Principles-based Standards David Cairns

© David Cairns Principles-based Standards Deal with about 80% of events, transactions and structures that arise in practice Require companies and their auditors to use their professional judgement in applying IFRS and the IASB’s Framework to other events, transactions and structures

© David Cairns IASB Framework IFRS balance sheet –includes only assets and liabilities –includes all assets and liabilities that qualify for recognition under IFRS –assets and liabilities are measured in accordance with IFRS –equity is the residual

© David Cairns IASB Framework IFRS balance sheet –includes only assets and liabilities –includes all assets and liabilities that qualify for recognition under IFRS –assets and liabilities are measured in accordance with IFRS –equity is the residual Income and expenses –result from the proper recognition and measurement of assets and liabilities on the balance sheet

© David Cairns Fair Value The amount at which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction The amount at which a liability could be settled between knowledgeable, willing parties in an arm’s length transaction

© David Cairns Measurement of Assets and Liabilities Fair Values – the Myth Under IFRS –all assets and liabilities must be measured at each balance sheet date at fair value –all the resulting gains and losses must be included in profit and loss

© David Cairns Measurement of Assets and Liabilities Fair Values – the Truth Under IFRS –most transactions are measured at fair value –derivatives and other held-for-trading financial assets/financial liabilities are measured at fair value at each balance sheet date –non-financial liabilities must be measured at up to date estimates of the amounts required to settle the obligations

© David Cairns Measurement of Assets and Liabilities Fair Values – the Truth Under IFRS virtually all assets and liabilities are measured at historical cost based amounts, including: property, plant and equipment intangible assets loans and receivables held-to-maturity investments equity investments in unquoted entities financial liabilities

© David Cairns Measurement of Assets and Liabilities Fair Values – the Truth Under IFRS some assets and liabilities may be measured at fair value based amounts, instead of historical cost based amounts, including: property, plant and equipment intangible assets loans and receivables some financial liabilities

© David Cairns Measurement of Assets and Liabilities Fair Values – the Truth Under IFRS 1 First-time Adoption of IFRS some assets may be measured at fair value on transition to IFRS and these fair values are used subsequently as deemed cost, including: property, plant and equipment intangible assets

© David Cairns Subsequent Measurement: Assets Cost model required –inventories –construction contracts Usually cost model –property, plant & equipment –intangible assets –loans and receivables –held-to-maturity investments

© David Cairns Subsequent Measurement: Assets Fair value model required –derivatives –other held for trading financial assets –available-for-sale financial assets –agricultural produce up to point of harvest Fair value model preferred –investment property –growing crops and animals

© David Cairns Subsequent Measurement: Assets Fair value model allowed but rare in practice –loans and receivables Revaluation (fair value) model allowed but rare in practice –property, plant & equipment –intangible assets

© David Cairns Impairment of Assets If the carrying amount of an asset exceeds the amount that the entity expects to recover from the sale or use of that asset –the asset is impaired –write down asset to amount that expect to recover Applies to cost model and fair value model Applies to all assets

© David Cairns Impairment of Assets Net realisable value Lower of value in use or fair value less costs to sell Fair value less costs to sell Present value of future cash flows Fair value Contract revenues less contract costs Inventories Property, plant and equipment Intangible assets Goodwill Non-current asset held for sale Loans and receivables Held-to-maturity investments Other financial assets Construction contracts Other service contracts) An entity expects to recover Asset

© David Cairns Subsequent Measurement: Liabilities Amount of cash and cash equivalents received or fair value of other consideration received –payables –own debt (Present value of) expected future payments required to settle obligation –provisions –pensions –leases

© David Cairns Subsequent Measurement: Liabilities Fair value model required –derivatives Fair value model allowed but rare in practice –some other financial liabilities

© David Cairns Initial Measurement: Transactions Cash transactions –amount of cash and cash equivalents given or received Non-cash transactions –fair value of other consideration given or received business combinations share-based payments asset exchanges restructuring of debt etc.

© David Cairns Initial Measurement: Transactions Total transaction –amount of cash or cash equivalents given or received or –fair value of the other consideration given or received Each element –fair value Residual item –total less aggregate fair values of other elements Compound Transactions (business combinations, compound financial instruments, multi-element sales or purchase transactions, interest free loans, etc.)

Principles-based Standards David Cairns