Category: IFRS

To account for leases under IFRS 16, the entity should follow the principles and rules of accounting for leases, which are the principles and rules that govern the recognition, measurement, and disclosure of leases in the financial statements.

IFRS 16 is the International Financial Reporting Standard that applies to leases. IFRS 16 replaces the previous leases standard, IAS 17, and introduces a single, on-balance sheet model for lessees. Under IFRS 16, lessees are required to recognize a right-of-use asset and a lease liability for all leases, except for short-term and low-value leases.

The key steps in accounting for leases under IFRS 16 are as follows:

1. Identify the lease: The first step in accounting for leases under IFRS 16 is to identify the lease. A lease is a contract that conveys the right to use an asset for a specified period of time in exchange for consideration. A lease is classified as a finance lease or an operating lease based on the nature of the underlying asset and the extent to which the risks and rewards of ownership of the asset are transferred to the lessee.
2. Measure the right-of-use asset and the lease liability: The second step in accounting for leases under IFRS 16 is to measure the right-of-use asset and the lease liability. The right-of-use asset is measured at the present value of the lease payments, discounted at the lessee’s incremental borrowing rate. The lease liability is measured at the present value of the lease payments, discounted at the lessee’s incremental borrowing rate, plus any lease incentives received by the lessee.
3. Recognize the right-of-use asset and the lease liability in the balance sheet: The third step in accounting for leases under IFRS 16 is to recognize the right-of-use asset and the lease liability in the balance sheet. The right-of-use asset is recognized as a non-current asset, and the lease liability is recognized as a non-current liability. The right-of-use asset and the lease liability are recognized at the commencement date of the lease.

The right of use asset has to be depreciated over the lease term. At each year end the value of the remaining asset should be compared to the lease liability to assess for any impairment.

The business may have coded rental/lease payments to the rent nominal in the p&l. This needs to be reclassified to reducing the lease liability. Instead the p&l will show the lease interest payable for the year.

The lease term is generally used for the calculations, unless there is a break clause at the option of the lessee etc.

There is an exemption available for short leases such as 1 year lease/tenancy agreements.

International Accounting Standard (IAS) 38, “Intangible Assets,” provides guidance on the recognition, measurement, and disclosure of intangible assets. IAS 38 applies to all intangible assets, except for certain intangible assets that are specifically excluded from the scope of the standard, such as financial instruments, deferred tax assets, and assets arising from employee benefits.

IAS 38 defines an intangible asset as an identifiable non-monetary asset without physical substance. An intangible asset is identifiable if it is separable, meaning that it can be sold, transferred, licensed, or exchanged separately from the entity’s other assets. An intangible asset is non-monetary if it cannot be measured in terms of money.

Intangible assets are required to be recognized as assets if they meet certain criteria, including the criterion that they are identifiable and meet the definition of an intangible asset. Intangible assets that are recognized as assets are required to be measured at cost less accumulated amortization and accumulated impairment losses, unless they are measured at fair value through profit or loss.

Intangible assets with finite useful lives are required to be amortized over their useful economic lives, which is the period over which the assets are expected to generate economic benefits for the entity. The amortization period should be determined based on the expected pattern of consumption of the economic benefits of the assets, taking into account the nature of the assets and the entity’s expected future use of the assets.

Intangible assets with indefinite useful lives are not amortized, but are required to be tested for impairment at least annually, or more frequently if there are indicators of impairment. The impairment test for intangible assets with indefinite useful lives involves comparing the carrying value of the assets to their recoverable amount. The recoverable amount is the higher of the assets’ fair value less costs to sell and their value in use.

Intangible assets that are measured at fair value through profit or loss are required to be recognized at fair value at the date of acquisition, with any subsequent changes in fair value recognized in profit or loss in the period in which they arise. Intangible assets measured at fair value through profit or loss are not amortized, but are tested for impairment in the same way as intangible assets with indefinite useful lives.

Disclosure of intangible assets is required in the financial statements, including information about the carrying amount, amortization, and impairment of intangible assets. The financial statements should also disclose any relevant assumptions and estimates used in determining the useful lives and impairment of intangible assets.

A convertible loan is a type of loan that can be converted into shares of the borrower’s common stock at the option of the lender. In accounting, a convertible loan is typically accounted for as a liability, with the potential conversion option being accounted for as a separate instrument, either as a liability or as equity.

According to International Accounting Standard (IAS) 32, “Financial Instruments: Presentation,” a convertible loan should be initially recognized at fair value, with any difference between the loan’s fair value and the proceeds received from the lender being recognized as a gain or loss in the income statement. The loan should then be subsequently measured at amortized cost, using the effective interest method, with any difference between the loan’s amortized cost and its redemption value being recognized as a gain or loss in the income statement.

The potential conversion option should be accounted for separately from the loan. If the conversion option is classified as a liability, it should be initially recognized at fair value, with any difference between the option’s fair value and the proceeds received from the lender being recognized as a gain or loss in the income statement. The option should then be subsequently measured at fair value, with any changes in fair value being recognized in the income statement.

If the conversion option is classified as equity, it should be initially recognized at fair value, with any difference between the option’s fair value and the proceeds received from the lender being recognized as a contribution to equity. The option should then be subsequently measured at fair value, with any changes in fair value being recognized directly in equity.

For example, if a company borrows £100,000 from a lender and the loan includes a conversion option that allows the lender to convert the loan into shares of the company’s common stock at a conversion price of £10 per share, the company would initially recognize the loan at fair value. If the fair value of the loan is £105,000, the company would recognize a gain of £5,000 in the income statement. The loan would then be subsequently measured at amortized cost using the effective interest method, with any difference between the amortized cost and the redemption value being recognized as a gain or loss in the income statement.

If the conversion option is classified as a liability, it would be initially recognized at fair value. If the fair value of the option is £10,000, the company would recognize a gain of £10,000 in the income statement. The option would then be subsequently measured at fair value, with any changes in fair value being recognized in the income statement.

If the conversion option is classified as equity, it would be initially recognized at fair value. If the fair value of the option is £10,000, the company would recognize a contribution to equity of £10,000. The option would then be subsequently measured at fair value, with any changes in fair value being recognized directly in equity.

International Financial Reporting Standard 15 (IFRS 15) is a new accounting standard that provides guidance on how to account for revenue from contracts with customers. IFRS 15 replaces the previous revenue recognition standards, including IAS 18, “Revenue,” and IAS 11, “Construction Contracts,” and is effective for annual periods beginning on or after January 1, 2018.

IFRS 15 establishes a single, principles-based five-step model for recognizing revenue from contracts with customers. The five steps are:

1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

The first step in applying IFRS 15 is to identify the contract with the customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract with a customer exists when the entity has approved the contract and the customer has accepted the offer to enter into the contract.

The second step is to identify the performance obligations in the contract. A performance obligation is a promise to transfer a good or service to the customer in the contract. The entity should assess the contract to determine which promises are performance obligations, and which promises are not.

The third step is to determine the transaction price. The transaction price is the amount of consideration to which the entity expects to be entitled in exchange for transferring the goods or services to the customer. The transaction price should be determined based on the contract, using the expected value of the consideration that the entity expects to receive from the customer.

The fourth step is to allocate the transaction price to the performance obligations in the contract. The transaction price should be allocated to each performance obligation in the contract based on the relative standalone selling prices of the goods or services promised in the contract. The standalone selling price is the price at which the entity would sell the good or service separately to the customer.

The fifth and final step is to recognize revenue when (or as) the entity satisfies a performance obligation. The entity should recognize revenue when it satisfies a performance obligation by transferring a good or service to the customer. This means that the entity should recognize revenue when it completes the performance obligation, or when it receives payment from the customer, whichever comes first.

IFRS 15 includes detailed guidance on how to apply the five-step model in various situations, including contracts with multiple performance obligations, contracts with variable consideration, and contracts with non-cash consideration.

Contingent consideration is a type of payment that is dependent on the occurrence of a future event. In accounting, contingent consideration is recognized and measured when it is probable that the event will occur and the amount of the payment can be reasonably estimated.

According to International Financial Reporting Standard 3 (IFRS 3), “Business Combinations,” contingent consideration is recognized as a liability in the acquirer’s balance sheet at the acquisition date. The liability is measured at fair value, which is the best estimate of the amount of the future payment at the acquisition date.

The fair value of contingent consideration is determined using a valuation technique, such as a discounted cash flow analysis or a probability-weighted expected return calculation. The fair value of the liability is then adjusted for the passage of time and changes in the probability of the event occurring, until the event is no longer probable or the amount of the payment can no longer be reasonably estimated.

Once the event has occurred and the amount of the payment has been determined, the acquirer is required to remeasure the liability at the amount of the payment. The difference between the original measurement of the liability and the remeasurement of the liability is recognized in the acquirer’s income statement as a gain or loss on the contingent consideration.

For example, if a company acquires another company and agrees to pay a contingent consideration of £1 million if the acquired company achieves certain financial targets, the company would recognize a liability of £1 million at the acquisition date, measured at fair value. If the acquired company achieves the financial targets and the amount of the payment is determined to be £1 million, the company would remeasure the liability at £1 million and recognize any difference between the original measurement and the remeasurement as a gain or loss on the contingent consideration.

Share-based payment is a method of compensating employees or other parties using the entity’s own equity instruments, such as shares or share options. International Financial Reporting Standard 2 (IFRS 2), “Share-Based Payment,” provides guidance on the accounting treatment of share-based payment transactions.

According to IFRS 2, a share-based payment arrangement is a contract between an entity and the recipient of the share-based payment, in which the entity agrees to provide the recipient with equity instruments of the entity, or cash in lieu of the equity instruments, in exchange for goods or services received. The equity instruments may be shares, share options, or other instruments that will be settled in the entity’s own shares or share options.

IFRS 2 requires entities to recognize the fair value of the goods or services received under a share-based payment arrangement as an expense in the income statement. The fair value of the goods or services is determined at the date at which the recipient completes the performance of the services or other conditions for vesting of the equity instruments.

The fair value of the equity instruments issued under a share-based payment arrangement is also recognized as an expense in the income statement. The fair value of the equity instruments is determined at the date at which the recipient completes the performance of the services or other conditions for vesting of the equity instruments.

IFRS 2 includes guidance on the measurement of the fair value of the goods or services received under a share-based payment arrangement. The fair value of the goods or services may be determined using either a fair value model or an attribution model.

The fair value model is based on the fair value of the equity instruments issued or to be issued under the share-based payment arrangement. The fair value of the equity instruments is determined using a valuation technique, such as a Black-Scholes option pricing model. The fair value of the goods or services is then determined by multiplying the number of equity instruments issued or to be issued by the fair value of the equity instruments.

The attribution model is based on the grant-date fair value of the goods or services received by the recipient. The grant-date fair value of the goods or services is determined using a valuation technique, such as a present value calculation based on the expected cash flows from the goods or services. The fair value of the goods or services is then determined by allocating the grant-date fair value of the goods or services to the vesting period of the equity instruments.

IFRS 2 also includes guidance on the accounting for modifications of share-based payment arrangements. A modification of a share-based payment arrangement is a change to the original terms of the arrangement that results in a change in the fair value of the goods or services received, or the number or fair value of the equity instruments issued or to be issued.

If a modification of a share-based payment arrangement results in a change in the fair value of the goods or services received, or the number or fair value of the equity instruments issued or to be issued, the entity is required to recognize the incremental fair value of the goods or services received as an expense in the income statement. The incremental fair value of the goods or services is determined by comparing the fair value of the goods or services received before and after the modification.

If a modification of a share-based payment arrangement does not result in a change in the fair value of the goods or services received, or the number or fair value of the equity instruments issued or to be issued, the entity is not required to recognize the modification as an expense in the income statement.

Black-Scholes model

The Black-Scholes model is a mathematical model used to determine the fair value of a European call or put option, using the current market price of the underlying asset, the option’s exercise price, the option’s time to expiration, the underlying asset’s volatility, and the risk-free interest rate.

To use the Black-Scholes model, the user inputs the current market price of the underlying asset, the option’s exercise price, the option’s time to expiration, the underlying asset’s volatility, and the risk-free interest rate. The model then uses a set of equations to calculate the fair value of the option.