TECHNICAL BULLETIN Vol.1
January 2014
in association with:
Table of contents 1. Foreword by CEO 2. IFRS 13 Fair value measurement 2. New and amended standards effective 01 Jan 2013 4. Issued but not effective standards 5. IASB Projects 6. Proposed changes to Auditor’s Report
Foreword by CEO
Technical queries email: technicalhelp@pafa.org.za
We take this opportunity to alert our members of the following forthcoming events:
At the second PAFA General Assembly meeting held in Accra, Ghana. It was announced that PAFA had entered
1. 07 May 2014 – Standard Setters/Technical Forum
into a partnership with a South African Audit Firm
2. 08 May 2014 – Seminar/Conference
SizweNtsalubaGobodo – SNG. Under this partnership, SNG
3. 09 May 2014 – 3rd General Assembly
would make available to PAFA its Technical Department.
4. 09 May 2014 - PAFA Board Meeting
The production of this Technical Bulletin is part of this partnership. This Bulletin will be produced every month.
Vickson Ncube Chief Executive Officer
Improving quality of financial reporting in both private and public sectors and enhancing the international credibility of the accountancy profession in Africa through adopting, implementing and enforcing International standards and best practice in each member country is one of PAFA’s four priorities. One of the observations made by the International Accounting Standards Board IASB is that comment letters on Discussions Papers and Exposure Drafts from the African Region are very few. We hope this Bulletin will awaken the desire to participate in the Standard Setting process by our Standard Setters from Africa. We trust our members will make full use of this Bulletin to share matters of technical concern. .01
IFRS 13 Fair value measurement and its interaction with other standards IFRS 13 introduces a new definition of fair value as ‘The price that would be received to sell an asset or
Interaction of IFRS 13 and standards on financial instruments
paid to transfer a liability in an orderly transaction between market participants at the measurement
IAS 39 or IFRS 9 requires that all financial
date.’ The new definition has provided more clarity
instruments be measured at fair value on initial
on the following:
recognition. Subsequently the financial instruments
• Fair value is exit price rather than a transaction
are classified into various categories and for each
price (entry price). However there is a presumption
category a measurement method is assigned. On
that the transaction price equal fair value unless
subsequent measurement the entity can measure
there are exceptions like the transaction is
its financial instruments using three measurement
distressed or forced sale, transactions are between
basis being fair value, amortized cost or cost where
related parties.
fair value cannot be reliable determined. Therefore
• Fair is a market based measurement and it not
when dealing with financial instruments, one
entity specific measurement. Therefore entity’s
will apply IFRS 13 on all financial instruments at
intention to hold an asset or to fulfil a liability is
initial recognition as that is the measurement basis
not relevant.
prescribed by the relevant standard. Subsequently one
• Fair value is determined at measurement date
will only apply IFRS 13 to those financial instruments
and it’s therefore a current price based on
that the entity subsequently measures at fair value.
prevailing market conditions at that date.
Impairment of instruments carried at amortized cost is not required to be at fair value.
It further provides a comprehensive guidance on how the fair value should be determined and the
However IFRS 7 para 25 requires that the entity
consideration to be made depending on whether you
discloses fair value for each class of financial assets
are valuing the asset or a liability. It does not stipulate
and financial liabilities in a way that it permits to be
when fair value can be or should be used. The entities
compared with its carrying amount. This requirement
turn to IFRS 13 Fair value measurement only if the
brings the entity back to IFRS 13 for financial
other standard requires or permit the use of fair value
instruments that are measured at amortized cost or
measurement or fair value based measurement at
cost. However, there is limited exception provided in
initial or subsequent measurement date.
terms of IFRS 7 par 29, where fair value disclosure is not required:
The aim of this paper is to provide clarity on when the
• when the carrying amount is a reasonable
entity should apply IFRS 13 Fair value
approximation of fair value, for example, for
measurement and the extent to which it must be
financial instruments such as short-term trade
applied. This is achieved by providing high level
receivables and payables
analysis of the interaction between IFRS 13 and
• for investment in equity instruments that is
other standards. IFRS “Consolidated without early
measured at cost because its fair value cannot be
application applicable on 1 January 2013” was used
determined reliably. for a contract containing a
as the source for this article and the paragraph
discretionary participation feature (as described
references are therefore as per that IASB official
in IFRS 4) if the fair value of that feature cannot be
pronouncement.
measured reliably.
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In addition to IFRS 7 disclosure requirements, the
comply with all the disclosure requirements of IFRS
entity must provide all disclosures required by IFRS
13 in addition to those required by IAS 16. As there
13. The extent of disclosure is determined by the fair
are no quoted prices for majority of Property, plant
value hierarchy. Where Level 1 fair value where quoted
and equipment, these will be categorized as either
unadjusted prices are used requires less disclosures
Level 2 or Level 3 fair value in terms of the fair value
than the Level 3 fair value where valuation technique
hierarchy depending on the extent of unobservable
and significant unobservable inputs are used require
input used in determining the fair value.
comprehensive disclosures. We have further investigated whether the entity would Interaction of IFRS 13 and employee benefits
be allowed to continue with the policy of determining revalued amount at regular intervals under the IFRS
The Employee benefits are scope out of IFRS 13 with
13 regime. Our analysis reveal that this is still allowed
exception for the entities that have funded defined
as IAS 16 para 34 has not been deleted which discusses
benefits. The plan assets should be recognized at fair
the frequency of revaluations. This paragraph states
value in terms of IAS19 Employee benefits. The entity
that “The frequency of revaluations depends upon the
is therefore required to apply IFRS 13 in determining
changes in fair values of the items of property, plant
the fair value of its plan assets. The fair value standard
and equipment being revalued. When the fair value of
is applied to all underlying assets that makes the total
a revalued asset differs materially from its carrying
amount of plan assets.
amount, a further revaluation is required. Some items of property, plant and equipment experience
The plan assets are scoped out of the IFRS 13
significant and volatile changes in fair value, thus
disclosure requirements, however IAS 19 par 142
necessitating annual revaluation. Such frequent
require disclosure of disaggregation ( each type
revaluations are unnecessary for items of property,
of underlying assets) of the plann assets and split
plant and equipment with only insignificant changes
between those valued at quoted prices ( Level 1) and
in fair value. Instead, it may be necessary to revalue
those that were not ( level 2 and 3)
the item only every three or five years.�
Interaction of IFRS 13 and Property, plant
In the case of impairment of assets, the similar
and equipment
principles apply. The entity is only required to apply IFRS 13 if the recoverable amount was determined
IAS 16 provides entities with the option for accounting
using fair value less costs to sell. In cases where the
for its property, plant and equipment at revaluation
entity have used the value in use IFRS 13 would not be
model or cost model subsequent to initial recognition.
relevant.
The revaluation model is a fair value based model, which is scope into IFRS 13. Revalued amount is
Interaction of IFRS 13 and Investment Property
described as fair value at the date of the revaluation less any subsequent accumulated depreciation and
Currently IAS 40 is flexible, as it allows entities with
subsequent accumulated impairment losses.
properties that meet the definition of an investment property to still make a policy decision to apply the
Therefore before making the accounting policy
cost model as described in IAS16. However, once
decision for carrying your property, plant and
the entity has chosen the fair value model as the
equipment at fair value, carefully weigh the cost and
accounting policy, IFRS 13 would be applicable on
benefits. IAS 16 para 66 further requires the entity to
subsequent measurement of the investment property.
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The entity would also have to comply with all the
Conclusion
disclosure requirements. Again, the fair value for
The analysis provides entities with the point of
the investment properties is considered to be a Level
departure for application of IFRS 13 in practice.
2 or Level 3 fair value. It is Level 3 if valuation
It is important that when preparing the financial
technique uses significant unobservable inputs.
information at any reporting date the entity have a list of all assets and liabilities that would be affected by
Interaction of IFRS 13 and Non-current asset held
IFRS 13. The list needs to be split between recurring
for sale
and non-recurring fair value measurement. Nonrecurring fair values are all the fair values that are
IFRS 5 requires that a non-current asset classified
triggered by a certain event like impairment using
as held for sale be measured at the lower of carrying
the fair value less cost to sell instead of the value in
amount and fair value less costs to sell. This is
use. The list below reflect the summary of assets and
interesting because the requirements of IFRS 13
liabilities that would be affected by IFRS 13.
would not be relevant if the carrying amount is lower
• Financial assets and liabilities at fair value through
than the fair value less costs to sell, as the reclassified
asset would be carried as carrying amount. However
• All financial instruments are carried at fair value on
if the fair value less costs to sell is lower than the
carrying amount, the entity is required to apply IFRS
• Property, plant and equipment and intangible assets
13 in determining that fair value and also need to
comply with the disclosure requirements of IFRS 13 in
• Non-current asset held for sale measured at fair
addition to those required by IFRS 5.
profit and loss after initial recognition. initial recognition carried at revalued amount value less cost to sell
• Property, plant and equipment that has been Interaction of IFRS 13 and Investment in other
impaired, where the recoverable amount was
entities
based on fair value less cost to sell.
• Investment properties where the entity have chosen Investments in other entities are accounted for at
cost or at fair value in the entities separate financial
• Agriculture assets carried at fair value
statements IAS 27 para 10. The entity would be
• Plan assets relating to funded defined employee
required to apply IFRS 13 only in circumstances where
benefit
it has made a policy decision to use the fair value
• Investments in other entities that are carried at
instead of cost.
fair value model as its accounting policy.
fair value in the entities separate financial
statements. Interaction of IFRS 13 and Agriculture
• Government grants measured at fair value on initial recognition
Agricultural produce at the point of harvest and biological assets are required to be carried at fair value less cost to sell at initial and subsequent measurement. IAS 41 presume that the fair value of biological assets can be measured reliably, unless quoted prices are not available. In those instances the entity is allowed to use cost less accumulated depreciation and any accumulated impairment losses.
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New and amended standards effective 01 Jan 2013 New standards Annual periods beginning on
Standard
Details of amendment
IFRS 10, Consolidated Financial
New standard that replaces the
Statements (new)
consolidation requirements in SIC- period beginning on or after
or after Applies retrospectively for annually
12 Consolidation – Special Purpose
1 January 2013. Early adoption
Entities and IAS 27 Consolidated
is permitted.
and Separate Financial Statements. Standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess IFRS 11, Joint Arrangements (new)
New standard that deals with the
Applies retrospectively for annually
accounting for joint arrangements
period beginning on or after
and focuses on the rights and
1 January 2013. Early adoption
obligations of the arrangement,
is permitted.
rather than its legal form. Standard requires a single method for accounting for interests in jointly controlled entities IFRS 12, Disclosure of Interests in
New and comprehensive standard
Applies retrospectively for annually
Other Entities (new)
on disclosure requirements for all
period beginning on or after
forms of interests in other entities,
1 January 2013. Early adoption is
including joint arrangements,
permitted.
associates, special purpose vehicles and other off balance sheet vehicles IFRS 13, Fair Value Measurement
New standard on fair value
Applies retrospectively for annually
(new)
measurement. This standard brings
period beginning on or after
in the definition of fair value, and
1 January 2013. Early adoption is
requires disclosures for measuring
permitted.
fair value. This standard applies when other IFRS’s permit fair value measurements. It does not introduce any new requirements to measure fair value or present changes in fair value.
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Amendments Annual periods beginning on
Standard
Details of amendment
IAS 1,Presentation of financial
The amendments clarifies the
Applies retrospectively for annually
statements(amended)
disclosure requirements for
period beginning on or after
comparative information when
1 January 2013. Early adoption
an entity provides a third balance
is permitted.
or after
sheet either: As required by IAS8, Accounting policies, changes in accounting estimates and errors; or • Voluntarily. Annual periods beginning on
Standard
Details of amendment
IAS 16 Property, Plant and
The amendment clarifies that spare Applies retrospectively for annually
Equipment(amended)
parts and servicing equipment are
period beginning on or after
classified as property, plant and
1 January 2013. Early adoption
equipment rather than Inventory
is permitted.
or after
when the meet the definition of property, plant and equipment. IAS 19, Employee Benefits
Amendments to the accounting
Applies retrospectively for annually
(amended)
for current and future obligations
period beginning on or after
resulting from the provision of
1 January 2013. Early adoption
defined benefit plans
is permitted.
IAS 27, Consolidated and Separate
Consequential amendments
Applies retrospectively for annually
Financial Statements (amended)
resulting from the issue of IFRS
period beginning on or after
10,11 and 12
1 January 2013. Early adoption is permitted.
IAS 32 Financial instruments: Presentation(amended)
The amendment clarifies the treatment of income tax relating to distributions and transaction costs. Prior to the amendment, IAS 32 was ambiguous as to whether the tax effects of distributions and tax effects of equity transactions should be accounted for in the income statement or in equity. This amendment clarifies that the treatment is in accordance with IAS 12. Income tax related to distributions is recognised in the
Applies retrospectively for annually period beginning on or after 1 January 2013. Early adoption is permitted.
Income statement, and income tax related to the costs of equity transactions is recognised in equity.
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Annual periods beginning on
Standard
Details of amendment
IAS 34 Interim financial reporting
The amendment clarifies the
Applies retrospectively for annually
(amended)
disclosure requirements for
period beginning on or after
segment assets and liabilities
1 January 2013. Early adoption
in interim financial statements.
is permitted.
or after
A measure of total assets and liabilities is required for an operating segment in interim financial statements if such information regularly provided to management and there has been a material change in those measures since the last annual financial statements. IFRS 1, First-time Adoption of
Standard amended to provide
International Financial Reporting
guidance for entities emerging from period beginning on or after
Standards (amended)
severe hyperinflation and resuming
1 January 2013. Early adoption
presentation of IFRS compliant
is permitted.
Applies retrospectively for annually
financial statements, or presenting IFRS complaint financial statements for the first time. This amendment clarifies that an entity may apply IFRS 1 more than once under certain circumstances. IFRS 7, Financial Instruments:
Amendments require entities to
Applies retrospectively for annually
Disclosures (amended)
disclose gross amounts subject to
period beginning on or after
rights of set-off, amounts set off
1 January 2013. Early adoption
in accordance with the accounting
is permitted.
standards followed, and the related net credit exposure. This information will help investors understand the extent to which an entity has set off in its statement of financial position and the effects of rights of set-off on the entity’s rights and obligations IFRIC 20, Stripping Costs in the
This interpretation clarifies when
Production Phase of a Surface Mine production stripping should lead
Applies retrospectively for annually period beginning on or after
to the recognition of an asset and
1 January 2013. Early adoption
how that asset should be measured,
is permitted.
initially and at subsequent periods.
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Issued but not effective standards Annual periods beginning on
Standard
Details of amendment
IAS 32, Financial Instruments:
Amendments require entities to
Applies retrospectively for annually
Presentation- Offsetting Financial
disclose gross amounts subject to
period beginning on or after
Assets and Financial Liabilities
rights of set-off, amounts set off
1 January 2014. Early adoption
(Amended)
in accordance with the accounting
is permitted.
or after
standards followed, and the related net credit exposure. This information will help investors understand the extent to which an entity has set off in its statement of financial position and the effects of rights of set-off on the entity’s rights and obligations Investment entities IFRS 10, IFRS
These amendments define
Applies retrospectively for annually
12 and IAS 27 (Amended)
investment entity and introduce
period beginning on or after
exceptions to consolidating
1 January 2014. Early adoption
particular subsidiaries for
is permitted.
investment entities. They require investment entities to measure those subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments: in its consolidated and separate financial statements. The amendments also introduce new disclosure Requirements for investment entities in IFRS 12 and IAS 27. Novation of Derivatives and
Amendments provides relief
Applies retrospectively for annually
continuation of Hedge Accounting
to entities from discontinuing
period beginning on or after
IAS 39, Financial Instruments
hedge accounting when novation
1 January 2014. Early adoption
recognition and measurement
(introduction of something new)
is permitted.
(Amended)
of a derivative - designated as a hedging instrument meets certain criteria. Similar relief will be included in IFRS 9 Financial Instruments. This amendment was necessary in order to clarify whether an entity is required to discontinue hedge accounting where a derivative has been
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Standard
Details of amendment
Annual periods beginning on or after
designated as a hedging instrument in accordance with IAS 39 in a circumstance where that derivative is novated to a central counterparty (CCP) following the introduction of a new law or regulation. IAS 36, Impairment of assets
Amendments require entities to
Applies retrospectively for annually
(Amended)
disclose additional information
period beginning on or after
about fair value measurement when 1 January 2014. Early adoption the recoverable amount of impaired is permitted assets is based on fair value less costs of disposal. Moreover the amendment requires entities to disclose the discount rates used in the current and previous measurements if the recoverable amount of impaired assets based on fair value less costs of disposal was measured using a present value technique. IFRIC 21, Levies
The Interpretation addresses the
Applies retrospectively for annually
accounting treatment of a liability
period beginning on or after
to pay a levy, if that
1 January 2014. Early adoption
Liability is within the scope of
is permitted.
IAS 37.This IFRIC will therefore not address the accounting for associated costs of the liability for levy. IFRS 9, Financial Instruments
New standard that forms the
Applies retrospectively for annually
(new)
first part of a three-part project
period beginning on or after
to replace IAS 39 Financial
1 January 2015. Early adoption
Instruments: Recognition and
is permitted. The IASB is
Measurement
reconsidering the effective date, It is expected to be further postponed.
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IASB Projects PROJECT
STATUS
IFRS 9: Financial Instruments (replacement of IAS 39) Classification and Measurement (Limited Amend-
Expected to issue an IFRS in Quarter 1 and Quarter 2 of
ments)
2014
Impairment
Expected to issue IFRS in Quarter 1 and Quarter 2 of 2014
Accounting for Macro Hedging
Expected to issue DP in Quarter 1 of 2014
Insurance Contracts
Redeliberations
Leases
Redeliberations
Rate-regulated Activities Interim IFRS
Expected to issue an IFRS in Quarter 1 of 2014
Rate Regulation
Expected to issue DP in Quarter 1 of 2014
Revenue Recognition
Expected to issue IFRS in Quarter 1 of 2014
Proposed changes to Auditor’s report Introduction
requirements of the audit report and consequential
The International Auditing and Assurance Standards
changes to existing International Standards on
Board (IAASB) has proposed new and revised
Auditing as a result of these requirements. Proposed
International Standards on Auditing (ISA) that deal
new requirement of the audit report
with reporting on audited financial statements. The proposals are aimed at enhancing the communicative
ISA 701 establishes requirements and guidance for the
value of the auditor’s report and establish new
auditor’s determination and communication of key
required reporting elements including:
audit matters.
- key audit matters - a requirement for the auditor to include an explicit
Essential qualities of the definition of key audit
statement of auditor independence and disclose
matters which must both be present are:
the source(s) of relevant ethics requirements for all
a. Matters that, in the auditor’s professional
audits; and
judgment, were of most significance in the audit of the
- specific auditor’s comment on going concern.
financial statements of the current period based on the
Key audit matters, which is a new requirement in the
following:
audit report has resulted in the issue of a proposed
- Areas identified as significant risks in accordance
ISA 701 (henceforth referred to as ISA 701). ISA
with ISA 315 (Revised) or involving significant auditor
701 applies to the audit reports of listed entities,
judgment.
however it may be applied voluntarily by unlisted
- Areas in which the auditor encountered significant
entities. Where key audit matters are communicated
difficulty during the audit, including with respect to
for audits of financial statements of unlisted entities
obtaining sufficient appropriate audit evidence.
(either voluntarily or when required by law or
- Circumstances that required significant
regulation) then such matters should be determined
modification of the auditor’s planned approach to the
and communicated in the same manner as for listed
audit, including as a result of the identification of a
entities.
significant deficiency in internal control
The purpose of this paper is to highlight new
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b. Selected from matters communicated with those charged with governance. Key audit matters should be described using an appropriate heading, an explanation of why the auditor considered the matter to be one of most significance in the audit and a reference to the related disclosure(s), if any, in the financial statements. Relevance of key audit matters in expressing an audit opinion Key audit matters are matters that do not impact the audit opinion. Whilst matters that may give rise to qualified opinion, disclaimer of opinion or emphasis of matter are by their nature key audit matters they should not be described under the paragraph dealing with key audit matters. Instead they should be reported on appropriately in accordance with the relevant ISA (as a basis for a qualified opinion, disclaimer of opinion or an emphasis of matter paragraph). The auditor should however include a reference to the basis for qualified (or adverse) opinion or the going concern section(s) in the introductory language of the key audit matters section. Consequential amendments The above proposals have required the IAASB to consider revision to the following other standards: a. ISA 210 (Agreeing the Terms of Audit Engagements), particularly if the auditor is not required to communicate key audit matters but intends to do so voluntarily. b. ISA 260 (Communication with Those Charged with Governance), to expand communication on scope and timing of the audit to include communicating about the significant risks identified by the auditor. c. ISA 570 (Going Concern), to establish auditor reporting requirements applicable to all audits.
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PAN AFRICAN FEDERATION OF ACCOUNTANTS – PAFA Integritas II 7 Zulberg Close Bruma Lake, 2198 PO Box 59875 Kengray, 2100 Johannesburg, South Africa Email:vicksonn@pafa.org.za Telephone +27 (011) 479 0602/4 Website: www.pafa.org.za
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