Technical Summary Of IFRS 3 Business Combinations

Objective:

• To specify the financial reporting by an entity when it undertakes a business combination.

[ A business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. If an entity obtains control of one or more other entities that are not businesses, the bringing together of those entities is not a business combination. ]

This IFRS:

(a) requires all business combinations within its scope to be accounted for by applying the purchase method.

(b) requires an acquirer to be identified for every business combination within its scope. The acquirer is the combining entity that obtains control of the other combining entities or businesses.

(c) requires an acquirer to measure the cost of a business combination as the aggregate of: the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the combination.

       (d) requires an acquirer to recognise separately, at the acquisition date, the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the following recognition criteria at that date, regardless of whether they had been previously recognised in the acquiree’s financial statements:

  (i) in the case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably;

 (ii) in the case of a liability other than a contingent liability, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably; and

(iii) in the case of an intangible asset or a contingent liability, its fair value can be measured reliably.

(e) requires the identifiable assets, liabilities and contingent liabilities that satisfy the above recognition criteria to be measured initially by the acquirer at their fair values at the acquisition date, irrespective of the extent of any minority interest.

(f)  requires goodwill acquired in a business combination to be recognised by the acquirer as an asset from the acquisition date, initially measured as the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities recognised in accordance with (d) above.

(g)  prohibits the amortisation of goodwill acquired in a business combination and instead requires the goodwill to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, in accordance with IAS 36 Impairment of Assets.

(h) requires the acquirer to reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the business combination if the acquirer’s interest in the net fair value of the items recognised in accordance with (d) above exceeds the cost of the combination. Any excess remaining after that reassessment must be recognised by the acquirer immediately in profit or loss.

(i) requires disclosure of information that enables users of an entity’s financial statements to evaluate the nature and financial effect of:

       (i) business combinations that were effected during the period;

      (ii) business combinations that were effected after the balance sheet date but before the financial statements are authorised for issue; and

      (iii)some business combinations that were effected in previous periods.

     (j) requires disclosure of information that enables users of an entity’s  financial statements to evaluate changes in the carrying amount of goodwill during the period.

• A business combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases. If so, each exchange transaction shall be treated separately by the acquirer, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of any goodwill associated with that transaction.
• This results in a step-by-step comparison of the cost of the individual investments with the acquirer’s interest in the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities at each step.

• If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values.

• The acquirer shall recognise any adjustments to those provisional values as a result of completing the initial accounting:

(a) within twelve months of the acquisition date; and

(b) from the acquisition date.

Technical Summary Of IFRS 2 Share Based Payment

Objective of IFRS 2:

• To specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

Requirements:

• An entity needs to recognize share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity.

• There are no exceptions to the IFRS, other than for transactions to which other Standards apply.

• This also applies to transfers of equity instruments of the entity’s parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.

The IFRS sets out measurement principles and specific requirements for three types of share-based payment transactions:

(a) equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options);

(b) cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity; and

(c) transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.

• For equity-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity is required to measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. Furthermore:

(a)  for transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. The fair value of the equity instruments granted is measured at grant date.

(b) transactions with parties other than employees (and those providing similar services), there is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. That fair value is measured at the date the entity obtains the goods or the counterparty renders service. In rare cases, if the presumption is rebutted, the transaction is measured by reference to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders service.

(c) for goods or services measured by reference to the fair value of the equity instruments granted, the IFRS specifies that vesting conditions, other than market conditions, are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest. Hence, on a cumulative basis, no amount is recognised for goods or services received if the equity instruments granted do not vest because of failure to satisfy a vesting condition (other than a market condition).

(d) the IFRS requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated, using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm’s length transaction between knowledgeable, willing parties.

(e)  the IFRS also sets out requirements if the terms and conditions of an option or share grant are modified (eg an option is repriced) or if a grant is cancelled, repurchased or replaced with another grant of equity instruments. For example, irrespective of any modification, cancellation or settlement of a grant of equity instruments to employees, the IFRS generally requires the entity to recognise, as a minimum, the services received measured at the grant date fair value of the equity instruments granted.

• For cash-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity is required to remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in profit or loss for the period.

• For share-based payment transactions in which the terms of the arrangement provide either the entity or the supplier of goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments, the entity is required to account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.

• The IFRS prescribes various disclosure requirements to enable users of financial statements to understand:

(a) the nature and extent of share-based payment arrangements that existed during the period;

(b) how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and

(c) the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.

Difference Between International Financial Reporting Standards (IFRS) & International Accounting Standards (IAS)

• First and foremost, the “I” definitely stands for International. These accounting standards are meant for the global arena supposed to be used by countries worldwide. Please note that each individual country in the world actually has its own Generally Accepted Accounting Practise (GAAP). Due to globalization, there is a dire need by the users of financial statements like the investors, fund managers and other to have consistent, uniform and transparent financial information (using the correct accounting concepts, principles or methodology) hence the need for the establishment of the international accounting standards (IFRS or IAS).

• Secondly, both IFRS and IAS, essentially are set of accounting standards.

• Thirdly, the main differentiation is that IASs were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). In April 2001 the IASB adopted all IASs and continued the development, calling new standards IFRSs.

Incidentally, take note that although IAS’s are no longer produced, they are still in effect unless replaced by an IFRS, whether in its entirety or part of . IFRS are now used in many countries in the world which include Singapore, Hong Kong and Russia, most European countries under the jurisdiction of the EU, and recently Australia. In Africa, South Africa has adopted the IFRS standards.

Listing Of International Financial Reporting Standards (IFRSs) at 1/1/2007:-

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

List of International Accounting Standards (IASs) at 1/1/2007:

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 7 Cash Flow Statements

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10 Events After the Balance Sheet Date

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 31 Interests in Joint Ventures

IAS 32 Financial Instruments: Presentation

IAS 33 Earnings per Share

IAS 34 Interim Financial Reporting

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture

Meaning Of GAAP:

• issuances from an authoritative body designated by the Certified Accountants Council
• other CPA issuances
• industry practice; and
• accounting literature in the form of books and articles.

Hence, there should not be any surprise that every country has its own version of GAAP with standards set by a national governing body. ( in the case of Malaysia, the GAAP is the FRS and the govening board is MASB).

Similarly being applied to the international arena, International GAAP are in the form of International Financial Reporting Standard (IFRS) which are established by International Accounting Standards.

For ease of reference, I have also attached many local and international Accounting Boards into this blog. You can click into Accounting Bodies for more information on each country’s GAAP/FRS.

In the Purchaser’s Books:

• Goods on hire purchase are treated as Assets upon receipt. The cash price is recorded as Cost of Assets re: Fixed Assets and
• The interests on hire purchase are charge to the Profit & Loss account as revenue expenditure over the period of the Hire Purchase Agreement

Accounts Required in The Purchaser’s Books:

a.Asset Account

b.Hire Purchaser Company Vendor A/c

c.Hire Purchase Interest Suspense Account

Double entries:

(a) Debit :Asset Account

Credit: Hire Purchaser Company Vendor A/c

[ with the cash price of asset ]

(b) Debit: HP Interest Suspense A/c

Credit: Hire Purchaser Company Vendor A/c

[ with the total hire purchase interest ]

(c) Debit :HP Company Vendor a/c

Credit: Bank A/c

[ payment of deposit and installment paid ]

(d) Debit : Profit & Loss a/c

Credit: HP Interest Suspense A/c

[ interest written off in the period ]

Various Accounts Items

1.  Asset Account

• records the cash price of the goods and separate asset accounts in respect of cost, depreciation and disposal are maintained.
• Depreciation is computed on the full amount of the cash price
• In Balance Sheet, asset will appear at cost less provision for depreciation.

2.  Hire Purchase Company Vendor A/c

• Shows amount payable payable under the hp agreement for both cash price plus hp interest.
• Balance represent all unpaid installments
• In the Balance sheet, the amount outstanding at the end of the account period shown as Current liability.

3.  Hire Purchase Interest Suspense A/c

• Shows interest included in the balance on the HP Company vendor a/c.
• Interest apportioned to any accounting period is charged to the profit & loss a/c.
• Balance represent interest needed to be apportioned to later accounting period
• In the Balance sheet, the amount of hp interest suspense a/c must be deducted from the balance in the HP Company vendor a/c and shown as Current liability

Features of Hire Purchase

When goods are purchased under a Hire Purchase Agreement:

• Vendor of the goods leases the asset to the purchaser on the terms that the purchaser shall pay to the vendor hire charges equivalent to the cash purchase price plus interest on the outstanding balance.
• The legal title to the assets does not pass to the purchaser until he has paid his final installment and exercise his option to purchase
• On default of payment, the vendor can reclaim/repossess the asset subject to certain clauses of the Hire Purchase Acts 

Credit Sales Agreement :-

Here, the legal title of the goods passes to the purchaser immediately on delivery and the purchase price is payable by installments. In the eve

Rental Agreement:-

The legal title to the goods remains with the vendor and for as long as the customer possess the goods, he has to pay a rental charge.