Pafa bullettin final

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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