AUDIT COMMITTEE INSTITUTE Insights into IFRS An overview September 2013 kpmg.com/ifrs 2 | Section or Brochure name About the Audit Committee Institute The KPMG-sponsored Audit Committee Institute is a growing international network that provides complimentary guidance and resources. It is designed to help non- executive directors update and refresh the skills and knowledge that are essential for each member to fulfl their role within the board. From small, sector-specifc forums to large key speaker dinners, the Audit Committee Institute offers non- executive directors a forum to network with their peers. For more information, speak to your usual KPMG contact or go to www.kpmg.com/globalACI. Insights into IFRS: An overview | 1 ALL EYES ON CONSISTENCY It was not so long ago that the mention of IFRS immediately conjured up thoughts only of the four major projects (fnancial instruments, insurance, leases and revenue) and convergence with US GAAP. But today, the key word is ‘consistency’ – consistency of application and consistency of enforcement. Having achieved the adoption of IFRS in over 100 countries, thereby creating a platform for the comparability of fnancial statements, the drive for increased global consistency across that platform is the logical next step. The IASB has signalled its intention to lead this drive, but all stakeholders – including preparers, auditors and enforcers – have a role to play. For us, consistency does not necessarily mean an identical answer in all cases; rather, it means applying the principles of the standards in the same way, to reach a conclusion based on a particular set of facts and circumstances. And we look forward to playing our part. At its heart, Insights into IFRS is all about consistency – explaining the standards and illustrating their application through examples based on the collective experience of IFRS specialists from around the global KPMG network. This companion guide, Insights into IFRS: An overview, is designed to help Audit Committee members and others by providing a structured guide to the key issues arising from the standards. Audit Committee Institute September 2013 © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2 | Insights into IFRS: An overview CONTENTS How to navigate this publication 4 1. Background 5 1.1 Introduction 5 1.2 The Conceptual Framework 6 2. General issues 7 2.1 Form and components of fnancial statements 7 2.2 Changes in equity 9 2.3 Statement of cash fows 10 2.4 Fair value measurement 11 2.5 Consolidation 14 2.6 Business combinations 17 2.7 Foreign currency translation 19 2.8 Accounting policies, errors and estimates 21 2.9 Events after the reporting period 22 2.10 Hyperinfation 23 3. Statement of fnancial position 24 3.1 General 24 3.2 Property, plant and equipment 25 3.3 Intangible assets and goodwill 27 3.4 Investment property 29 3.5 Associates and the equity method 31 3.6 Joint arrangements 33 3.7 [Not used] 3.8 Inventories 34 3.9 Biological assets 35 3.10 Impairment of non-fnancial assets 36 3.11 [Not used] 3.12 Provisions, contingent assets and liabilities 38 3.13 Income taxes 40 4. Statement of proft or loss and other comprehensive income 42 4.1 General 42 4.2 Revenue 44 4.3 Government grants 46 4.4 Employee benefts 47 4.5 Share-based payments 49 4.6 Borrowing costs 51 © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Insights into IFRS: An overview | 3 5. Special topics 52 5.1 Leases 52 5.2 Operating segments 54 5.3 Earnings per share 56 5.4 Non-current assets held for sale and discontinued operations 58 5.5 Related party disclosures 60 5.6A Investment entities 61 5.7 Non-monetary transactions 63 5.8 Accompanying fnancial and other information 64 5.9 Interim fnancial reporting 65 5.10 [Not used] 5.11 Extractive activities 66 5.12 Service concession arrangements 67 5.13 Common control transactions and Newco formations 69 6. First-time adoption of IFRS 71 6.1 First-time adoption of IFRS 71 7. Financial instruments 73 7.1 Scope and defnitions 73 7.2 Derivatives and embedded derivatives 74 7.3 Equity and fnancial liabilities 75 7.4 Classifcation of fnancial assets and fnancial liabilities 77 7.5 Recognition and derecognition 78 7.6 Measurement and gains and losses 79 7.7 Hedge accounting 81 7.8 Presentation and disclosure 83 7A Financial instruments: IFRS 9 85 8. Insurance contracts 88 8.1 Insurance contracts 88 Appendix I 90 Summary of forthcoming requirements 90 Appendix II 93 Quick reference table: Currently effective requirements and forthcoming requirements 93 Keeping you informed 102 © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | Insights into IFRS: An overview HOW TO NAVIGATE THIS PUBLICATION This overview provides a quick overview of the key requirements of IFRS, for easy reference, and is organised by topic. This edition of the overview is designed for companies with a year end of 31 December 2013. It is based on IFRS in issue at 1 August 2013, and includes standards and interpretations that are effective at that date1 (currently effective requirements) and signifcant amendments that are effective in later periods (forthcoming requirements). Appendix I provides a listing of forthcoming requirements, other than minor amendments, and Appendix II provides a list of the standards and interpretations that are currently effective. 1 IAS 26 Accounting and Reporting by Retirement Beneft Plans and the IFRS for Small and Medium-sized Entities are excluded. © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Insights into IFRS: An overview | 5 1. BACKGROUNDA 1.1 Introduction Currently effective: IFRS Foundation Constitution, IASB and IFRS Interpretations Committee Due Process Handbook, Preface to IFRSs, IAS 1 International Financial Reporting Standards • ‘IFRS’ is a set of globally accepted standards for fnancial reporting applied primarily by listed entities in over 120 countries. • Individual standards and interpretations are developed and maintained by the IASB and the IFRS Interpretations Committee. • IFRS is designed for use by proft-oriented entities. Compliance with IFRS • Any entity claiming compliance with IFRS complies with all standards and interpretations, including disclosure requirements, and makes an explicit and unreserved statement of compliance with IFRS. • The overriding requirement of IFRS is for the fnancial statements to give a fair presentation (or a true and fair view). © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 6 | Insights into IFRS: An overview 1.2 The Conceptual Framework Currently effective: Conceptual Framework for Financial Reporting Purpose • The Conceptual Framework is a point of reference: – for the IASB and the IFRS Interpretations Committee in developing and maintaining standards and interpretations; and – for preparers of fnancial statements in the absence of specifc guidance in IFRS. • The Conceptual Framework does not override any specifc IFRS. Objective of general purpose fnancial reporting • The objective of general purpose fnancial reporting is to provide fnancial 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. Qualitative characteristics of useful fnancial information • For fnancial information to be useful, it needs to be relevant to users and faithfully represent what it purports to represent. The usefulness of fnancial information is enhanced by its comparability, verifability, timeliness and understandability. Building blocks of fnancial statements • The Conceptual Framework sets out the defnitions of ‘assets’ and ‘liabilities’. The defnitions of ‘equity’, ‘income’ and ‘expenses’ are derived from the defnition of assets and liabilities. Measurement basis • Financial statements are prepared on a modifed historical cost basis, with a growing emphasis on fair value (see 2.4). Underlying assumption: Going concern • Financial statements are prepared on a going concern basis, unless management intends, or has no alternative other than, to liquidate the entity or to stop trading. © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Insights into IFRS: An overview | 7 2. GENERAL ISSUES 2.1 Form and components of fnancial statements Currently effective: IFRS 10, IFRS 11, IAS 1, IAS 27, IAS 28 Forthcoming: Investment Entities – Amendments to IFRS 10, IFRS 12 and IAS 27 Complete set of fnancial statements • A complete set of fnancial statements comprises the following. – A statement of fnancial position. – A statement of proft or loss and other comprehensive income. – A statement of changes in equity. – A statement of cash fows. – Notes, including accounting policies. – Comparative information. – A statement of fnancial position as at the beginning of the preceding period (‘third statement of fnancial position’) in certain circumstances. Reporting period • The end of the annual reporting period may change only in exceptional circumstances. Comparative information • Comparative information is required for the immediately preceding period only. Additional comparative information may be presented if it is compliant with IFRS; however, it need not comprise a complete set of fnancial statements. Types of fnancial statements • IFRS sets out the requirements that apply to consolidated, individual and separate fnancial statements. © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 8 | Insights into IFRS: An overview Consolidated fnancial statements • An entity with one or more subsidiaries presents consolidated fnancial statements unless specifc exemption criteria are met. Individual fnancial statements • An entity with no subsidiaries but with associates or joint ventures prepares individual fnancial statements if such investments are accounted for using the equity method, unless specifc exemption criteria are met. Separate fnancial statements • A parent, an investor in an associate or a venturer in a joint venture that is not required to prepare consolidated or individual fnancial statements is permitted, but not required, to present separate fnancial statements. Alternatively, separate fnancial statements may be prepared in addition to consolidated or individual fnancial statements. Presenting pro forma information • In our view, it is acceptable to present pro forma information if it is allowed by local regulations and stock exchange rules and if certain criteria are met. © 2013 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.