Strategic Business Reporting

A person that:

• has control or joint control of the reporting entity
• has significant influence
• is a member of KEY MANAGEMENT PERSONNEL

A company:

• If companies are in the same group, they are related parties.
• Parent & Subsidiary
• Associate
• Joint Venture

A party is not automatically a related party just because there is some connection. IAS 24 only treats parties as related if there is control, joint control, significant influence, or key management relationships as defined in the standard.

provide financial information to primary users of FS that is useful for economic decision making, relating to providing resources to the entity

-> decisions depend on expectations about returns:

• future net cash inflow (amount & timing)
• stwardship of economic resources

-> FS must reflect the economic phenomena relating to the events/transactions occured in the period

• if it does not have public accountability
  • if debt & equity instruments are traded in a public market
  • entity manages investments of others
• if it publishes general purpose financial statements for external users

NO SIZE THRESHOLDS

NO PARTIAL USE OF STANDARDS ALLOWED

When the recognition provides relevant information and is a faithful representation (consider possible measurement uncertainty)

FV = price received to sell an asset

Value in use = PV of cashflows expected to be derived from the use of an asset

Current cost = Cost of an equivalent asset

Net realisable value = Amount it could be sold for, net of selling costs

• focus on presentation & disclosure objectives & principles: balance between flexibility to provide relevant info and achieve comparability
• classification on basis of shared characteristics
• aggregation of items that are included in the same classification

Fundamental qualitative characteristics

• Relevance
  • affected by materiality
  • predictive vs confirmatory value
• Faithful representation
  • Neutral, complete, free from error

Enhancing qualitative characteristics

• Comparability
  • throughout time & acriss different entities
• Verifiability
• TImeliness
• Understandability
  • expects reasonable knowledge of business&economic activities & accounting

if omitting, misstating or obscuting information could reasonably be expected to influence decisions

the transaction should be accounted for according to their economic reality, not merely their legal form

IFRS 13 Fair Value does NOT prescribe when an entity should use FV but HOW FV should be used. The definition of FV is based on an exit price, rather than an entry price

all characteristics that a market participant would take into account should be reflected in valuation

definition is market-based

FV including transportation cost bud excluding transaction costs

- transaction costs arenot characteristics of the asset/Liability & are usually expensed as incurred

FV Must reflect highest & best use, considering:

• physically possible
• legally allowed
• financially feasible

1. Level
   1. quoted prices in active markets for identical assets & liabilities which the entity can access
   2. most reliable, must be used whenever possible
2. Level
   1. inputs other than quoted prices that are directly/indirectly obervable
   2. for similar but not identical assets
3. Level
   1. unobservable
   2. when there is minimal or no market activity

IFRS 10: At disposal of a subsidiary, you compare everything you receive with everything you give up

The group loses control and the remaining investment is treated as if you immediately bought it back at FV (Inv in associate)

Cash Proceeds

+ FV remaining interest

- Goodwill (You derecognise)

-Net assets at Disposal

+ NCI at Disposal (= NCI at Acquisition + share of past acquisition profit (=delta Retained earnings))

= Profit on disposal

On disposal you need to remove NCI = remove an equity balance = credit = add back to calculation since we never owned it. Before disposal all assets/liabilities were recognised eventhough we only own part which was shown by NCI. so when we sell, we dont lose all assets/liabilities but only the ones actually belonging to uss

Profit on disposal is an adjustment to operating profit

Control = Subsidiary

• Power over investee
  • Power = Existing rights that give the current ability to direct the relevant activities of the investee
• exposure to variable returns
• ability to use power to affect returns

Significant Influence (Associate - IAS 28 = Equity method)

• you can influence decisions but not make them on your own. E.g. shareholding 20-50% / representation on the board of directors

Equity method = Investment recorded at FV + share of profit from associate

Convertible bond = compound instrument = characteristics of financial liability (obligation to repay cash) & equity (obligation to issue shares)

IAS 23 specifies that compound interest must be split into

1. Liability component = PV of cash repayments
   1. Interest + maturity proceeds, discounted at market rate
2. Equity component
   1. = difference between maturity proceeds & liability component

Equity component remains unchanged

Liability is measured at Amortised Cost:

Liability + Finance Cost (EIR*Liability) - Cash paid (based on contract IR & amount) = ending liability

• significant non-cash transactions

• Under IAS 7 Statement of Cash Flows, the effect of acquiring (or losing control of) a subsidiary must be disclosed in the notes to the financial statements.

  The reason is that the statement of cash flows itself only shows the net cash flow, but users also need to understand what assets and liabilities were acquired.Under investing activities, you normally show only the net cash outflow:

• Cash consideration paid−Cash and cash equivalents acquired\text{Cash consideration paid} - \text{Cash and cash equivalents acquired}Cash consideration paid−Cash and cash equivalents acquired

IAS 7 requires the acquisition to be disclosed separately, including information such as:

• Total purchase consideration.
• The portion paid in cash.
• Cash and cash equivalents acquired.
• The net cash outflow.
• The major classes of assets and liabilities acquired.

expenditures intended to generate future income and cash flows

activities which result in changes in the size and composition of the contributed equity & borrowings of the entity

Cash & Cash equivalents (reconciliation) if bankoverdraft is:

• repayable on demand
• forms an integral part of the entity's cash mgmt

If it is of permanent ntature:

• financing activities

Joint operation = Rights to the asssets & obligations for the liabilities

• 2 oil companies jointly operate an oil field. each own 50 % of assets & liabilities. each company records in its own accounts its share of assets / liabilities
• no single investment account

Joint venture = parties dont own the assets directly, instead they own an investment in a separate entity

• Company A & B each invest 5 million to create AB Ltd / each owns 50% of investment in AB
• AB Ltd owns all assets / liabilities - neither A nor B owns assets directly. 

Associate = entity over which investor has significant infuence

Joint arrangement = arrangement in which two parties have joint control

• Joint control must have been contractually agreed in some form
• decision must require the unanimous constent of the parties

Deferred Consideration

• buyer agrees to pay fixed amount at a future date
• Discount to PV at acquisition date
• unwinding of discount is recognised in finance costs & increase liability

Contingent Consideration

• Amount is not fixed and depends on future events
• Recognise at FV at acquisition date
• Any future changes to FV: remeasurement recorded in operating P&L & increase liability
  • not caused by passage of time, ony by eassessment of acquisition price
  • No update to Goodwill!
• .

Contingent Liability

IAS 37 defines that a contingent liability is not recognised, only disclosed. A provision is disclosed if it is:

• present obligation
• reliably measured
• probable outflow

IFRS 3 says that a contingnet liability must be recognised on acquisition if it can be reliably measured & is a present obligation (no matter if probable outflow or not)

Under IFRS 11, a joint arrangement is one in which two or more parties are bound by a contractual arrangement which gives them joint control over the arrangement

Joint Venture / Joint operation

Joint Operation

The parties (joint operators) have:

• Rights to the assets of the arrangement
• Obligations for the liabilities of the arrangement [ifrsbuddy.com], [bdo.global]

Accounting treatment:

Each joint operator recognizes its share of:

• Assets
• Liabilities
• Revenue
• Expenses

directly in its own financial statements.

Joint Venture

Structured through a separate vehicle

The parties (joint venturers) have:

• Rights only to the net assets of the arrangement, not to specific assets or liabilities. [ifrsbuddy.com], [bdo.global]

Accounting treatment:

The investment is accounted for using the equity method under IAS 28:

• Record a single investment line item.
• Subsequently adjust it for the share of profit/loss and OCI.

• When the contractual rights to the cash flows from the financial asset expire
• when the entity transfers the asset or substantially all risk and rewards of ownership to another party
  • consider substance over form : It means that transactions should be accounted for based on their economic reality (substance) rather than merely their legal structure (form).

  • The question is often: Has the entity really transferred the risks and rewards?

    rather than

    Has legal ownership changed?

This concept is embedded in the IFRS Conceptual Framework through the requirement for faithful representation, which states that information must represent the economic substance of phenomena, not merely their legal form

Business combination is a transaction in which the acquirer obtains control over one or more businesses

IFRS 3 Business Combinations

This requires assessment wether a business is actually a business

inputs + substantive processes which have the ability to create outputs

e,g A factory + a workforce

Processes do NOT include administrative & accounting functions

The concentration test in IFRS 3 Business Combinations is an optional screening test that allows an entity to determine quickly whether an acquired set of activities and assets is not a business and therefore should be accounted for as an asset acquisition rather than a business combination.

The concentration test asks:

Is substantially all of the fair value of the gross assets acquired concentrated in:

• a single identifiable asset, or
• a group of similar identifiable assets?

If yes → the set is not a business.
If no → you must perform the normal IFRS 3 assessment to determine whether a business has been acquired.

A company acquires:

• Office building: CHF 95m
• Lease contracts: CHF 3m
• Other assets: CHF 2m

Total gross fair value = CHF 100m

95% of the value is concentrated in the building.

✅ Concentration test passed

→ Account for the transaction as an asset acquisition

A company acquires:

• Manufacturing plant: CHF 50m
• Customer relationships: CHF 25m
• Brand: CHF 20m
• Inventory: CHF 5m

No single asset or group of similar assets contains substantially all the fair value.

❌ Concentration test failed

→ Need to assess whether the acquired set includes:

• Inputs
• Substantive processes
• Ability to create outputs

to determine whether it is a business.

When you acquire a subsidiary, all identifiable assets and liabilities of the acquiree must be measured at fair value at the acquisition date, including identifiable intangible assets, even if they were not previously recognized in the subsidiary's own financial statements.

IAS 28

• identifiable
  • separable (can be sold, transferred, exchanged etc)
  • arises from contractual rights
• non-monetary
• without phyisical substance

• Pjurchased intangible assets: recognisable
• internally generated intangible assets: not recognisable

• research = expense
• development = capitalised if:
  • technically feasible
  • intention to completion
  • ability to use or sell
  • probable future economic benefits
  • adequate resources to complete it
  • ability to measure development costs reliably

probable future benefits

measurable reliably

Under IAS 21 The Effects of Changes in Foreign Exchange Rates, the functional currency is: "The currency of the primary economic environment in which the entity operates."

An entity first considers:

1. The currency that mainly influences sales prices of goods and services.
2. The currency of the country whose competitive forces and regulations mainly determine sales prices.
3. The currency that mainly influences labour, material, and other operating costs.

These are the primary indicators used to identify the functional currency. [ifrs.org]

If the answer is not obvious from the primary indicators, consider:

• The currency in which financing activities are generated (debt, equity).
• The currency in which operating cash receipts are retained.
• Whether cash flows are primarily generated and spent in a particular currency.

For intangible assets, IFRS 3 states that an asset is identifiable if it meets either of the following criteria:

if it is capable of beign used or sold separately or it must arise from legal or contractual rights

1. Separability criterion

The asset:

• Can be separated or divided from the acquiree, and
• Sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, asset, or liability

2. Contractual-legal criterion

The asset arises from:

• Contractual rights, or
• Other legal rights,

regardless of whether those rights are transferable or separable from the business