the economic benefits from use of
the retail space This is because the cash flows arising from those sales are
considered to be economic benefits that the customer obtains from use of the
retail space a portion of which it then pays to the supplier as consideration for
the right to use that space
Right to direct the use
B24 A customer has the right to direct the use of an identified asset throughout the
period of use only if either
(a) the customer has the right to direct how and for what purpose the asset
is used throughout the period of use (as described in paragraphs
B25–B30) or
(b) the relevant decisions about how and for what purpose the asset is used
are predetermined and
IFRS 16
IFRS FoundationA762(i) the customer has the right to operate the asset (or to direct others
to operate the asset in a manner that it determines) throughout
the period of use without the supplier having the right to
change those operating instructions or
(ii) the customer designed the asset (or specific aspects of the asset)
in a way that predetermines how and for what purpose the asset
will be used throughout the period of use
How and for what purpose the asset is used
B25 A customer has the right to direct how and for what purpose the asset is used if
within the scope of its right of use defined in the contract it can change how
and for what purpose the asset is used throughout the period of use In making
this assessment an entity considers the decisionmaking rights that are most
relevant to changing how and for what purpose the asset is used throughout the
period of use Decisionmaking rights are relevant when they affect the
economic benefits to be derived from use The decisionmaking rights that are
most relevant are likely to be different for different contracts depending on the
nature of the asset and the terms and conditions of the contract
B26 Examples of decisionmaking rights that depending on the circumstances grant
the right to change how and for what purpose the asset is used within the
defined scope of the customer’s right of use include
(a) rights to change the type of output that is produced by the asset (for
example to decide whether to use a shipping container to transport
goods or for storage or to decide upon the mix of products sold from
retail space)
(b) rights to change when the output is produced (for example to decide
when an item of machinery or a power plant will be used)
(c) rights to change where the output is produced (for example to decide
upon the destination of a truck or a ship or to decide where an item of
equipment is used) and
(d) rights to change whether the output is produced and the quantity of
that output (for example to decide whether to produce energy from a
power plant and how much energy to produce from that power plant)
B27 Examples of decisionmaking rights that do not grant the right to change how
and for what purpose the asset is used include rights that are limited to
operating or maintaining the asset Such rights can be held by the customer or
the supplier Although rights such as those to operate or maintain an asset are
often essential to the efficient use of an asset they are not rights to direct how
and for what purpose the asset is used and are often dependent on the decisions
about how and for what purpose the asset is used However rights to operate an
asset may grant the customer the right to direct the use of the asset if the
relevant decisions about how and for what purpose the asset is used are
predetermined (see paragraph B24(b)(i))
IFRS 16
IFRS Foundation A763Decisions determined during and before the period of use
B28 The relevant decisions about how and for what purpose the asset is used can be
predetermined in a number of ways For example the relevant decisions can be
predetermined by the design of the asset or by contractual restrictions on the
use of the asset
B29 In assessing whether a customer has the right to direct the use of an asset an
entity shall consider only rights to make decisions about the use of the asset
during the period of use unless the customer designed the asset (or specific
aspects of the asset) as described in paragraph B24(b)(ii) Consequently unless
the conditions in paragraph B24(b)(ii) exist an entity shall not consider
decisions that are predetermined before the period of use For example if a
customer is able only to specify the output of an asset before the period of use
the customer does not have the right to direct the use of that asset The ability
to specify the output in a contract before the period of use without any other
decisionmaking rights relating to the use of the asset gives a customer the same
rights as any customer that purchases goods or services
Protective rights
B30 A contract may include terms and conditions designed to protect the supplier’s
interest in the asset or other assets to protect its personnel or to ensure the
supplier’s compliance with laws or regulations These are examples of
protective rights For example a contract may (i) specify the maximum amount
of use of an asset or limit where or when the customer can use the asset (ii)
require a customer to follow particular operating practices or (iii) require a
customer to inform the supplier of changes in how an asset will be used
Protective rights typically define the scope of the customer’s right of use but do
not in isolation prevent the customer from having the right to direct the use of
an asset
IFRS 16
IFRS FoundationA764B31 The following flowchart may assist entities in making the assessment of whether
a contract is or contains a lease
No
No
Yes
Yes
Yes
Customer Supplier
No
Is there an identified asset
Consider paragraphs B13–B20
Does the customer have the right to
obtain substantially all of the economic
benefits from use of the asset throughout
the period of use
Consider paragraphs B21–B23
Does the customer the supplier or
neither party have the right to direct how
and for what purpose the asset is used
throughout the period of use
Consider paragraphs B25–B30
Neither how and for what
purpose the asset will be
used is predetermined
Does the customer have the right to
operate the asset throughout the period of
use without the supplier having the right
to change those operating instructions
Consider paragraph B24(b)(i)
The contract contains a lease The contract does not
contain a lease
No
Yes
Did the customer design the asset in a way
that predetermines how and for what
purpose the asset will be used throughout
the period of use
Consider paragraph B24(b)(ii)
IFRS 16
IFRS Foundation A765Separating components of a contract (paragraphs 12–17)
B32 The right to use an underlying asset is a separate lease component if both
(a) the lessee can benefit from use of the underlying asset either on its own
or together with other resources that are readily available to the lessee
Readily available resources are goods or services that are sold or leased
separately (by the lessor or other suppliers) or resources that the lessee
has already obtained (from the lessor or from other transactions or
events) and
(b) the underlying asset is neither highly dependent on nor highly
interrelated with the other underlying assets in the contract For
example the fact that a lessee could decide not to lease the underlying
asset without significantly affecting its rights to use other underlying
assets in the contract might indicate that the underlying asset is not
highly dependent on or highly interrelated with those other underlying
assets
B33 A contract may include an amount payable by the lessee for activities and costs
that do not transfer a good or service to the lessee For example a lessor may
include in the total amount payable a charge for administrative tasks or other
costs it incurs associated with the lease that do not transfer a good or service to
the lessee Such amounts payable do not give rise to a separate component of
the contract but are considered to be part of the total consideration that is
allocated to the separately identified components of the contract
Lease term (paragraphs 18–21)
B34 In determining the lease term and assessing the length of the noncancellable
period of a lease an entity shall apply the definition of a contract and determine
the period for which the contract is enforceable A lease is no longer enforceable
when the lessee and the lessor each has the right to terminate the lease without
permission from the other party with no more than an insignificant penalty
B35 If only a lessee has the right to terminate a lease that right is considered to be
an option to terminate the lease available to the lessee that an entity considers
when determining the lease term If only a lessor has the right to terminate a
lease the noncancellable period of the lease includes the period covered by the
option to terminate the lease
B36 The lease term begins at the commencement date and includes any rentfree
periods provided to the lessee by the lessor
B37 At the commencement date an entity assesses whether the lessee is reasonably
certain to exercise an option to extend the lease or to purchase the underlying
asset or not to exercise an option to terminate the lease The entity considers all
relevant facts and circumstances that create an economic incentive for the lessee
to exercise or not to exercise the option including any expected changes in
facts and circumstances from the commencement date until the exercise date of
the option Examples of factors to consider include but are not limited to
(a) contractual terms and conditions for the optional periods compared
with market rates such as
IFRS 16
IFRS FoundationA766(i) the amount of payments for the lease in any optional period
(ii) the amount of any variable payments for the lease or other
contingent payments such as payments resulting from
termination penalties and residual value guarantees and
(iii) the terms and conditions of any options that are exercisable after
initial optional periods (for example a purchase option that is
exercisable at the end of an extension period at a rate that is
currently below market rates)
(b) significant leasehold improvements undertaken (or expected to be
undertaken) over the term of the contract that are expected to have
significant economic benefit for the lessee when the option to extend or
terminate the lease or to purchase the underlying asset becomes
exercisable
(c) costs relating to the termination of the lease such as negotiation costs
relocation costs costs of identifying another underlying asset suitable
for the lessee’s needs costs of integrating a new asset into the lessee’s
operations or termination penalties and similar costs including costs
associated with returning the underlying asset in a contractually
specified condition or to a contractually specified location
(d) the importance of that underlying asset to the lessee’s operations
considering for example whether the underlying asset is a specialised
asset the location of the underlying asset and the availability of suitable
alternatives and
(e) conditionality associated with exercising the option (ie when the option
can be exercised only if one or more conditions are met) and the
likelihood that those conditions will exist
B38 An option to extend or terminate a lease may be combined with one or more
other contractual features (for example a residual value guarantee) such that
the lessee guarantees the lessor a minimum or fixed cash return that is
substantially the same regardless of whether the option is exercised In such
cases and notwithstanding the guidance on insubstance fixed payments in
paragraph B42 an entity shall assume that the lessee is reasonably certain to
exercise the option to extend the lease or not to exercise the option to terminate
the lease
B39 The shorter the noncancellable period of a lease the more likely a lessee is to
exercise an option to extend the lease or not to exercise an option to terminate
the lease This is because the costs associated with obtaining a replacement asset
are likely to be proportionately higher the shorter the noncancellable period
B40 A lessee’s past practice regarding the period over which it has typically used
particular types of assets (whether leased or owned) and its economic reasons
for doing so may provide information that is helpful in assessing whether the
lessee is reasonably certain to exercise or not to exercise an option For
example if a lessee has typically used particular types of assets for a particular
period of time or if the lessee has a practice of frequently exercising options on
leases of particular types of underlying assets the lessee shall consider the
IFRS 16
IFRS Foundation A767economic reasons for that past practice in assessing whether it is reasonably
certain to exercise an option on leases of those assets
B41 Paragraph 20 specifies that after the commencement date a lessee reassesses
the lease term upon the occurrence of a significant event or a significant change
in circumstances that is within the control of the lessee and affects whether the
lessee is reasonably certain to exercise an option not previously included in its
determination of the lease term or not to exercise an option previously included
in its determination of the lease term Examples of significant events or changes
in circumstances include
(a) significant leasehold improvements not anticipated at the
commencement date that are expected to have significant economic
benefit for the lessee when the option to extend or terminate the lease
or to purchase the underlying asset becomes exercisable
(b) a significant modification to or customisation of the underlying asset
that was not anticipated at the commencement date
(c) the inception of a sublease of the underlying asset for a period beyond
the end of the previously determined lease term and
(d) a business decision of the lessee that is directly relevant to exercising or
not exercising an option (for example a decision to extend the lease of a
complementary asset to dispose of an alternative asset or to dispose of a
business unit within which the rightofuse asset is employed)
Insubstance fixed lease payments (paragraphs 27(a)
36(c) and 70(a))
B42 Lease payments include any insubstance fixed lease payments Insubstance
fixed lease payments are payments that may in form contain variability but
that in substance are unavoidable Insubstance fixed lease payments exist for
example if
(a) payments are structured as variable lease payments but there is no
genuine variability in those payments Those payments contain variable
clauses that do not have real economic substance Examples of those
types of payments include
(i) payments that must be made only if an asset is proven to be
capable of operating during the lease or only if an event occurs
that has no genuine possibility of not occurring or
(ii) payments that are initially structured as variable lease payments
linked to the use of the underlying asset but for which the
variability will be resolved at some point after the
commencement date so that the payments become fixed for the
remainder of the lease term Those payments become
insubstance fixed payments when the variability is resolved
(b) there is more than one set of payments that a lessee could make but only
one of those sets of payments is realistic In this case an entity shall
consider the realistic set of payments to be lease payments
IFRS 16
IFRS FoundationA768(c) there is more than one realistic set of payments that a lessee could make
but it must make at least one of those sets of payments In this case an
entity shall consider the set of payments that aggregates to the lowest
amount (on a discounted basis) to be lease payments
Lessee involvement with the underlying asset before the
commencement date
Costs of the lessee relating to the construction or design of the
underlying asset
B43 An entity may negotiate a lease before the underlying asset is available for use by
the lessee For some leases the underlying asset may need to be constructed or
redesigned for use by the lessee Depending on the terms and conditions of the
contract a lessee may be required to make payments relating to the
construction or design of the asset
B44 If a lessee incurs costs relating to the construction or design of an underlying
asset the lessee shall account for those costs applying other applicable
Standards such as IAS 16 Costs relating to the construction or design of an
underlying asset do not include payments made by the lessee for the right to use
the underlying asset Payments for the right to use an underlying asset are
payments for a lease regardless of the timing of those payments
Legal title to the underlying asset
B45 A lessee may obtain legal title to an underlying asset before that legal title is
transferred to the lessor and the asset is leased to the lessee Obtaining legal title
does not in itself determine how to account for the transaction
B46 If the lessee controls (or obtains control of) the underlying asset before that asset
is transferred to the lessor the transaction is a sale and leaseback transaction
that is accounted for applying paragraphs 98–103
B47 However if the lessee does not obtain control of the underlying asset before the
asset is transferred to the lessor the transaction is not a sale and leaseback
transaction For example this may be the case if a manufacturer a lessor and a
lessee negotiate a transaction for the purchase of an asset from the
manufacturer by the lessor which is in turn leased to the lessee The lessee may
obtain legal title to the underlying asset before legal title transfers to the lessor
In this case if the lessee obtains legal title to the underlying asset but does not
obtain control of the asset before it is transferred to the lessor the transaction is
not accounted for as a sale and leaseback transaction but as a lease
Lessee disclosures (paragraph 59)
B48 In determining whether additional information about leasing activities is
necessary to meet the disclosure objective in paragraph 51 a lessee shall
consider
IFRS 16
IFRS Foundation A769(a) whether that information is relevant to users of financial statements A
lessee shall provide additional information specified in paragraph 59
only if that information is expected to be relevant to users of financial
statements In this context this is likely to be the case if it helps those
users to understand
(i) the flexibility provided by leases Leases may provide flexibility
if for example a lessee can reduce its exposure by exercising
termination options or renewing leases with favourable terms
and conditions
(ii) restrictions imposed by leases Leases may impose restrictions
for example by requiring the lessee to maintain particular
financial ratios
(iii) sensitivity of reported information to key variables Reported
information may be sensitive to for example future variable
lease payments
(iv) exposure to other risks arising from leases
(v) deviations from industry practice Such deviations may include
for example unusual or unique lease terms and conditions that
affect a lessee’s lease portfolio
(b) whether that information is apparent from information either presented
in the primary financial statements or disclosed in the notes A lessee
need not duplicate information that is already presented elsewhere in
the financial statements
B49 Additional information relating to variable lease payments that depending on
the circumstances may be needed to satisfy the disclosure objective in
paragraph 51 could include information that helps users of financial statements
to assess for example
(a) the lessee’s reasons for using variable lease payments and the prevalence
of those payments
(b) the relative magnitude of variable lease payments to fixed payments
(c) key variables upon which variable lease payments depend and how
payments are expected to vary in response to changes in those key
variables and
(d) other operational and financial effects of variable lease payments
B50 Additional information relating to extension options or termination options
that depending on the circumstances may be needed to satisfy the disclosure
objective in paragraph 51 could include information that helps users of
financial statements to assess for example
(a) the lessee’s reasons for using extension options or termination options
and the prevalence of those options
(b) the relative magnitude of optional lease payments to lease payments
(c) the prevalence of the exercise of options that were not included in the
measurement of lease liabilities and
IFRS 16
IFRS FoundationA770(d) other operational and financial effects of those options
B51 Additional information relating to residual value guarantees that depending on
the circumstances may be needed to satisfy the disclosure objective in
paragraph 51 could include information that helps users of financial statements
to assess for example
(a) the lessee’s reasons for providing residual value guarantees and the
prevalence of those guarantees
(b) the magnitude of a lessee’s exposure to residual value risk
(c) the nature of underlying assets for which those guarantees are provided
and
(d) other operational and financial effects of those guarantees
B52 Additional information relating to sale and leaseback transactions that
depending on the circumstances may be needed to satisfy the disclosure
objective in paragraph 51 could include information that helps users of
financial statements to assess for example
(a) the lessee’s reasons for sale and leaseback transactions and the
prevalence of those transactions
(b) key terms and conditions of individual sale and leaseback transactions
(c) payments not included in the measurement of lease liabilities and
(d) the cash flow effect of sale and leaseback transactions in the reporting
period
Lessor lease classification (paragraphs 61–66)
B53 The classification of leases for lessors in this Standard is based on the extent to
which the lease transfers the risks and rewards incidental to ownership of an
underlying asset Risks include the possibilities of losses from idle capacity or
technological obsolescence and of variations in return because of changing
economic conditions Rewards may be represented by the expectation of
profitable operation over the underlying asset’s economic life and of gain from
appreciation in value or realisation of a residual value
B54 A lease contract may include terms and conditions to adjust the lease payments
for particular changes that occur between the inception date and the
commencement date (such as a change in the lessor’s cost of the underlying
asset or a change in the lessor’s cost of financing the lease) In that case for the
purposes of classifying the lease the effect of any such changes shall be deemed
to have taken place at the inception date
B55 When a lease includes both land and buildings elements a lessor shall assess the
classification of each element as a finance lease or an operating lease separately
applying paragraphs 62–66 and B53–B54 In determining whether the land
element is an operating lease or a finance lease an important consideration is
that land normally has an indefinite economic life
B56 Whenever necessary in order to classify and account for a lease of land and
buildings a lessor shall allocate lease payments (including any lumpsum
IFRS 16
IFRS Foundation A771upfront payments) between the land and the buildings elements in proportion
to the relative fair values of the leasehold interests in the land element and
buildings element of the lease at the inception date If the lease payments
cannot be allocated reliably between these two elements the entire lease is
classified as a finance lease unless it is clear that both elements are operating
leases in which case the entire lease is classified as an operating lease
B57 For a lease of land and buildings in which the amount for the land element is
immaterial to the lease a lessor may treat the land and buildings as a single unit
for the purpose of lease classification and classify it as a finance lease or an
operating lease applying paragraphs 62–66 and B53–B54 In such a case a lessor
shall regard the economic life of the buildings as the economic life of the entire
underlying asset
Sublease classification
B58 In classifying a sublease an intermediate lessor shall classify the sublease as a
finance lease or an operating lease as follows
(a) if the head lease is a shortterm lease that the entity as a lessee has
accounted for applying paragraph 6 the sublease shall be classified as an
operating lease
(b) otherwise the sublease shall be classified by reference to the rightofuse
asset arising from the head lease rather than by reference to the
underlying asset (for example the item of property plant or equipment
that is the subject of the lease)
IFRS 16
IFRS FoundationA772Appendix C
Effective date and transition
This appendix is an integral part of the Standard and has the same authority as the other parts of
the Standard
Effective date
C1 An entity shall apply this Standard for annual reporting periods beginning on or
after 1 January 2019 Earlier application is permitted for entities that apply
IFRS 15 Revenue from Contracts with Customers at or before the date of initial
application of this Standard If an entity applies this Standard earlier it shall
disclose that fact
Transition
C2 For the purposes of the requirements in paragraphs C1–C19 the date of initial
application is the beginning of the annual reporting period in which an entity
first applies this Standard
Definition of a lease
C3 As a practical expedient an entity is not required to reassess whether a contract
is or contains a lease at the date of initial application Instead the entity is
permitted
(a) to apply this Standard to contracts that were previously identified as
leases applying IAS 17 Leases and IFRIC 4 Determining whether an
Arrangement contains a Lease The entity shall apply the transition
requirements in paragraphs C5–C18 to those leases
(b) not to apply this Standard to contracts that were not previously
identified as containing a lease applying IAS 17 and IFRIC 4
C4 If an entity chooses the practical expedient in paragraph C3 it shall disclose that
fact and apply the practical expedient to all of its contracts As a result the
entity shall apply the requirements in paragraphs 9–11 only to contracts entered
into (or changed) on or after the date of initial application
Lessees
C5 A lessee shall apply this Standard to its leases either
(a) retrospectively to each prior reporting period presented applying IAS 8
Accounting Policies Changes in Accounting Estimates and Errorsor
(b) retrospectively with the cumulative effect of initially applying the
Standard recognised at the date of initial application in accordance with
paragraphs C7–C13
C6 A lessee shall apply the election described in paragraph C5 consistently to all of
its leases in which it is a lessee
C7 If a lessee elects to apply this Standard in accordance with paragraph C5(b) the
lessee shall not restate comparative information Instead the lessee shall
IFRS 16
IFRS Foundation A773recognise the cumulative effect of initially applying this Standard as an
adjustment to the opening balance of retained earnings (or other component of
equity as appropriate) at the date of initial application
Leases previously classified as operating leases
C8 If a lessee elects to apply this Standard in accordance with paragraph C5(b) the
lessee shall
(a) recognise a lease liability at the date of initial application for leases
previously classified as an operating lease applying IAS 17 The lessee
shall measure that lease liability at the present value of the remaining
lease payments discounted using the lessee’s incremental borrowing
rate at the date of initial application
(b) recognise a rightofuse asset at the date of initial application for leases
previously classified as an operating lease applying IAS 17 The lessee
shall choose on a leasebylease basis to measure that rightofuse asset
at either
(i) its carrying amount as if the Standard had been applied since the
commencement date but discounted using the lessee’s
incremental borrowing rate at the date of initial application or
(ii) an amount equal to the lease liability adjusted by the amount of
any prepaid or accrued lease payments relating to that lease
recognised in the statement of financial position immediately
before the date of initial application
(c) apply IAS 36 Impairment of Assets to rightofuse assets at the date of initial
application unless the lessee applies the practical expedient in
paragraph C10(b)
C9 Notwithstanding the requirements in paragraph C8 for leases previously
classified as operating leases applying IAS 17 a lessee
(a) is not required to make any adjustments on transition for leases for
which the underlying asset is of low value (as described in paragraphs
B3–B8) that will be accounted for applying paragraph 6 The lessee shall
account for those leases applying this Standard from the date of initial
application
(b) is not required to make any adjustments on transition for leases
previously accounted for as investment property using the fair value
model in IAS 40 Investment Property The lessee shall account for the
rightofuse asset and the lease liability arising from those leases applying
IAS 40 and this Standard from the date of initial application
(c) shall measure the rightofuse asset at fair value at the date of initial
application for leases previously accounted for as operating leases
applying IAS 17 and that will be accounted for as investment property
using the fair value model in IAS 40 from the date of initial application
The lessee shall account for the rightofuse asset and the lease liability
arising from those leases applying IAS 40 and this Standard from the
date of initial application
IFRS 16
IFRS FoundationA774C10 A lessee may use one or more of the following practical expedients when
applying this Standard retrospectively in accordance with paragraph C5(b) to
leases previously classified as operating leases applying IAS 17 A lessee is
permitted to apply these practical expedients on a leasebylease basis
(a) a lessee may apply a single discount rate to a portfolio of leases with
reasonably similar characteristics (such as leases with a similar
remaining lease term for a similar class of underlying asset in a similar
economic environment)
(b) a lessee may rely on its assessment of whether leases are onerous
applying IAS 37 Provisions Contingent Liabilities and Contingent Assets
immediately before the date of initial application as an alternative to
performing an impairment review If a lessee chooses this practical
expedient the lessee shall adjust the rightofuse asset at the date of
initial application by the amount of any provision for onerous leases
recognised in the statement of financial position immediately before the
date of initial application
(c) a lessee may elect not to apply the requirements in paragraph C8 to
leases for which the lease term ends within 12 months of the date of
initial application In this case a lessee shall
(i) account for those leases in the same way as shortterm leases as
described in paragraph 6 and
(ii) include the cost associated with those leases within the
disclosure of shortterm lease expense in the annual reporting
period that includes the date of initial application
(d) a lessee may exclude initial direct costs from the measurement of the
rightofuse asset at the date of initial application
(e) a lessee may use hindsight such as in determining the lease term if the
contract contains options to extend or terminate the lease
Leases previously classified as finance leases
C11 If a lessee elects to apply this Standard in accordance with paragraph C5(b) for
leases that were classified as finance leases applying IAS 17 the carrying amount
of the rightofuse asset and the lease liability at the date of initial application
shall be the carrying amount of the lease asset and lease liability immediately
before that date measured applying IAS 17 For those leases a lessee shall
account for the rightofuse asset and the lease liability applying this Standard
from the date of initial application
Disclosure
C12 If a lessee elects to apply this Standard in accordance with paragraph C5(b) the
lessee shall disclose information about initial application required by
paragraph 28 of IAS 8 except for the information specified in paragraph 28(f) of
IAS 8 Instead of the information specified in paragraph 28(f) of IAS 8 the lessee
shall disclose
IFRS 16
IFRS Foundation A775(a) the weighted average lessee’s incremental borrowing rate applied to
lease liabilities recognised in the statement of financial position at the
date of initial application and
(b) an explanation of any difference between
(i) operating lease commitments disclosed applying IAS 17 at the
end of the annual reporting period immediately preceding the
date of initial application discounted using the incremental
borrowing rate at the date of initial application as described in
paragraph C8(a) and
(ii) lease liabilities recognised in the statement of financial position
at the date of initial application
C13 If a lessee uses one or more of the specified practical expedients in
paragraph C10 it shall disclose that fact
Lessors
C14 Except as described in paragraph C15 a lessor is not required to make any
adjustments on transition for leases in which it is a lessor and shall account for
those leases applying this Standard from the date of initial application
C15 An intermediate lessor shall
(a) reassess subleases that were classified as operating leases applying IAS 17
and are ongoing at the date of initial application to determine whether
each sublease should be classified as an operating lease or a finance lease
applying this Standard The intermediate lessor shall perform this
assessment at the date of initial application on the basis of the
remaining contractual terms and conditions of the head lease and
sublease at that date
(b) for subleases that were classified as operating leases applying IAS 17 but
finance leases applying this Standard account for the sublease as a new
finance lease entered into at the date of initial application
Sale and leaseback transactions before the date of initial
application
C16 An entity shall not reassess sale and leaseback transactions entered into before
the date of initial application to determine whether the transfer of the
underlying asset satisfies the requirements in IFRS 15 to be accounted for as a
sale
C17 If a sale and leaseback transaction was accounted for as a sale and a finance lease
applying IAS 17 the sellerlessee shall
(a) account for the leaseback in the same way as it accounts for any other
finance lease that exists at the date of initial application and
(b) continue to amortise any gain on sale over the lease term
C18 If a sale and leaseback transaction was accounted for as a sale and operating
lease applying IAS 17 the sellerlessee shall
IFRS 16
IFRS FoundationA776(a) account for the leaseback in the same way as it accounts for any other
operating lease that exists at the date of initial application and
(b) adjust the leaseback rightofuse asset for any deferred gains or losses
that relate to offmarket terms recognised in the statement of financial
position immediately before the date of initial application
Amounts previously recognised in respect of business
combinations
C19 If a lessee previously recognised an asset or a liability applying IFRS 3 Business
Combinations relating to favourable or unfavourable terms of an operating lease
acquired as part of a business combination the lessee shall derecognise that
asset or liability and adjust the carrying amount of the rightofuse asset by a
corresponding amount at the date of initial application
References to IFRS 9
C20 If an entity applies this Standard but does not yet apply IFRS 9 Financial
Instruments any reference in this Standard to IFRS 9 shall be read as a reference
to IAS 39 Financial Instruments Recognition and Measurement
Withdrawal of other Standards
C21 This Standard supersedes the following Standards and Interpretations
(a) IAS 17 Leases
(b) IFRIC 4 Determining whether an Arrangement contains a Lease
(c) SIC15 Operating Leases—Incentives and
(d) SIC27 Evaluating the Substance of Transactions Involving the Legal Form of a
Lease
IFRS 16
IFRS Foundation A777Appendix D
Amendments to other Standards
This appendix sets out the amendments to other Standards that are a consequence of the IASB issuing this
Standard An entity shall apply the amendments for annual periods beginning on or after 1 January
2019 If an entity applies this Standard for an earlier period it shall also apply these amendments for
that earlier period
An entity is not permitted to apply IFRS 16 before applying IFRS 15 Revenue from Contracts with
Customers (see paragraph C1)
Consequently for Standards that were effective on 1 January 2016 the amendments in this appendix are
presented based on the text of those Standards that was effective on 1 January 2016 as amended by
IFRS 15 The text of those Standards in this appendix does not include any other amendments that were
not effective at 1 January 2016
For Standards that were not effective on 1 January 2016 the amendments in this appendix are presented
based on the text of the initial publication of that Standard as amended by IFRS 15 The text of those
Standards in this appendix does not include any other amendments that were not effective at 1 January
2016
*****
The amendments contained in this appendix when this Standard was issued in 2016 have been
incorporated into the text of the relevant Standards included in this volume
IFRS 16
IFRS FoundationA778
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