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FTOC 02/18/2017 4:43:10 Pagev CONTENTS AbouttheAuthors vii 1 IntroductiontoInternationalFinancialReportingStandards 1 2 ConceptualFramework 27 3 PresentationofFinancialStatements 43 4 StatementofFinancialPosition 63 5 StatementsofProfitorLossandOtherComprehensiveIncome, andChangesinEquity 79 6 StatementofCashFlows 99 7 AccountingPolicies,ChangesinAccountingEstimates,andErrors 117 8 Inventories 137 9 Property,PlantandEquipment 155 10 BorrowingCosts 189 11 IntangibleAssets 197 12 InvestmentProperty 227 13 ImpairmentofAssetsandNon-CurrentAssetsHeldforSale 241 14 Consolidations,JointArrangements,AssociatesandSeparate FinancialStatements 265 15 BusinessCombinations 317 16 Shareholders’Equity 373 17 Share-BasedPayment 395 18 CurrentLiabilities,Provisions,ContingenciesandEventsAfter theReportingPeriod 425 19 EmployeeBenefits 459 20 RevenueRecognition,IncludingConstructionContracts 485 21 GovernmentGrants 519 22 Leases 533 23 ForeignCurrency 589 24 FinancialInstruments 619 25 FairValue 747 v FTOC 02/18/2017 4:43:10 Pagevi vi Contents 26 IncomeTaxes 777 27 EarningsperShare 813 28 OperatingSegments 833 29 Related-PartyDisclosures 851 30 AccountingandReportingbyRetirementBenefitPlans 865 31 Agriculture 873 32 ExtractiveIndustries 889 33 AccountingforInsuranceContracts 899 34 InterimFinancialReporting 911 35 Hyperinflation 933 36 First-TimeAdoptionofInternationalFinancialReportingStandards 943 Index 975 FABOUT 02/18/2017 4:37:19 Pagevii ABOUT THE AUTHORS ErwinBakker,RA,isheadofauditofPKFWallastintheNetherlands,andactsasaudit partner,mainlyforinternational(group)audits.HeservesaschairmanoftheIFRSworking group of PKF Wallast and is a member of the Technical Bureau of PKF Wallast in the Netherlands. T V Balasubramanian, FCA, CFE, CFIP, is a senior partner in PKF Sridhar & Santhanam LLP, Chartered Accountants, India and previously served as a member of theAuditingandAssuranceStandardsBoardoftheICAI,India.Heisapartofthetechnical team of the firm engaged in transition to Ind AS (the converged IFRS Standards). AsifChaudhry,FCCA,CPA(K),MBA,isanauditandtechnicalpartneratPKFKenya and is on the Kenyan Institute’s Professional Standards Committee as well as the PKF International Africa Professional Standards Committee. He has 18 years of experience including8yearswithDeloitteLLP, London.Hewasassistedbyfellow partnersDarshan Shah, Salim Alibhai and Patrick Kuria. DanieCoetsee,CA(SA),isProfessorofAccountingattheUniversityofJohannesburg, specializing in financial accounting. He is the chair of the Financial Reporting Technical Committee of the Financial Reporting Standards Council of South Africa. ChrisJohnstone,isamemberoftheICAEWandalsoholdsICAEW’sDiplomainIFRS. She is the Audit Senior Technical Manager at Johnston Carmichael. She joined Johnston Carmichael in 2014 having previously worked at Baker Tilly and MacIntyre Hudson in London.SheisalsoamemberoftheAccountingandAuditingTechnicalCommitteeofthe PKF firms in the United Kingdom and Republic of Ireland. Edward Rands, FCA, is the Risk and Professional Standards partner at PKF Cooper Parry.Heleadsthefirm’stechnicalteam,whichisresponsibleformaintainingandupdating accounting knowledge and for dealing with complex problems and queries as they arise. HealsochairstheAccountingandAuditingTechnicalCommitteeofthePKFfirmsinthe United Kingdom and Republic of Ireland. Candice Unsworth, CA (SA), is a technical supervisor at PKF International Ltd and serves on PKF’s International Professional Standards Committee. She qualified at PKF Durban before moving to the technical division of PKF International in 2015. Minette van der Merwe, CA (SA) is PKF South Africa’s IFRS technical expert responsible for the interpretation and application of IFRS within the Southern African region. SantoshVarughese,CA(Germany),Tax Advisor (Germany),CPA(US),isone of the partnersatPKFFasseltSchalgeGermany(www.pkf-fasselt.de).HeistheheadoftheIFRS CenterofExcellenceofPKFinGermany.Oneofhisoperativefocusesisonauditsforlarge listed companies. Paul Yeung, CPA, served as the Technical Writer of the Education and Training DepartmentoftheHongKongInstituteofCertifiedPublicAccountantsandisaTechnical Director of PKF Hong Kong. vii C01 02/17/2017 22:48:14 Page1 Wiley2017InterpretationandApplicationofIFRS®Standards,FirstEdition.ErwinBakkeretal. 2017byJohnWiley&Sons,Ltd.Published2017byJohnWiley&Sons,Ltd. 1 INTRODUCTION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Introduction 1 AppendixC:IFRSforSMEs 17 OriginsandEarlyHistoryoftheIASB 3 DefinitionofSMEs 18 TheCurrentStructure 6 IFRSforSMEsisaComplete,Self- ProcessofIFRSStandardSetting 7 ContainedSetofRequirements 19 ModificationsofFullIFRSMadefor Convergence:TheIASBandFinancial IFRSforSMEs 19 ReportingintheUS 9 DisclosureRequirementsunderIFRS TheIASBandEurope 12 forSMEs 23 AppendixA:CurrentInternational MaintenanceoftheIFRSforSMEs 24 FinancialReportingStandards SMEImplementationGroup 24 (IAS/IFRS)andInterpretations ImplicationsoftheIFRSforSMEs 24 (SIC/IFRIC) 14 ApplicationoftheIFRSforSMEs 25 AppendixB:ProjectsCompleted SincePreviousIssue(July2015 toJune2016) 16 INTRODUCTION The stated objective of the IFRS Foundation and the International Accounting Stan­ dards Board (IASB) is to develop a single set of high-quality, understandable, enforceable andgloballyacceptedfinancialreportingstandardsbaseduponclearlyarticulatedprinciples. Theimpetusfortheconvergenceofhistoricallydisparatefinancialreportingstandards hasbeen,inthemain,tofacilitatethefreeflowofcapitalsothat,forexample,investorsinthe US would become more willing to finance business in, say, China or the Czech Republic. Access to financial statements which are written in the same “language” would help to eliminateamajorimpedimenttoengenderinginvestorconfidence,sometimesreferredtoas “accounting risk,” which adds to the more tangible risks of making such cross-border investments. Additionally, permission to list a company’s equity or debt securities on an exchangehasgenerallybeenconditionalonmakingfilingswithnationalregulatoryauthori­ ties,whichtendtoinsisteitheronconformitywithlocalGAAPoronaformalreconciliation tolocalGAAP.Theseproceduresaretediousandtime-consuming,andthehumanresources and technical knowledge to carry them out are not always widely available, leading many would-be registrants to forgo the opportunity of broadening their investor bases and potentially lowering their costs of capital. Therewereoncescoresofuniquesetsoffinancialreportingstandards amongthemore developednations(“nationalGAAP”).Theyear2005markedthebeginningofanewerainthe 1 C01 02/17/2017 22:48:14 Page2 2 WileyInterpretationandApplicationofIFRS®Standards2017 globalconductofbusiness,andthefulfilmentofa30-yearefforttocreatethefinancialreporting rules for a worldwide capital market. During that year’s financial reporting cycle, the 27 European Union (EU) member states plus many other countries, such as Australia, New ZealandandSouthAfrica,adoptedInternationalFinancialReportingStandards(IFRS). Since then, many countries, such as Argentina, Brazil, Korea, Canada, Mexico and Russia have adopted IFRS. Indeed at the time of writing more than 100 countries now require or permit the use of IFRS. China has moved its national standards significantly towardsIFRS.Allothermajoreconomies,suchasJapanandtheUnitedStates,haveeither movedtowardsIFRSinrecentyearsorestablishedtimelinesforconvergenceoradoptionin the near future. 2007 and 2008 proved to be watershed years for thegrowing acceptability of IFRS. In 2007, one of the most important developments was that the US Securities and Exchange Commission (SEC) dropped the reconciliation (to US GAAP) requirement, which had formerlyappliedtoforeignprivateregistrants.Sincethen,thosereportinginamannerfully compliantwithIFRS(i.e.,withoutanyexceptionstothecompletesetofstandardsimposedby IASB) have been required to reconcile net income and shareholders’ equity to theamounts whichwouldhavebeenpresentedunderUSGAAP.Ineffect,theSECwasacknowledgingthat IFRSwasfullyacceptableasabasisforaccurate,transparent,meaningfulfinancialreporting. ThiseasingofUSregistrationrequirementsforforeigncompaniesseekingtoenjoythe benefits of listing their equity or debt securities in the US led understandably to a call by domesticcompaniestopermitthemalsotochoosefreelybetweenfinancialreportingunder US GAAP and IFRS. By late 2008 the SEC appeared to have begun the process of acquiescence, first for the largest companies in those industries having (worldwide) the preponderanceofIFRSadopters,andlaterforallpubliclyheldcompanies.However,anew SECchairtookofficein2009,expressingaconcernthatthemovetoIFRS,ifitweretooccur, should perhaps take place more slowly than had previously been indicated. It had been highly probable that non-publicly held US entities would have remained restrictedtoUSGAAPfortheforeseeablefuture,bothfromhabitandbecausenoothersetof standardswouldbeviewedasbeingacceptable.However,theAmericanInstituteofCertified PublicAccountants,whichoverseestheprivate-sectorauditingprofession’sstandardsinthe US,amendeditsrulesin2008tofullyrecogniseIASBasanaccountingstandard-settingbody (givingitequalstatuswiththeFASB),meaningthatauditorsandotherserviceprovidersin the US could now issue opinions (or provide other levels of assurance, as specified under pertinent guidelines) which affirmed that IFRS-based financial statements conformed with “generallyacceptedaccountingprinciples.”Thischange,coupledwiththepromulgationby IASB of along-soughtstandard providing simplified financial reporting rulesforprivately heldentities(describedlaterinthischapter),mightbeseenasincreasingthelikelihoodthata more broadly-based move to IFRS will occur in the US over the coming years. Thehistoric2002NorwalkAgreement—betweentheUSstandardsetter,FASB,andthe IASB—calledfor“convergence”oftherespectivesetsofstandards,andindeedanumberof revisionsofeitherUSGAAPorIFRShavealreadytakenplacetoimplementthiscommit­ ment.TheaimoftheBoardswastocompletethemilestoneprojectsoftheMemorandumof Understanding (MoU) by the end of June 2011. Despite this commitment by the Boards, certain projects such as financial instruments (impairment and hedge accounting), revenue recognition, leases and insurance contracts were deferred due to their complexity and the difficulty in reaching consensus views. The convergedstandardonrevenuerecognitionwasfinallypublishedinMay2014,althoughboth C01 02/17/2017 22:48:14 Page3 Chapter1 / IntroductiontoInternationalFinancialReportingStandards 3 Boardshavesubsequentlydeferreditseffectivedate.Detailsoftheseandotherprojectsofthe standard setters are included in a separate section in each relevant chapter of this book. Despite the progress towards convergence described above, the SEC dealt a blow to hopes of future alignment in its strategic plan published in February 2014. The document statesthattheSEC“willconsider,amongotherthings,whetherasinglesetofhigh-quality globalaccountingstandardsisachievable,”whichisasignificantreductioninitspreviously expressedcommitmenttoasinglesetofglobalstandards.ThisleavesIFRSandUSGAAPas thetwocomprehensivefinancialreportingframeworksintheworld,withIFRSgainingmore and more momentum. TheMoUwithFASB(andwithotherinternationalorganisationsandalsojurisdictional authorities) has beenreplaced by aMoUwith theAccounting StandardsAdvisoryForum (ASAF).TheASAFisanadvisorygrouptotheIASB,whichwassetupin2013.Itconsistsof national standard setters and regional bodies with an interest in financial reporting. Its objective is to provide an advisory forum where members can constructively contribute towards the achievement of the IASB’s goal of developing globally accepted high-quality accounting standards. FASB’s involvement with the IASB is now through ASAF. ORIGINS AND EARLY HISTORY OF THE IASB Financial reporting in the developed world evolved from two broad models, whose objectivesweresomewhatdifferent.Theearliestsystematisedformofaccountingregulation developed in continental Europe in 1673. Here a requirement for an annual fair value statementoffinancialpositionwasintroducedbythegovernmentasameansofprotecting the economy from bankruptcies. This form of accounting at the initiative of the state to controleconomicparticipantswascopiedbyotherstatesandlaterincorporatedinthe1807 Napoleonic Commercial Code. This method of regulating the economy expanded rapidly throughout continental Europe, partly through Napoleon’s efforts and partly through a willingnessonthepartofEuropeanregulatorstoborrowideasfromeachother.This“code law”familyofreportingpracticeswasmuchdevelopedbyGermanyafterits1870unification, with the emphasis moving away from market values to historical cost and systematic depreciation. It was used later by governments as the basis of tax assessment when taxes on business profits started to be introduced, mostly in the early twentieth century. This model of accounting serves primarily as a means of moderating relationships betweentheindividualentityandthestate.Itservesfortaxassessment,andtolimitdividend payments, and it is also a means of protecting the running of the economy by sanctioning individual businesses which are not financially sound or are run imprudently. While the modelhasbeenadaptedforstockmarketreportingandgroup(consolidated)structures,this is not its main focus. The other model did not appear until the nineteenth century and arose as a conse­ quence of the industrial revolution. Industrialisation created the need for large concen­ trations of capital to undertake industrial projects (initially, canals and railways) and to spreadrisksbetweenmanyinvestors.Inthismodelthefinancialreportprovidedameans ofmonitoringtheactivitiesoflargebusinessesinordertoinformtheir(non-management) shareholders. Financial reporting for capital markets purposes developed initially in the UK,inacommon-lawenvironmentwherethestatelegislatedaslittleaspossibleandlefta largedegreeofinterpretationtopracticeandforthesanctionofthecourts.Thisapproach wasrapidlyadoptedbytheUSasit,too,becameindustrialised.AstheUSdevelopedthe