• Basis for an intangible asset having an indefinite life
• Description and carrying amount of individual intangible assets, if they are material
EXAMPLES OF RELATED NATIONAL STANDARDS Canada: CICA Handbook 3062, 3450
United Kingdom: FRS 10 United States: SFAS 142
IAS 39
principles for recognizing, measuring, and disclosing information about finan- cial instruments. IAS 39 requires all financial assets and financial liabilities, including derivatives, to be recognized on the balance sheet. The standard also requires derivatives that are embedded in non-derivative contracts to be accounted for separately at fair value through the income statement.
SCOPE
All financial instruments apart from specified exclusions.
EXCLUSIONS
• Interests in subsidiaries, associates, and joint ventures under IAS 27, IAS 28, and IAS 31
• Rights and obligations of leases under IAS 17 but with qualifications
• Employers’ rights and obligations of employee benefit plans under IAS 19
• Financial instruments that meet the definition of an equity instrument under IAS 32
• Rights and obligations of insurance contracts under IFRS 4 but with qualifications
• Contracts for contingent consideration in a business combination under IFRS 3
• Loan commitments that cannot be settled net in cash or another finan- cial instrument (with qualifications)
• Contracts between a vendor and an acquirer in a business combination to sell an acquiree at a future date
• Financial instruments, contracts and obligations of share-based payment transactions under IAS 2 but with qualifications
• Contracts to buy or sell non-financial items entered into and that con- tinue to be held for the purpose of the receipt or delivery of a non-financial item with respect to the entity’s expected purchase, sell, or usage requirements
MAIN REQUIREMENTS
Financial assets or liabilities are recognized initially at fair value when the en- tity becomes a party to the instrument contract. Examples of financial instru- ments are cash, leases, accounts receivable and payable, commercial paper,
and repurchase agreements. Derecognition for a liability occurs when the lia- bility is extinguished. Derecognition for an asset occurs when the contractual rights to the cash flows expire, or substantially all the risks and rewards of ownership are transferred, or control is transferred but some of the risks and rewards are retained. IAS 39 defines four categories of financial instruments:
A financial asset (or liability) at fair value through profit and loss Held-to-maturity investments
Loans and receivables
Available-for-sale financial assets
Financial assets or liabilities at fair value should be remeasured at fair value at each balance sheet date. Changes in fair value are recognized directly in the income statements as part of the profit or loss for the period.
Held-to-maturity financial instruments are non-derivative financial assets and have fixed, or determinable, payments and a fixed maturity date. Finan- cial assets that are held-to-maturity should be recognized initially at fair value, and subsequently measured at amortized cost using the effective inter- est method. The effective interest rate is the rate that discounts estimated fu- ture cash payments or receipts over the expected life of the financial instrument to its net carrying amount.
Loans and receivables are non-derivative financial instruments that have fixed, or determinable, payments, no maturity date, and are not quoted on ac- tive markets. Loans and receivables should be measured on the same basis as held-to-maturity financial instruments.
Available-for-sale financial instruments are either specifically designated as such or because they do not fall under one of the other three classifications.
They should be measured at fair value at each balance sheet date. Any period gains or losses arising from measuring at fair value should be recognized in equity. On disposal of the financial instrument, cumulative gains and losses will be reported in the income statement.
An embedded derivative is a component of a combined financial instrument that also incorporates a non-derivative host contract. An embedded derivative should not be separated from the host contract and accounted for as a deriva- tive unless its economic character and risks are dissimilar to the host contract, its terms meet the definition of a derivative, and it is measured at fair value with changes recognized in the income statement as part of profit or loss.
An entity must assess the financial asset or group of assets at each balance sheet date to see whether there is any objective evidence of impairment. If there is evidence, a detailed impairment calculation must be carried out to de- termine whether an impairment loss should be recognized.
IAS 39 • 155
Hedge accounting is where the related changes in the fair value of a finan- cial asset and a financial liability are offset against each other. There must be a hedged item and a hedging instrument. Hedge accounting is allowed by IAS 39 under certain circumstances and is classified into two general types of hedging. The standard lays down strict conditions and classifies hedge ac- counting into cash flow hedging where there is the possibility of changes in cash flows and fair value hedging where there is a possibility of changes in fair value hedge. There is also the hedge of a net investment in a foreign operation under IAS 21.
The conditions that must be met under IAS 39 before hedge accounting is applied are as follows:
• There is formal designation and documentation of a hedge at inception.
• The hedge is expected to be highly effective. For instance, the hedging instrument is expected to almost fully offset changes in fair value or cash flows of the hedged item that are attributable to the hedged risk.
• Any forecast transaction being hedged is highly probable.
• Hedge effectiveness is reliably measurable. For instance, the fair value or cash flows of the hedged item and the fair value of the hedging instru- ment can be reliably measured.
• The hedge must be assessed on an ongoing basis and be highly effective.
With cash flow hedging, the fair value movements on the part of the hedge that is effective are recognized in equity until such time as the hedged item af- fects profit or loss in the income statement. Any ineffective part of the fair value movement is recognized in the income statement. With fair value hedg- ing, the fair value movements on the hedging instrument and the correspond- ing fair value movements on the hedged item are recognized in the income statement.
All derivative contracts with an external counterparty may be designated as hedging instruments except for some written options. External non-derivative financial asset or liability may not be designated as a hedging instrument ex- cept as a hedge of foreign currency risk.
MAIN DISCLOSURES
All disclosure requirements as stated in IAS 32.
IAS 40 Investment Property
ISSUED OR LAST REVISED December 2003
EFFECTIVE DATE
Financial statements covering periods beginning on or after January 1, 2005.
PROBLEM AND PURPOSE
There is a clear distinction between a property that is acquired for use by an entity in its own operation and one that is acquired for investment purposes.
Appropriate accounting treatment and disclosures are required, so that the user can gain a better understanding of the financial statements. IAS 40 ad- dresses these issues.
SCOPE
Investment property (land, building or part of a building, or both) held to earn rentals or for capital appreciation or both.
EXCLUSIONS
• Property held for use in the production or supply of goods or services or for administrative purposes
• Properties held for sale in the ordinary course of business or in the process of construction or development for such sale (IAS 2)
• Property that is being constructed or developed on behalf of third par- ties (IAS 11)
• Property that is being constructed or developed for use as an investment (IAS 16)
IAS 40 • 157
• Owner-occupied property (IAS 16)
• Property leased to another entity under a finance lease
MAIN REQUIREMENTS
Investment property should be recognized as an asset when it is probable that the future economic benefits that are associated with the property will flow to the enterprise and that the cost of the property can be reliably measured. The initial measurement should be at cost, including transactions costs but exclud- ing start-up costs, abnormal waste, or initial operating losses incurred before the planned level of occupancy.
Subsequently, investment property may be carried either at:
• Fair value: This is the amount where the property could be exchanged between knowledgeable and willing parties in an arm’s length transac- tion. Gains or losses arising from changes in the fair value of the invest- ment property must be included in net profit or loss for the period in which it arises.
• Cost less accumulated depreciation and any accumulated impairment losses as prescribed by IAS 16.
The selected measurement method must be adopted for all the entity’s in- vestment property. The decision on which model to be used must be taken carefully as there can be a substantial impact on the income statement. Trans- fers to, or from, the investment property classification can take place only when there is a change in use supported by evidence. An investment property sold without development should not be reclassified.
On disposal or permanent withdrawal from use, a property should be derecognized. The gain or loss on derecognition should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset. The gain or losses should be recognized in the income statement.
MAIN DISCLOSURES
• Whether fair value or cost method used
• Methods and assumptions in determining fair value
• Useful life or depreciation rate, and the depreciation method for the cost method
• Gross carrying amounts and accumulated depreciation
• Whether property interests under operating leases are deemed invest- ment property, if fair value model is used
• Whether a qualified independent valuer has been used
• Details of revenue and direct operating expense
EXAMPLES OF RELATED NATIONAL STANDARDS United Kingdom: SSAP 19
IAS 41 Agriculture
ISSUED OR LAST REVISED December 2000
EFFECTIVE DATE
Periods beginning on or after January 1, 2003.
PROBLEM AND PURPOSE
Agricultural activity, particularly in some countries and regions, is a significant part of the economy. This standard sets out the accounting treatment, financial statement presentation, and disclosures for agricultural activity. The standard contains the presumption that a biological asset can be measured reliably by using fair value.
SCOPE
Activities concerned with the transformation of biological assets (that is, liv- ing plants and animals) into agricultural produce.
IAS 41 • 159
EXCLUSIONS
• Land (IAS 16)
• Intangible assets (IAS 38)
• Processing of agricultural produce after harvest (IAS 2)
MAIN REQUIREMENTS
Biological assets should be recognized only where there is control of the asset as a result of past events, it is probable that future economic benefits will flow to the entity, and the fair value or cost of the asset can be measured reliably.
On initial recognition and subsequently, biological assets should be recog- nized at fair value less estimated point-of-sale costs, unless fair value cannot be reliably measured. Agricultural produce should be measured at fair value less estimated point-of-sales costs at the point of harvest. Point-of-sales costs include commissions, levies, and transfer duties and taxes.
The gain on initial recognition of biological assets at fair value, and changes in fair value of biological assets during a period, are reported in the income statement for that period. A gain on initial recognition of agricultural produce at fair value should be included in the income statement for the pe- riod in which it arises.
An unconditional government grant related to a biological asset is recog- nized as income when the grant becomes receivable, a conditional govern- ment grant is recognized when the conditions attached to the grant are met.
IAS 41 presumes that fair value can be measured reliably for most biologi- cal assets. If the determination of fair value of a biological asset is not possible at the time when it is initially recognized, then it is measured at cost less accu- mulated depreciation and impairment losses. All other biological assets should be measured at fair value. If circumstances change and fair value can be meas- ured reliably, the adoption to fair value less point-of-sale costs should be made.
MAIN DISCLOSURES
• Descriptions and carrying amounts with reconciliation of changes in carrying amounts
• Methods and assumptions for determining fair value
• Changes in fair value during the period
• Fair value of agricultural produce harvested during the period
• Financial risk management strategies
• Additional disclosures if fair value cannot be measured reliably