Discuss the IFRS 15 was issued in 2014 and is effective for accounting periods
difference beginning on or after 1 January 2018
between IFRS 15 IFRS 15 was a joint development with the US FASB and supersedes
and IAS18 both IAS18 Revenues and IAS155 Construction Contracts.
The purpose of IFRS15 is to establish the principles that an entity
Include should apply to report useful information in the financial statements
*examples of concerning “the nature, amount, timing and uncertainty of revenue
firms/ industries and cash flows arising from a contract with a customer”.
that are IFRS 15 brings in 5 step revenue recognition process that did not exist
expected to be under IAS 18 standard. These steps include:
most affected 1. Identify the contract with Customer
*financial 2. Identify the Separate Performance Obligations
reporting and 3. Determine the Transaction Price
performance 4. Allocate the Transaction Price to Performance Obligation
implications of 5. Recognise Revenue When a Performance Obligation is Satisfied
the new IFRS 15
IFRS 15 is expected to affect companies that book pre-payments and
by taking into
operate using long-term contracts such as Telecommunication Service
account the (old)
Providers.
IAS 18 lease
IFRS 15 will make it more difficult for companies to accelerate/delay
accounting
revenues
Revenue is only recognised when a customer obtains control of a good
or service, including service revenue, such as engine maintenance
revenues that Rolls Royce expects to make after engine sales.
Discuss the IFRS 16 was issued in January 2016 and replaces IAS 17
differences The new standard is effective from 1 January 2019
between IAS 17 IFRS 16 was developed jointly with the US FASB and adopts a new
and IFRS 16 approach to lease accounting by lessees. In summary:
Lessees are required to recognise assets and liabilities in relation to
the rights and obligations created by leases of all types
This requirement removes the distinction between finance leases and
operating leases as defined under IAS17
Aims to present more faithful representation of a lessee’s financial
position and provide greater transparency
The standard brings minimal changes for lessors. The accounting
requirements of IAS17 are substantially carried over into IFRS16
including the distinction between finance and operating leases.
These new asset/liability recognition requirements will significantly
affect companies reported leverage, hence apparent risk profiles, in
particular for firms with heavy capital investment such as airlines and
mining companies.
, Differences IFRS 9. Published in July 2014, is the new financial standard replacing
between IFRS 9 IAS 39 – effective date 1st Jan 2018
and IAS 39 Major changes to the classification and measurement of an entity’s
financial assets and impairment calculation with largest effects on
financial institutions
The new financial instrument classification requirements are
dependent on:
- Contractual cash flow characteristics of the financial instruments
- The Business model (of the entity) under which financial assets are
held and managed
→ provides better purpose and economic value alignment
IAS 39 IFRS 9
Fair Value through P/L (FVTPL) Fair Value through P/L (FVTPL)
Amortised cost Loans and Receivables (L&R)/
Held-to-Maturity (HTM)
Fair Value through Other Available for Sale (AFS)
Comprehensive Income (FVOCI)
How goodwill Estimated goodwill will depend on the NCI estimation method. It has
would be long been argued that the proportionate share method of measuring the
affected from NCI only recognises the goodwill acquired by the parent and is based
both NCI on the parent’s ownership interest rather than the goodwill controlled
measurement by the parent.
types That is, any goodwill attributable to the non-controlling interest is NOT
recognised.
IFRS 3 has introduced an explicit option, available on a transaction-by-
transaction basis, to measure any NCI in the entity acquired at fair
value. With this method, the share of ownership allocated to NCI is
determined based on available and most up-to-date information on the
fair value of the net assets of the subsidiary. If a subsidiary is publicly
traded, market price on the transaction date and/or at a specified date
can be used to estimate the NCI based on the amount of shares that will
not belong to the parent:
Market Price × Portion of Shares Not Purchased
Depending on the fair value price, goodwill estimated from the
transaction may increase or decrease. This is because under fair value
option to calculate NCI, the total value of the company is grossed-up
as:
Consideration Paid + FV of NCI
,which may or may not value the total company higher than the case
where the NCI is calculated using proportionate-share method.
But remember, goodwill on its own has no cash generating ability nor
one can explicitly identify goodwill. That is why there is no such a
thing as capitalising internally generated goodwill. Goodwill,
regardless of the way we calculate NCI, will be most likely to be
transaction specific. That is, two very similar companies might arrive at
different goodwill considerations given that these two companies might
have very different synergy estimations from a merger. That is, as
much as it is correct to define goodwill as brand premium, reputation
difference beginning on or after 1 January 2018
between IFRS 15 IFRS 15 was a joint development with the US FASB and supersedes
and IAS18 both IAS18 Revenues and IAS155 Construction Contracts.
The purpose of IFRS15 is to establish the principles that an entity
Include should apply to report useful information in the financial statements
*examples of concerning “the nature, amount, timing and uncertainty of revenue
firms/ industries and cash flows arising from a contract with a customer”.
that are IFRS 15 brings in 5 step revenue recognition process that did not exist
expected to be under IAS 18 standard. These steps include:
most affected 1. Identify the contract with Customer
*financial 2. Identify the Separate Performance Obligations
reporting and 3. Determine the Transaction Price
performance 4. Allocate the Transaction Price to Performance Obligation
implications of 5. Recognise Revenue When a Performance Obligation is Satisfied
the new IFRS 15
IFRS 15 is expected to affect companies that book pre-payments and
by taking into
operate using long-term contracts such as Telecommunication Service
account the (old)
Providers.
IAS 18 lease
IFRS 15 will make it more difficult for companies to accelerate/delay
accounting
revenues
Revenue is only recognised when a customer obtains control of a good
or service, including service revenue, such as engine maintenance
revenues that Rolls Royce expects to make after engine sales.
Discuss the IFRS 16 was issued in January 2016 and replaces IAS 17
differences The new standard is effective from 1 January 2019
between IAS 17 IFRS 16 was developed jointly with the US FASB and adopts a new
and IFRS 16 approach to lease accounting by lessees. In summary:
Lessees are required to recognise assets and liabilities in relation to
the rights and obligations created by leases of all types
This requirement removes the distinction between finance leases and
operating leases as defined under IAS17
Aims to present more faithful representation of a lessee’s financial
position and provide greater transparency
The standard brings minimal changes for lessors. The accounting
requirements of IAS17 are substantially carried over into IFRS16
including the distinction between finance and operating leases.
These new asset/liability recognition requirements will significantly
affect companies reported leverage, hence apparent risk profiles, in
particular for firms with heavy capital investment such as airlines and
mining companies.
, Differences IFRS 9. Published in July 2014, is the new financial standard replacing
between IFRS 9 IAS 39 – effective date 1st Jan 2018
and IAS 39 Major changes to the classification and measurement of an entity’s
financial assets and impairment calculation with largest effects on
financial institutions
The new financial instrument classification requirements are
dependent on:
- Contractual cash flow characteristics of the financial instruments
- The Business model (of the entity) under which financial assets are
held and managed
→ provides better purpose and economic value alignment
IAS 39 IFRS 9
Fair Value through P/L (FVTPL) Fair Value through P/L (FVTPL)
Amortised cost Loans and Receivables (L&R)/
Held-to-Maturity (HTM)
Fair Value through Other Available for Sale (AFS)
Comprehensive Income (FVOCI)
How goodwill Estimated goodwill will depend on the NCI estimation method. It has
would be long been argued that the proportionate share method of measuring the
affected from NCI only recognises the goodwill acquired by the parent and is based
both NCI on the parent’s ownership interest rather than the goodwill controlled
measurement by the parent.
types That is, any goodwill attributable to the non-controlling interest is NOT
recognised.
IFRS 3 has introduced an explicit option, available on a transaction-by-
transaction basis, to measure any NCI in the entity acquired at fair
value. With this method, the share of ownership allocated to NCI is
determined based on available and most up-to-date information on the
fair value of the net assets of the subsidiary. If a subsidiary is publicly
traded, market price on the transaction date and/or at a specified date
can be used to estimate the NCI based on the amount of shares that will
not belong to the parent:
Market Price × Portion of Shares Not Purchased
Depending on the fair value price, goodwill estimated from the
transaction may increase or decrease. This is because under fair value
option to calculate NCI, the total value of the company is grossed-up
as:
Consideration Paid + FV of NCI
,which may or may not value the total company higher than the case
where the NCI is calculated using proportionate-share method.
But remember, goodwill on its own has no cash generating ability nor
one can explicitly identify goodwill. That is why there is no such a
thing as capitalising internally generated goodwill. Goodwill,
regardless of the way we calculate NCI, will be most likely to be
transaction specific. That is, two very similar companies might arrive at
different goodwill considerations given that these two companies might
have very different synergy estimations from a merger. That is, as
much as it is correct to define goodwill as brand premium, reputation
